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Top 5 questions on our 2024 commodities outlook
In this edition of our Commodities Weekly, we put together the top five questions on our 2024 commodities outlook (see here), with our views surrounding macro and micro risks, the “OPEC+ put”, the global manufacturing malaise, Chinese demand and our supercycle thesis. We reiterate our high level conviction that commodity price risks skew neutral in 2024 with bullish cyclical forces of a fading monetary policy drag and receding recession fears offset by bearish reverberations of higher for longer interest rates. In this context, until the current macro headwinds are in the rear-view mirror, we pause our supercycle thesis (see here). However, we critically caution that the supply-constrained decades-long bull market is merely delayed – not derailed – given the near-decades-long structural underinvestment in physical commodities. The Fed’s attempt to soft land the economy through higher for longer rates that lowers demand and inflation may relieve the symptoms of underinvestment (commodity inflation), but cannot cure the underlying illness of inadequate production capacity. Without sufficient capex to de-bottleneck the system and provide excess capacity, commodities will remain stuck in a state of long-run shortages, with higher and more volatile prices.
The global oil market is poised for an unhappy new year with Brent crude prices plunging to a five month low on escalating fears of oversupply. Notwithstanding the latest iteration of OPEC+ output cuts, rising production from the US, Guyana and Brazil is hitting a market that’s mired by bearish sentiment on the demand-side of the equation. Meanwhile, natural gas markets are brimming with confidence with weak European (TTF) and US (Henry Hub) prices signalling confidence that the winter heating season will pass comfortably.
Base metals remain stuck in a tactical trading range without firm evidence of either a recession (necessary for further capitulation) or ex-China demand recovery (necessary for a sustained break higher).
Gold is finding some support following the latest US inflation reading which reversed US yields and US dollar recovered some losses. As we documented in our 2024 commodities outlook, gold is our most bullish call and is to hit record levels in 2024 on a trifecta of Fed cuts, supportive central bank demand and bullion’s role as the geopolitical hedge of last resort (see here).
Iron ore continues to extend losses after a widely-watched government policy meeting (the Communist Party’s annual economic work conference) in China finished without any major new stimulus pledges. According to reports, the messaging on macro policy stemming from the meeting remained accommodative but with few hints of a more aggressive stance.
Key grains – wheat, corn and soybeans – are falling after Argentina (key grower) devalued the currency, in a move that may trigger a wave of crop selling from farmers. The new government of President Milei announced the 54% devaluation of the Argentinian peso (ARS), alongside a swath of spending cuts, on 12 December – farmers will now receive more cash for their crops (with revenues tied to the US dollar values on export markets), but will have to pay a higher price for their crop inputs.
Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.