Commodity forecast for 2022: How gold, oil and industrial metals are expected to fare this year

Commodities were one of the best performing asset classes of 2021, with the Bloomberg Commodity Index gaining more than 25 per cent for the year.

Demand rebounding after the pandemic, supply chain disruptions, government stimulus and adverse weather have all contributed to market tightness last year, driving commodity prices higher. Heading into the year, supply chain disruptions are anticipated to improve, while the commodity balances will appear less tight than in 2021. This should ideally result in lower prices from current levels. Nonetheless, prices are expected to remain above long-term averages.

Besides, there will be a number of macro headwinds, which will likely limit further upside for the commodities complex. Firstly, global central banks are set to tighten monetary policy over the course of 2022, which will increase the pressure on yields and the dollar. Since commodities are dollar-denominated and are non-yielding assets, this scenario will cap the upside.

The Chinese property market is another lingering concern. If there is a further slowdown, it is likely to put downward pressure on the complex, particularly metals. Nevertheless, the likelihood of this happening looks less likely as China seems to be becoming a little more accommodating when it comes to policy.

Fundamental backdrop remains favourable for oil
Oil is set to see strong supply growth from non-OPEC nations, which coupled with a further easing in OPEC+ supply cuts, should push the global oil market back into surplus. China and the US are trying to put political pressure on global oil markets by releasing oil from their strategic reserves.

Nevertheless, OPEC leader Saudi Arabia’s comments suggest that the OPEC members are unlikely to succumb to pressure tactics. Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman commented that it was up to the US to release more supply from strategic petroleum reserves. However, whether or not the prices will correct on any more reserve supply releases, will depend on the magnitude of reserve replenishment, and how top oil importers exert pressure on OPEC.

From a fundamental perspective, oil seems to be bullish as demand for 2022 could hit a record high on the back of recovering air travel. The post pandemic demand outstrips supply, and it could go even higher as countries open up further. OECD inventories are likely to fall by the summer to their lowest levels since 2000.

Moreover, OPEC+ spare capacity is also set to drop to historically low levels of about 1.2 million barrels per day (bpd). This sets a bullish backdrop for oil.

Major gains for gold will remain on hold
Gold finished the last year nearly 4 per cent lower, its first yearly loss in three years, despite inflation hitting the highest level in nearly four decades. Since the metal does not pay any interest, it succumbed to rising yields as central banks worldwide resorted to policy tightening measures to contain inflation. Gold may face similar dynamics in 2022 like those seen last year, as tightening from central banks around the world along with expectations of further dollar strength should mean investment demand for gold remains weak.

Nonetheless, contrary to expectations, gold has managed to remain stable so far this year even as central banks prepare to dial back stimulus and inflation-adjusted bond yields rise. Given expectations for even more rate hikes this year than markets are pricing in, gold may be seeing some inflation hedging from traders who believe central banks are not doing enough to reduce price pressures.

Meanwhile, recent market volatility and geopolitical concerns surrounding Russia and Ukraine have boosted demand for safe-haven gold.

For the year, gold is expected to remain range bound with any major upside potential capped as interest rates rise. However, at the same time, market pullbacks will likely sustain the hedge demand for gold, while jewellery and central bank gold demand may provide additional longer-term support. Strong resistance for gold is seen near the $1,900-1,920 zone, while strong support is seen near $1,680 levels.

Positive outlook on industrial metals
The supply demand balance for most metals appears to be improving, implying that prices will pull back from their present highs. However, they are expected to remain above their long-term averages. Inventories are low among several metals, and the outlook on the medium-term forecast for demand is positive due to increased expenditures in green initiatives, which are metal-intensive.

Copper will continue to prosper in the long run
The global copper market could have a bearish undertone for the second half of the year, as new supply hits the market. Refined output growth of 6 per cent will outstrip refined demand growth of 1.3 per cent this year. The Democratic Republic of the Congo-based Kamoa-Kakula concentrator capacity is to double in the second quarter of 2022, while Anglo American predicts its 300,000 metric tonnes (t)/yr Peruvian Quellaveco mine will start this year.

Nevertheless, the long-term fundamentals of copper are bullish as its demand is forecasted to rise by 16 per cent by the end of the decade, attaining 25.5 million tonnes per annum (tpa) by 2030. This is compared to a supply forecast showing a 12 per cent decrease versus 2021 levels. Moreover, current copper mines are near peak capacity due to ore quality and reserves exhaustion.

Iron ore outlook to remain sour
Iron ore prices have rebounded nearly 45 per cent from the lows of $80 per tonne in November 2021 to $114 per tonne as of January 2022, thanks to the recent measures by the Chinese government to front-load infrastructure investment to help the economy.

However, the outlook for iron ore appears gloomy, courtesy of the turmoil in the country’s property sector and continuing steel production curbs in line with the country’s decarbonisation goals. As witnessed in the second half of 2021, steel output cuts are likely to feature again this year in China. Because iron ore is used to create steel, a decrease in steel production will put downward pressure on iron ore prices.

Aluminium appears strong
The aluminum market is approaching a period of structural shortfalls, and there is no quick fix to resolve this – this should likely see prices trading higher.

Nickle is likely to continue doing well
Nickel remains in the spotlight due to fears of a shortage, as battery demand grows and supplies face headwinds. Nickel prices have risen to their highest level in nearly 11 years, as Indonesia – a major producer – has touted the idea of taxing nickel exports, just as stocks of the metal dwindle. As long as these imbalances continue, prices will remain elevated.

Agricultural commodities
Prices are expected to ease as weather conditions improve, but they’ll likely remain above long-term price averages. Overall, there are some downside risks across the commodities complex in 2022, however relative to the historical average, prices are likely to trade at elevated levels for another year. Of course, the course of the pandemic will remain a potential risk factor, be it upside or downside.

Yogesh Khairajani is the global market strategist at Century Financial 

Taken from GB Invest February 2022 edition