We expect the broad commodity rally that saw the Bloomberg Commodity Index rose by 10 per cent during the last quarter will extend further into 2021. Driven by multiple tailwinds from tightening supply, a global market flushed with cash driving speculation across markets and increased demand for inflation hedges.
Adding to this, the prospect for a weaker dollar, a vaccine-led recovery in global demand as well as emerging weather worries and the components for another commodity supercycle have started to emerge.
All of this during a time when the pandemic is still raging across many countries, especially in winter-hit regions across the northern hemisphere where the prospect for improvement — vaccine or not — is unlikely to occur until warmer weather arrives in March and April.
While the rally may pause until the vaccine rollout gathers momentum, the market will have to rely on continued investment demand is strong enough to keep markets supported during the coming months when the negative impact of lockdowns and reduced mobility will be the greatest.
Investment demand was on clear display during the first full week of trading with the US stock market racing higher to reach a fresh record high, led by so-called ‘bubble stocks’ within technology and green stocks following the Democratic majority in US Congress.
Bitcoin, another bubble candidate, surged past $40,000 as the alternative investment continues to become more mainstream with institutional demand on the rise.
Speculators have responded very forcefully to the improved sentiment during the past six months and as we enter 2021, they hold a total net long across 24 major commodity futures of 2.5 million lots, representing a nominal value of $125 billion.
While the two previous peaks in 2017 and 2018 were primarily led by the crude oil market, the chart below shows how bullish bets have been spread out more evenly between the three major sectors of energy, metals and agriculture.
Overall, the biggest bets are held in crude oil with the combined 614k lots long in WTI and Brent representing a nominal value of $30 billion, gold’s 137k lots long at a value of $26 billion and finally the soybean complex where the net long in soybeans, meal and oil reached 399k lots or $19 billion nominal.
The net long in crude oil and gold, the two biggest contracts in terms of exposure, remain well below their previous peaks which for crude oil was the 1.1 million lots reached in March 2018 and 292k lots in gold that was reached in September 2019.
Crude oil’s impressive rally since the first vaccine announcements in early November extended into the first week of trading with Brent crude oil breaking above $55/b for the first time since last February. This after Opec+ faced with an uncertain short-term demand outlook decided to rollover current production levels until March. Topping up the agreement was the surprise unilateral production cut announced by Saudi Arabia, which increasingly is being seen as the guardian of the oil market.
The Saudis most likely concluded that the next few months could see the current weakness in Western world fuel demand spread to Asia where infections are rising quickly.
With this in mind and from a current fundamental perspective, we remain sceptical about crude oil’s ability to forge much higher at this stage. Momentum, however, remains strong and with this in mind the price can easily reach levels that may otherwise be difficult to justify at this stage of the recovery.
We see Brent trade above $60/b later in the when global fuel demand recovers further and Opec and Non-Opec spare capacity, currently above 7 million barrels/day, start to reduce through additional Opec+ led production hikes. [The writer is head of Commodity Strategy at Saxo Bank]
Ole S Hansen
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