Commodities

Commodity markets benefit little from economic recovery

The economic recovery, aided by stimulus packages from governments and central banks, offers opportunities in risky assets. But in commodity markets, the positive effects of the economic recovery can be held back by supply-side conditions or rising interest rates.

 

03/06/2021 – Hans van Cleef & Georgette Boele

Both the Organisation of Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) expect a strong recovery in oil demand in 2021 after the huge drop in 2020. In the second half of the year in particular, demand will increase rapidly, leading to some 6 million barrels per day more being consumed this year than last. Nevertheless, this recovery will lead only to a moderate increase in the price of oil. The reasons are twofold. First, OPEC+ (a coalition of OPEC members supplemented by ten other oil-producing countries led by Russia) cut production sharply last year. OPEC+ did this to better balance supply and demand. As a result, prices have already recovered strongly. Second, the market started to anticipate the expected recovery of demand. This also drove prices upwards. 

Little upside potential for oil prices

Now that demand is actually picking up, there is room for OPEC+ to gradually increase production again. There is enough spare capacity to absorb the growth in demand for the next two to three years. As a result, oil can continue to be traded at around its current price level. Furthermore, some investors are taking profits on their long positions (long positions are used to anticipate expected price increases). This also limits the upside price potential for oil. As investors will remain focused on the coronavirus on the one hand and vaccines on the other, volatility may remain high in a relatively stable, sideways moving oil market. We expect an average oil price of around USD 60-65 per barrel for the remainder of 2021.

Gold outlook remains negative

The price of gold is also not moving 1 to 1 with the recovery of the economy. On the contrary, stronger economic growth can actually be negative for the price of gold. One of the consequences of an improving economy is a less expansionist Federal Reserve (meaning that the Federal Reserve will be less inclined to support the economy with monetary measures). Should the Fed decide to wind down its support programmes and - in time - raise interest rates, gold will become less interesting to investors. This is because the gold price has a strong, negative relationship with US interest rates adjusted for inflation. We also still see investors holding large gold positions. As interest rates rise and other investments become more interesting, the current large gold positions pose a risk to the future gold price.

The gold price has already rebounded somewhat from the price increase we saw in the first half of 2020. The rise in US interest rates (nominal and adjusted for inflation) subsequently put pressure on the gold price. The gold price fell from USD 2,075 per ounce in August to less than USD 1,700 per ounce in March. In recent weeks, the rise in interest rates came to a halt and the dollar weakened. As a result, the gold price recovered. However, we expect the gold price to decline again later this year, as we expect a modest increase in US inflation-adjusted interest rates and a strengthening dollar.

Hans van Cleef – Senior Energy Economist

Georgette Boele – Senior FX & Precious Metals Strategist

Commodities

Source: Bloomberg

For our latest commodities forecasts, please visit the website of ABN AMRO Group Economics:

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