Commodities were one of the best performing asset classes of 2021, with the Bloomberg Commodity Index gaining more than 25% on the year.

The rebound in demand from the pandemic, supply chain disruptions, government stimulus measures and adverse weather conditions all contributed to the market tightening last year, pushing up commodity prices. At the start of the year, supply chain disruptions should improve, while commodity balances will appear less tight than in 2021. This should ideally lead to lower prices from current levels. Nonetheless, prices are expected to remain above long-term averages.

Additionally, there will be a number of macro headwinds, which will likely limit further upside in the commodity complex. First, global central banks are expected to tighten monetary policy during 2022, which will increase pressure on yields and the dollar. Since commodities are denominated in dollars and are non-yielding assets, this scenario will cap the upside.

Another lingering concern is the Chinese property market. If there is a further downturn, it is likely to put downward pressure on the complex, especially the metals. Still, the likelihood of that happening seems less likely as China seems to be getting a bit more policy-friendly.

The fundamental context remains favorable to oil
Oil is expected to see strong supply growth from non-OPEC countries, which, coupled with further easing of OPEC+ supply cuts, is expected to return the global oil market to surplus . China and the United States are trying to exert political pressure on global oil markets by releasing oil from their strategic reserves.

Nonetheless, comments from OPEC chief Saudi Arabia suggest that OPEC members are unlikely to succumb to pressure tactics. Saudi Energy Minister Prince Abdulaziz bin Salman said it was up to the United States to release more supplies from strategic oil reserves. However, whether or not prices correct on further reserve releases will depend on the extent of the replenishment of reserves and how the major oil importers exert pressure on OPEC.

From a fundamental perspective, oil appears to be bullish as demand for 2022 could hit an all-time high thanks to the resumption of air travel. Post-pandemic demand exceeds supply, and it could increase further as countries open up further. OECD stocks are expected to fall by summer to their lowest levels since 2000.

Additionally, OPEC+ spare capacity is also expected to fall to historic lows of around 1.2 million barrels per day (bpd). This creates a bullish backdrop for oil.

Gold’s major gains will remain on hold
Gold ended last year down nearly 4%, its first annual loss in three years, despite inflation hitting its highest level in nearly four decades. Since the metal bears no interest, it succumbed to rising yields as central banks around the world resorted to policy-tightening measures to contain inflation. Gold could face similar momentum in 2022 to last year as tighter central banks around the world as well as expectations of further dollar strength should mean that investment demand for the remains weak.

Nevertheless, contrary to expectations, gold has managed to hold steady so far this year, even as central banks prepare to roll back stimulus and inflation-adjusted bond yields rise. Given expectations of even more rate hikes this year than markets are pricing in, gold could see an inflation hedge from traders who believe central banks aren’t doing enough to cut back. price pressures.

Meanwhile, recent market volatility and geopolitical concerns surrounding Russia and Ukraine have boosted demand for safe-haven gold.

For the year, gold is expected to remain rangebound, with any major upside capped as interest rates rise. However, at the same time, market pullbacks will likely support gold hedging demand, while jewelry and central bank gold demand could provide additional longer-term support. Strong resistance for gold is seen near the $1900-1920 area, while strong support is seen near the $1680 levels.

Positive outlook on industrial metals
The balance between supply and demand for most metals appears to be improving, implying that prices will pull back from their current highs. However, they should remain above their long-term averages. Inventories are low for several metals and the outlook for the medium-term demand forecast is positive due to increased spending on green initiatives, which are metal-intensive.

Copper will continue to thrive in the long term
The global copper market could trend lower in the second half of the year as new supplies hit the market. Refined production growth of 6% will outpace refined demand growth of 1.3% this year. Capacity at the Democratic Republic of Congo-based Kamoa-Kakula concentrator is expected to double in the second quarter of 2022, while Anglo American expects its Peruvian 300,000 metric ton

Nevertheless, the long-term fundamentals of copper are bullish as its demand is expected to increase by 16% by the end of the decade, reaching 25.5 million tonnes per annum (tpy) by 2030. This is compared to a supply forecast showing a 12% decrease from 2021 levels. In addition, current copper mines are nearing maximum capacity due to ore quality and depleted reserves.

Iron ore outlook will remain sour
Iron ore prices have rebounded nearly 45% from $80 per ton in November 2021 to $114 per ton in January 2022, thanks to recent moves by the Chinese government to accelerate infrastructure investment to support the economy.

However, the outlook for iron ore looks bleak, due to turmoil in the country’s real estate sector and continued curbs on steel production in line with the country’s decarbonization goals. As seen in the second half of 2021, steel production cuts are expected to recur this year in China. Since iron ore is used to create steel, a decrease in steel production will put downward pressure on iron ore prices.

Aluminum seems solid
The aluminum market is approaching a period of structural shortages, and there is no quick fix to this problem – it would likely lead to higher prices.

Nickle is likely to continue is fine
Nickel remains in the spotlight amid fears of a shortage, as demand for batteries rises and supply faces headwinds. Nickel prices hit their highest level in nearly 11 years as Indonesia – a major producer – touted the idea of ​​taxing nickel exports, just as stocks of the metal dwindle. As long as these imbalances persist, prices will remain high.

Agricultural products
Prices are expected to decline as weather conditions improve, but are likely to remain above long-term average prices. Overall, there are downside risks across the commodity complex in 2022, but relative to the historical average, prices are likely to trade at high levels for another year. Of course, the course of the pandemic will remain a potential risk factor, whether upside or downside.

Yogesh Khairajani is the Global Market Strategist at Century Financial

Excerpt from GB Invest February 2022 edition