Raw materials: we bounce back from the bottom? – Saxo Bank's QXNUMX forecasts

It seems that the commodities sector will start the third quarter on stronger foundations after several months of weakening, followed by a partial trend reversal in June. A number of factors contributed to the strong increases, some based on expectations and some based on facts; the most important of these are the weakening of the dollar again as the interest rate gap narrows, the active management of oil production and prices by OPEC, the yet-to-be-realized prospect of increased support for the economy by the Chinese government and, last but not least, the risk of higher food prices in the fall as a number of key growing regions struggle with heat and drought.

Despite continued demand concerns fueled by recession fears in the US and Europe, the energy sector is holding firm, helped by Saudi Arabia's unilateral production cuts, rising refining margins at the peak of summer demand, and traders and speculators' faith in higher prices that are almost the weakest in over ten years, thus reducing the risk of additional aggressive sales related to the macroeconomic environment. Conversely, hot and dry weather is raising concerns in the agricultural products sector, as well as boosting demand for natural gas from global power generators for cooling needs.

The precious metals rally lost momentum in Q2 as the boom in equity markets reduced demand for alternative investments while central banks continued to raise interest rates to control inflation. Despite possible further decline in inflation, we see increasing risk of long-term inflation staying well above the 2,5-XNUMX% target, and with the rising risk of a stock market bubble, continued strong demand from central banks, and eventual achievement of the peak of short-term rates due to the change in approach FOMC, we anticipate further upside potential for precious metal prices in the second half of the year.

Given recent price performance across sectors, we may be witnessing the first signs of bottoming out in the markets, with current price levels already taking into account some of the worst-case scenarios for growth. US economic data continues to point to below-trend economic activity, but also shows no signs of recessionary momentum, and earnings estimates have increased significantly, particularly in Europe, since the QXNUMX earnings season began in mid-April. However, the potential for further growth will depend primarily on China's ability to provide additional stimulus to support demand for key commodities, from crude oil to copper and iron ore. The development of the weather situation in the coming weeks in the northern hemisphere and its impact on crops will also be of key importance.

Gold is slowing down, but still targeting a new record high

After a strong increase in prices since November gold spent most of Q2 on consolidation, briefly reaching a new record high. Sentiment is currently negatively impacted by the recent bull market in the stock market and the prospect of additional interest rate hikes in the US, delaying the peak of interest rates that would benefit gold. Therefore, while the short-term outlook points to further consolidation below $000 an ounce pending incoming economic data, we maintain an overall positive outlook for gold and silver due to, among other things: continued dollar weakness; an economic downturn that makes current stock market gains unsustainable, leading to new demand for precious metals as a safe-haven investment; constant demand from central banks establishing a floor in the market; persistent inflation in the US and the difficulty of meeting the long-term target of 2,5% set by the US Federal Reserve (and if achieved, it is likely to result in a downward correction of real yields in favor of gold) and a multipolar world increasing the geopolitical temperature. In addition, silver could benefit from additional strengthening of industrial metals and could outperform gold as a result. Overall, based on the above expectations and assumptions, we see the potential for gold to hit a new all-time high above $2 before the end of the year.

Dr. Miedź: building foundations

Copper spent most of QXNUMX on the defensive after a less commodity-intensive recovery in China failed expectations for a strong rebound in demand for key industrial metals. In June, however, the prospect of additional economic stimulus in China and stocks in exchange-monitored warehouses falling to a five-month low helped shift sentiment among hedge funds that had previously favored short positions in copper.

However, regardless of the potential additional stimulus in China, we believe that the current decline in copper prices is temporary, as the theme of the green transition in the coming years will continue to provide strong support for the so-called green economy. green metals, the most important of which is copper as the best conductor of electricity necessary for the production of batteries and electric traction motors, renewable energy generation, energy storage and grid modernization. Add to this the unfavorable outlook for production as the mining industry grapples with deterioration of ore grades, rising mining costs, climate change and government intervention, as well as an ESG (Environmental, Social Responsibility and Governance) focus that reduces the available pool of investments provided by banks and funds.

From the current level below $4, we expect the price of the HG copper contract to finally pick up and reach a new all-time high, potentially only in the new year when global growth forecasts and the central bank will focus on interest rate cuts rather than hikes .

Oil: Demand concerns offset by Saudi production cuts

It seems that the sideways trend persisting since May oil market WTI and Brent will also move into QXNUMX, with global growth concerns continuing to be offset by the willingness of key OPEC+ members to sacrifice revenue and market share to support the price. Overall, we believe prices are near the low of the cycle, but several more difficult months cannot be ruled out, primarily due to concerns that the strong demand growth forecast by OPEC and IEA will not materialise. The latter may be why Saudi Arabia took the unprecedented step of announcing a unilateral reduction in output shortly after the group announced production cuts.

All of this means that the coming months could prove difficult for OPEC, especially if demand does not pick up after the Saudi decision, which would increase the pressure on other producers to cut production. For now, OPEC's de facto leader has managed to send a supportive signal that could prevent a deeper correction, while the eventual recovery we believe will pave the way for higher prices.

Until then, the price of Brent oil is likely to stay above $70 before eventually breaking the psychologically important $80 level towards the end of the quarter, pushing the current $70-80 range $5-$10 higher, and staying there until the end of the year.

The risk of a decline in agricultural production due to growing concerns about the weather

After a year-long retreat, the grain sector joined an already established boom in the market for key futures contracts on the so-called soft products, from sugar and cocoa to coffee and orange juice. The cereals sector has come back to life amid concerns about the potentially damaging effects of drought in key growing regions in the Northern Hemisphere, where unusual droughts have been reported from the Black Sea to Northern Europe, and most recently in the United States. Weekly data showing the conditions of the three main crops - wheat, corn and soybeans - have deteriorated and if the effects of the drought are not soon offset by rainfall, concerns about the final output of production could prove to be a major driver of prices ahead of the harvest season.

At the same time, markets are on high alert for the potential impact of a returning El Niño; after the phenomenon formed a month or two earlier than usual, the director of the El Niño/La Niña forecast office of the US NOAA (National Oceanic and Atmospheric Agency) warned that this meant a greater potential for the phenomenon to develop and therefore a higher risk of its occurrence intensification in the coming months. El Niño strongly affects the weather conditions in Australia, bringing it into a zone of higher temperatures and more drought, while the northern countries of South America - Brazil, Colombia and Venezuela - are usually drier, and south-eastern Argentina and parts of Chile are wetter. India and Indonesia also tend to be dry in August during El Niño.

In addition, the prospect of a long-term war in Ukraine, and thus impediments to supplies from the Black Sea region, as well as China, which as a result of domestic weather problems is becoming the world's largest importer of wheat, may contribute to increasing global competition for this desirable cereal - in particular in year in which El Niño could lead to a reduction in production in Australia, by far the largest supplier of wheat to China.

About the Author

Ole Hansen, head of department of commodity market strategy, Saxo Bank. Djoined a group Saxo Bank in 2008. Focuses on providing strategies and analyzes of global commodity markets identified by foundations, market sentiment and technical development. Hansen is the author of the weekly update of the situation on the goods market and also provides customers with opinions on trading goods under the #SaxoStrats brand. He regularly cooperates with both television and printed media, including CNBC, Bloomberg, Reuters, Wall Street Journal, Financial Times and Telegraph.