Commodities come in from the cold

STEALTH: The stealth commodities rebound has broadened, after a terrible 2023. With oil breaking $90/bbl.. New gold highs. ‘Dr. Copper’ surging. Alongside soaring niches like cocoa. Demand has been under-estimated. Supply is structurally tight. And technicals disproportionately important. With investor sentiment depressed, demand for inflation hedges, and geopolitical risks rising. Its a better but not great outlook. With US dollar resilient, US bond yields high, and China demand half-hearted. And major natgas and cereals markets deeply over-supplied. Caveat emptor that commodities has the worst long-term record of all assets and ‘solution to high prices is high prices’.

FUNDAMENTAL: Commodities is seeing a slow-burn supply-demand squeeze. 5.5% OPEC+ oil supply cuts and weather-driven disruptions are coming against a backdrop of 15-years of supply under-investment driven by low prices and ESG headwinds. Whilst demand growth is being under-estimated, with US ‘exceptionalism’ and China manufacturing signs of life. Most recently by the US Energy Information Agency raising its oil demand outlook and correcting past under-estimates. Yet the asset class is far from firing on all cylinders. Natgas and cereals are over-supplied. The robust dollar is dampening overseas demand. And higher oil will start to fray OPEC unity.

TECHNICAL: We see these drivers as significant. 1) A geopolitical risk premium has reemerged in oil and been a driver of safer-haven gold. 2) Stalling US inflation progress has driven investor demand for traditional inflation-hedges like commodities. 3) Whilst low investor commodity allocations, its 2023 underperformance, and extreme longer term underperformance vs tech (see chart) are contrarian positives. Our global retail investor survey sends a mixed allocation message. With 8% highlighting commodities as the asset they are most likely to increase investments in. Its ranked behind crypto, stocks, cash as the most attractive. But ahead of local bonds, FX, alternatives.