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Wealth Insights | Commodities

Commodity markets in spotlight as geopolitical conflict rolls on

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The geopolitical situation remains fluid and an escalation in the Russia-Ukraine conflict may buttress risk-on investor flows. Even as Russian production slides, a global GDP slowdown is hitting oil demand, relief for sanctions on Iran could be on the way, and non-OPEC+ supply is growing fast while Strategic Petroleum Reserve releases could now total 300-m bbls this year.

Commodities continue to outperform other USD-denominated asset markets with ~30% year-to-date return, versus -13% for US equities. The outperformance has been led by a ~60% gain in the energy sub-index and ~26% gain in the agriculture sub-index followed by the industrial metals sector with a ~21% price gain YTD and precious metals with ~5% gain.

Oil: Barring a full escalation, prices should soften by year-end. Russian oil exports and output are at risk with dwindling capacity over time. Meanwhile, recent data point to potential explosive growth of US total and net oil exports, providing significant relief for countries shunning Russian exports and with significant implications for global oil trade. Recent net US exports hit a record alongside record gross exports.

Gold: Citi’s global commodity team sees gold prices moderating from fresh all-time highs hit in March but holding a high(er) range for the balance of 2022 as financial markets grapple with surging headline inflation, geopolitical uncertainty, and recession tail risks. 2022E forecast is $1,910/oz, and 2023E forecast is $1,725/oz. Much hinges on whether the Fed can dampen inflation without significant growth pains. On balance, macro and micro factors tilt positive for the yellow metal this year.

Bulks and metals: Though Citi analysts expect metals prices and demand to remain robust in developed markets in the near term, recession risks in 2023 are rising, with the most pressure from a commodity inflation standpoint likely to be on Europe. Zinc has rallied beyond our bullish $4,200/t target and is being traded as the sustained European energy shortage play. The Citi Global Copper End-Use Tracker for 2M’2022 suggests that copper consumption has been holding strong. Citi analysts remain bullish in the near-term, as the level of consumption is running ~8-10% above 2019 levels, justifying high prices in order to continue to incentivize supply to respond.

 

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