Are we at the cusp of a fresh bull run in commodities?

Commodity prices have witnessed a strong recovery after witnessing a significant fall due to the Covid-19 pandemic. Crude oil and base metals prices have rebounded from March 2020 levels, reporting gains of 198 per cent and 69 per cent, respectively. Many investors and traders are advocating for another supercycle in the commodity market, driven by a strong consumer demand in the post-Covid era.

Gold prices have witnessed much needed correction from the all-time high made in 2020 with COMEX spot gold prices near $1,780 per ounce, falling by nearly 15 per cent. Gold prices in India have declined by 17 per cent from all-time highs, witnessing additional pressure from rupee appreciation. Gold ETF holdings continued to witness outflows as holdings at SPDR Gold Shares fell to 1,132 tonne with the decline in gold prices.

Silver prices, on the contrary, have managed to limit their losses. Silver has a double advantage of the rally in industrial metals on higher demand.

Vaccine rollouts and strong optimism over economic recovery has led to some liquidation in precious metals with risk-on sentiments. The rally in US bond yields and dollar recovery has kept bullion prices lower for the last few months.

Multiple factors can affect the demand for precious metals in the medium to long term. The coronavirus crisis is still a developing story as variants from UK, Brazil and Africa are still a concern for many regions which may keep risk premium high in precious metals. The loose monetary policy from major central banks and the expansion of the balance sheet of central banks are key factors that can boost demand for precious metals.

The rally in industrial metals is robust as the complex has witnessed an average growth of 48 per cent from the lows made in March 2020. Base metals rallied on strong demand optimism. Supply disruption fears from mining giants Peru and Chile fuelled buying in copper while zinc and nickel prices soared with the surge in global steel and iron ore prices. Consumer driven demand will boost buying in base metals further as the global economy is still on the recovery path.

Looking at the current scenario, copper is a clear winner for the medium-term outlook due to supply deficit fears against higher demand. LME copper prices have rallied to eight-year highs, trading above $8,500 per tonne on strong fundamentals. The cash to future spread at LME stood at $29, showing a clear backwardation scenario where spot demand outpaces supply.

Crude oil is one commodity where investors were cautious despite a major rally from the lows. The benchmark NYMEX WTI crude oil prices have rallied nearly 198 per cent, trading above $61 per barrel thanks to efforts from oil producers to balance the global oil market. The investors’ confidence was restored in the crude oil market once prices breached above $27 and $38 per barrel range, recovering from $10 per barrel. Crude oil prices have attained the price range above $55-$60, which is considered a comfortable range acceptable to all major parties. The recent boost in the prices was supported by a voluntary cut of 1 mb per day from Saudi Arabia and hopes of fuel recovery with vaccine rollouts. The cold freeze in Texas, a major oil-producing region in the US, drove prices above $60 per barrel recently.

Crude oil prices may limit upside near $65 per barrel as higher oil prices will draw attention from major oil producers to hike oil output. Saudi Arabia can be the first nation to respond with an immediate output hike which may drag oil prices back to barrack of $55-$60 per barrel. The OPEC plus nations are scheduled to meet on 4th March where producers may discuss an option to increase oil production.

The global commodity/equity ratio is still at multi-year lows near 0.57 against an average of 3. Commodity prices are expected to trade higher as global economic recovery is still underway. The opening of border activities post-pandemic lockdowns may boost another round of investment in commodities prices, a possible super-cycle.

(The author is Senior Analyst, Commodities, HDFC securities. Views are his own)

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