WCU: Turbocharged commodities looking for more in 2021 WCU: Turbocharged commodities looking for more in 2021 WCU: Turbocharged commodities looking for more in 2021

WCU: Turbocharged commodities looking for more in 2021

Ole Hansen

Head of Commodity Strategy

Summary:  Are we at the beginning of a commodity super cycle? That's the question investors currently ask as the 'everything' rally continues. The strong tailwind from a weaker dollar, Chinese demand as well as vaccine and stimulus optimism were particularly noticeable in metals this past week. Copper charged higher to reach a seven year high while gold received support from a 7% jump in silver. The metals rally in 2020 has been the sharpest in a decade and the sector together with energy look set to receive an additional boost next year once the Covid-19 cloud lifts.

Commodity markets maintained their strong momentum ahead of year-end as the so called ‘everything’ rally continues to be fed supportive news. Apart from the weaker dollar and vaccine optimism lifting the prospects for 2021, the market is also being supported by speculation about more near-term stimulus from governments and central banks.

These developments highlight the current challenge where markets are pricing in a brighter tomorrow while the pandemic is still raging across many countries, especially in winter-hit regions across the northern hemisphere where the prospect for improvement - vaccine or not – is unlikely to occur until warmer weather arrives in March and April.

The combination of a global market flushed with cash, driving wild speculation across markets, and the potential for another super cycle in commodities led by China and its unstoppable appetite for raw materials, have seen the Bloomberg Commodity Index rise by close to 9% this quarter. Still on track for an annual loss, mostly due to heavy losses in energy during the early stages of the pandemic, the prospect for 2021 is looking increasingly bright.

The combination of the green transformation driving demand for key industrial metals, including silver, a weaker dollar, increased demand for inflation hedges, a pickup in fuel demand as global mobility recovers and not least rising demand outside China as governments go on a spending spree to support jobs. Adding to these the risk of elevated food prices as the weather becomes more volatile.

The ongoing ‘everything’ rally this past week was particularly noticeable in metals. Leading from the front we find industrial metals where HG copper topped $3.6/lb and LME copper $8000/t for the first time in seven years. That strength has been filtering through to semi-precious metals, with silver trading up by more than 7% on the week after breaking key technical levels, both against the dollar and against gold. 

Rising demand, especially from China, looks set to remain strong in 2021 when the rest of the world emerges from the Covid-19 cloud, thereby raising concerns about available supply following years of under investments. The metals rally in 2020 has been the sharpest in a decade with Goldman Sachs seeing echoes of the spike in early 2000’s when Chinese demand started a near decade-long super cycle.

One of the main obstacles for a commodity rally during the past decade has been the ample availability of raw materials. Oversupply during the past decade and especially during the past six years kept the commodity sector as a whole in a state of contango where the spot price, due to ample availability, trades cheaper than deferred prices. The impact on passive long investments can be seen in the below chart.

Since 2014, a portfolio of 24 major commodities carried a negative roll yield which at times was as high as five percent on an annual basis. From an investment perspective, this headwind combined with a generally strong dollar and low inflation reduced the attraction of the sector. In recent months, however, the roll yield has turned positive with the change so far being led by the agriculture sector where key crops have rallied strongly in response to lower production and rising demand.

Looking ahead to 2021 the expected pick up in demand as well as the reflation theme look set to underpin the sector, especially markets where supply may struggle to meet demand. We are focusing on copper, platinum and soybeans to mention a few.

Nothing ever goes in a straight line, especially when it comes to commodities. And while a bullish outlook for 2021 is growing we also have to acknowledge that the rally over the past few months has been driven by a very optimistic vaccine outlook driving the dollar down and stock markets higher.

With this in mind we may have reached levels that raise a few questions as 2021 gets under way. Not least in the oil market where Brent crude oil popped above $50/b for the first time since March. This during a period where the only bright spot is strong demand from China and India while lockdowns continue to impact fuel demand elsewhere. In their latest oil market reports for December, OPEC, IEA and EIA all warned that the rebalancing of the global oil market may take longer than previously expected. Following a demand loss of 9.2 million barrels/day in 2020, the three forecasters now see a 5.8 million barrel/day recovery in 2021 with the IEA seeing the oil glut staying until end-2021.

Having rallied non-stop since the early November vaccine announcements, Brent crude oil has now recovered 61.8% of the January to April collapse. Given the near-term outlook for supply and demand, the rally is likely to pause with $50/b being the level to gravitate around until an actual improvement in demand becomes more visible.

    Source: Saxo Group

    Gold and not least silver, the star performer this past week, enjoyed the continued surge in risk sentiment driven by a weaker dollar, U.S. lawmakers making progress towards a stimulus deal and the FOMC strengthened its commitment to supporting the recovery. Silver, up 7% on the week, was helped by a continued rally across the industrial metal sector. Once it broke the downtrend from the August high it raced higher to the next level of resistance at $26/b. Gold meanwhile is on track for its biggest annual gain in a decade has paused with $1900/oz the next major level to break.

    Source: Saxo Group

    Quarterly Outlook 2024 Q3

    Sandcastle economics

    01 / 07

    • Macro: Sandcastle economics

      Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

      Read article
    • Bonds: What to do until inflation stabilises

      Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

      Read article
    • Equities: Are we blowing bubbles again

      Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

      Read article
    • FX: Risk-on currencies to surge against havens

      Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

      Read article
    • Commodities: Energy and grains in focus as metals pause

      Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

      Read article
    • The rise of populism: Far-right parties will influence the future

      The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.

      Read article
    • Investing in China: Navigating Q1 amid economic challenges

      Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.

      Read article

    The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

    Please read our disclaimers:
    - Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
    - Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

    None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

    Saxo Capital Markets HK Limited
    19th Floor
    Shanghai Commercial Bank Tower
    12 Queen’s Road Central
    Hong Kong

    Contact Saxo

    Select region

    Hong Kong S.A.R
    Hong Kong S.A.R

    Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

    Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

    The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

    The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

    Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.