Norbert Ruecker, Head of Macro & Commodity Research Julius Baer
As the oil market increasingly wonders about the evolution of the supply agreement, the petro-nations continued their oil talk pledging for a longer-lasting cooperation between the Organisation of Petroleum Exporting Countries and Russia after the deal expires at the end of this year. 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 depressing prices, adverse weather in South America and Europe brings agricultural markets back into focus, lifting their prices from multi-year lows. Meanwhile, 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. Despite this news flurry largely supporting the ongoing recovery of commodity markets following the early February sell-off, we should consider the bigger picture. The sentiment cycle has run ahead of the fundamental cycle. The solid ec-nomic backdrop lifts commodity demand and tightens supplies, but this is largely anticipated in today’s prices. Sentiment remains at very bullish levels, as indicated by the futures positions. The upbeat mood is set to cool, with profit taking pressuring prices in the near term. Adding the outlook for a strengthening US dollar, we stick to our cautious view on commodities.
Commodity markets continue to recover lost ground following the early February sell-off, not least supported by a flurry of bullish news. We stick to our cautious view because the sentiment cycle cooling usually lasts weeks, not days, and because the dollar tailwinds should revert to headwinds again soon.