Commodities

In 2021, a continued economic recovery should lift physical demand for commodities. Extreme monetary and fiscal policies may finally spur higher inflation expectations and weigh on the USD, which would be broadly supportive for commodities. We prefer diversified exposure including both cyclical segments, i.e. energy and base metals, as well as precious metals, as we might see risk sentiment swing considerably along the way.

Oil demand outpacing supply

In terms of commodity-specific dynamics, demand for most commodities including oil has yet to recover to pre COVID-19 levels and is unlikely to do so in 2021. However, the crisis has left considerable capital expenditure holes and caused new projects to be deferred or even scrapped altogether, leaving supply more constrained than demand. As a consequence, large inventories that accumulated during the most acute shock phase are projected to normalize, which should ultimately lift spot prices and lead to flattening forward curves.

Oil in particular has some more room to catch up toward and potentially above equilibrium levels (which we see at around USD 50 a barrel), in our view, as inventory normalization is under way but takes time. Yet, we would stress that a prerequisite for this positive view on the energy complex is that members of the Organization of the Petroleum Exporting Countries and its allies, also known as OPEC+, continue to comply with pledged supply cuts. At the same time, we would not be surprised to see new all-time highs in gold, especially if US real yields drifted even deeper into negative territory.

Keep an eye on inflation

While inflationary pressures have remained muted and are not a major concern near-term, the inflation discussion deserves some attention in light of current policy measures and rising debt burdens. In this context, we note that a broad basket of commodities, including gold, provided a good inflation hedge in the past. For effective shelter, investors should be exposed to elements that spur inflation, e.g. energy and agriculture prices among others, while gold reacts positively to higher price levels if central bank actions are seen as causing an inflation overshoot.

What the risks are

The main risk to a positive commodities view would come from a much weaker than expected growth environment, which could be caused by renewed lockdowns triggered by a negative development of the COVID-19 pandemic. Conversely, rapid vaccine success could accelerate the rebalancing processes. Trade disputes and tariffs can also weigh on activity and commodity demand, as we saw in 2019.