THE post-November 9 surge in risk appetite on vaccine optimism extended into December with stock markets, led by Asia, continuing higher while the Bloomberg Dollar Index, which tracks the performance of ten leading global currencies versus the US dollar, slumped to a 32-month low.
These developments combined with additional stimulus being discussed in the US and Europe and OPEC+ reaching a sensible compromise on post-pandemic production increases helped boost crude oil and metal prices, both industrial and precious.
The agricultural sector paused following a 25 per cent rally since June with cocoa, wheat and coffee the main losers. Scraping the bottom was once again natural gas which slumped by more than 10 per cent with milder-than-normal US winter weather raising doubts about demand at a time of robust production.
Overall, these developments left the Bloomberg Commodity Index close to unchanged in a week that, following the monthly US jobs report, normally signals the beginning of slowing trading activity ahead of the Christmas and New Year period. Still down on the year following the Q1 lockdown-led collapse, the index has made a strong recovery since then.
A trend that vaccine optimism strengthened further this past month and which is likely to be carried forward into 2021.
This on the assumption that we will see a strong post-pandemic rebound in growth, the potential for further dollar weakness, rising inflation concerns and weather developments. All of these could drive the index towards potentially its best year in more than decade and in such a scenario key commodities such as copper, crude oil, soybeans and gold are all expected to perform well.
Rising food prices continue to add fuel to the inflation theme which may only strengthen further into 2021 was highlighted by the UN Food and Agriculture Organization in its monthly Food Price Index for November. The index, which tracks the average of 95 food prices spread across five commodity groups, jumped to a six-year high and recorded a year-on-year rise of 6.5 per cent. All sub-indices registered gains in November, with the vegetable oil subindex rising by a stunning 14.5 per cent from October and 31 per cent from the same month last year.
Crude oil reached a nine-month high after the OPEC+ group of producers, following another nail-biting week of discussions, agreed on a compromise deal that will see production rise in stages over the coming months, starting with 500,000 barrels/day in January. With the expected vaccine-driven recovery in global fuel demand this deal will go a long way to ensure the price of oil remains supported until it can stand on its own feet.
The fact that the market rallied despite having priced in a postponement of the previously agreed 1.9 million barrels/day production increase was due to the flexibility of the deal.
Meaning that production can be raised but also cut back should the recovery turn out to be slower than expected. Overall, analysts are now expecting that the road towards a balanced market has been shortened and on that basis expectations for higher crude oil and fuel prices into 2021 have been given a boost.
Adding to these supportive developments, a cut this year by the oil majors of more than $80 billion in longer-term capital spending will likely start to feed through to higher oil prices in 2022 and beyond. Unless this past year has changed dramatically the way global consumers will work and travel and thereby consume fuel going forward, only time will tell.
Brent is likely to print $50/b sooner rather than later with already strong Asian demand eventually being joined by others once the Covid-19 cloud lifts. Just how much further it may rally in the short term depends on how Europe and especially the US tackle the current and not-yet-under-control second wave of the COVID-19 outbreak.
[Ole S Hansen is Head of Commodity Strategy at Saxo Bank]
Ole S Hansen