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Wealth Insights | Asset Allocation | Commodities

Commodities: Geopolitical Uncertainty Support Short-term Upswing

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Oil: With the escalation of tensions between Russia and Ukraine, oil prices rallied above $100. Price spike risk and volatility remain high as global oil inventories are extremely low due to concerted OPEC+ action and plummeting US production while winter oil demand has been stronger, in part due to gas-to-oil switching. The outlook for oil markets remains very binary —a de-escalation could mean a subsiding of prices; further flashpoints could maintain a geopolitical risk premium in oil markets for a longer period. Although the West would not cut off Russia energy exports completely for now, western producers will have to step up and fill Russia’s energy export gap which will take as long as two years. This means price of oil and other commodities might linger in higher range for longer term. Meanwhile, Citi analysts expect to see Iranian sanctions relief in 2Q, along with fast growth in OPEC+ and non-OPEC+ supply which might put some pressure on oil price in 2H. 

 

Gold: Citi analysts upgraded the 0-3m gold point-price target $125/oz to $1,950/oz but remain bearish spot/forwards with a 6-12m downside target of $1,750. Even though gold trading tends to weaken into Fed lift-off, analysts think geopolitical tensions and elevated asset market volatility can support the yellow metal in the short-term. Over the medium term, higher real yields and stronger equities can weigh on bullion prices again, while risk premiums should erode. But robust physical demand in Asia and recession tail hedges might mute the extent of price downside in 2022. If bullion markets stay strong into April, it might point to a new bullish price cycle, and it would need to re-think our gold/rates thesis. 

Bulks and metals: Citi analysts expect lower grain prices on supply response later in the year. Russia/Ukraine conflict could potentially prolong the bull market for global grain markets and put upward pressure on food inflation. The unprecedented investor flows to commodities that started last year could soon peak if the Fed stays on course of its rate-hike plan. Citi analysts remain bullish on some metals (e.g. copper, aluminum and palladium), which prices are supported by China credit easing, tighter-than-expected global balances and elevating short-term risk premium due to geopolitical tensions.

 

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