CIO Commodity Commentary

One of the world's most important economies is going on a seven-day break starting on February 11, promising quiet days on commodity markets. The Chinese Lunar New Year rings in the year of the ox. Celebrations, however, are being overshadowed for a second year in a row by new Covid outbreaks in China. At the same time social-distancing measures and hampered travel in much of the world are continuing to contribute to plummeting global oil demand. But supply, too, is being restricted. We expect that Saudi Arabia's one million barrels per day production cut will offset any decline in demand as a result of the seasonal downturn and demand disruption from Covid-19. If members of the OPEC plus Russia agreement produce within the production cap, as they committed to do inventory levels should continue to draw down near the pre-pandemic 5-year average levels. Oil producers, too, remain very disciplined in their capital spending programs. The recent price rally in oil also drew support from a weaker dollar and colder than normal weather.

We expect oil prices to be well supported in coming weeks. Investors appear to be looking beyond the short-term Covid-19 impact on demand, focusing on potential production shortfalls in the second half of 2021. However, we share little concern that the recent suspension of new federal oil leases could be exacerbating any potential supply shortages. The suspension may only be temporary and many companies in need of new leases had already secured substantial numbers ahead of the moratorium.

For base metals, too, market fundamentals remain supportive, though we expect price increases to pause during the Chinese New Year period. A strong economic recovery in China, healthy fundamentals and a supportive macro backdrop paint a positive picture. Also, Israel's vaccination results raise hopes that widespread vaccination can tame the pandemic. However, the near-term headwind of Covid-19 could dampen investor optimism, despite positive news on fiscal stimulus. The timing of Chinese policy normalization and demand recovery for metals across the globe remains key.

Gold prices, however, will likely require a new catalyst to break out of the recent range, driven by rising real interest rates and a slightly firmer U.S. dollar. The outperformance of base metals over precious metals reflects investors' preference for assets that could benefit from a cyclical recovery. Gold appears to be finding support, however, just above the 1,800 dollars per ounce level, helped by global central banks persisting with their extremely loose monetary policies. And weaker U.S. jobs data makes a continuation of that more likely.

While dollar fluctuations are likely to continue to drive investment flows, global importers, including China, are already turning to the United States for corn and soybeans, pointing to strong export demand regardless of currency fluctuations. Tight inventory numbers from the U.S. Department of Agriculture should go a long way toward supporting elevated crop prices. Corn, the recent outperformer among agriculture commodities, has the most favorable risk/reward profile, in our view. Focus in the near term will be on South American harvests, where production estimates have stabilized for now.

Past 30-day and year-to-date performance of major commodity classes

Past performance is not indicative of future returns.
Sources: Bloomberg Finance L.P., DWS Investment Management Americas Inc. as of 2/8/21

¹Bloomberg Commodity Index, ²Bloomberg WTI Crude Oil Subindex, ³Bloomberg Natural Gas Subindex, ⁴Bloomberg Brent Crude Subindex, ⁵Bloomberg Silver Subindex, ⁶Bloomberg Platinum Subindex, ⁷Bloomberg Aluminum Subindex, ⁸Bloomberg Copper Subindex, ⁹Bloomberg Gold Subindex, ¹⁰Bloomberg Zinc Subindex, ¹¹Bloomberg Corn Subindex, ¹²Bloomberg Cotton Subindex, ¹³Bloomberg Sugar Subindex, ¹⁴Bloomberg Live Cattle Subindex, ¹⁵Bloomberg Wheat Subindex ¹⁶Bloomberg Soybeans Subindex,