Commodities are making a comeback after losing steam in mid-2021. But unlike the broad-based boom earlier this year, the commodity upswing is likely to be more differentiated. Oil is likely to outperform industrial metals, as downshifts in China growth expectations could continue to weigh on market sentiment for industrial metals and iron ore.
Prefer oil to industrial metals, as China growth concerns weigh on the latter
Source: Bloomberg, Bank of Singapore
We remain sceptical that the current oil upswing is a ‘super-cycle’. We forecast the oil rally should continue, upgrading our 3-month Brent forecast to USD85/bbl (old: USD80/bbl) but a drift back to below USD80/bbl remains likely in a year’s time as OPEC+ unwinds its supply curbs and US shale producers ramp up production. Also, the US and Iran could still reach a deal, allowing for a gradual increase of Iranian oil exports.
We remain positive on oil prices for the rest of this year. First, inventory withdrawals have been strong across the US and other OECD countries. Low inventory cushion poses significant upside risk for oil price in the near term. US oil production is yet to be fully restored after Hurricane Ida and another storm is threatening to hit the US east coast. Second, global oil demand should recover from the Delta impact that has led to a slowing of global PMI in 3Q21. But the improving Covid-19 and vaccination backdrop, both in the US and globally, provides scope for renewed optimism over global growth and increased mobility that could benefit jet fuel demand as governments relax restrictions on international travel.
Third, surging natural gas prices, especially in Europe - in part due to reduced Russian gas supply - could trigger gas-to-petroleum switching for power generation to the benefit of oil. Gas prices are set to stay at exceptionally high levels this winter with upside risks.
Surging natural gas prices could drive gas-to-oil switching to the benefit of oil
Source: Bloomberg, Bank of Singapore
De-carbonisation related investments, including the electrification of vehicles and the build-up of the renewable grid should sustain demand growth for industrial metals like copper over a multi-year horizon.
But with China continuing to dominate global industrial metal demand, increased China growth concerns is a near-term headwind for copper. The past few months have seen successive waves of headlines from China that has spurred some growth-related concerns. First the broad regulatory reset, then a focus on property developers facing near-term funding pressures and, most recently, sharp cuts to production in a range of high-energy-intensity industries to meet energy intensity targets.
The risk of Chinese property market slowdown is what matters most for commodity markets. Systemic risk from Evergrande can likely be contained. But with the property sector set to cool further, some spillover effects on commodity imports are inevitable, given the property sector (along with infrastructure investment) consumes a big chunk of imported commodities such as copper and iron ore.Disclaimer applicable to recommendation
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