Norbert Ruecker, Head of Macro & Commodity Research Julius Baer
Commodity prices continue to recover lost ground following the early February sell-off, not least supported by a flurry of bullish news. The oil market increasingly wonders about the future of the supply agreement, as the deal expires at the end of this year. The petro-nations continued their oil talk, pledging for a longer-lasting cooperation between the organisation of the Petroleum Exporting Countries and Russia. The cold spell in Europe not only ignites supply concerns in the gas market, pushing gas prices back towards the late 2017 highs, but also raises fears about potential freeze impacts for winter-dormant grain crops. Following a series of bumper harvests, which depressed prices, adverse weather in South America and Europe brings agricultural markets back into focus, lifting their prices from multi-year lows. Mean-while, metals markets are preparing for the US president’s decision on tariffs on steel and aluminium goods, which bears the risk of trade frictions and broader retaliation by punished countries.
The news flow notwithstanding, one should not lose sight of the bigger picture. Strong global growth solidly underpins commodities, not least because the later stages of the economic cycle are usually the most price-supportive. However, we believe that the sentiment cycle has run ahead of the fundamental cycle. Sentiment remains at very bullish levels, as indicated by positioning in futures markets. The market mood has already remained upbeat for longer than usual and is set to cool, with profit-taking pressuring prices in the near term. Moreover, the fundamental outlook is partially softening. The US shale boom should keep the oil market amply supplied even with strong demand, while the moderate slowdown of China’s construction sector partially offsets rising metals consumption in the rest of the world. Last but not least, we believe that rising rates and confidence in the US economy should ultimately support the US dollar, turning the recent currency tailwinds into headwinds. We reiterate our cautious view.