May 13, 2021


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Soaring commodity prices raise fears of an “ overshoot ”

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From corn to crude and copper, commodities got off to a great start through 2021 as investors scour the market for hedges against inflation and bet on the “greening” of the global economy.

A fierce rally in the copper sent him over $ 9,000 a tonne for the first time since 2011. After a spectacular rally, Brent briefly crossed $ 66 a barrel on Tuesday, a level at which it began a tumultuous 2020. But is up about 17% since the start of 2021 to a nearly eight-year high of $ 5.54 a bushel.

The S&P GSCI spot index, which tracks price movements of 24 commodities, is up 17% this year.

Predictions of a so-called supercycle – a prolonged period of high prices as demand exceeds supply – have attracted investors to commodities, according to industry experts. Others are looking to buy real assets as a hedge against inflation.

“The latest commodity price gains are driven by inflows and inflationary expectations, rather than actual physical buyers,” said Alastair Munro of Marex Spectron, a brokerage firm.

Inflation is a growing concern for investors, due to the unprecedented monetary and fiscal policies implemented during the crisis. The weaker dollar also makes commodities cheaper in other currencies, which is fueling demand.

“There are many signs that the economic recovery, combined with a massive monetary and fiscal stimulus, could lead to inflation, as newly created money makes its way into the real economy rather than just financial assets,” he said. said Ian Lance, co-manager of Temple Bar Investment Confiance.

But some analysts fear the inflation trade will become self-fulfilling.

Ole Hansen, head of commodities strategy at Saxo Bank, said the market risked entering a “vicious cycle” where speculators and investors looking for a hedge against inflation were feeding on from each other.

“People worry about inflation so they buy commodities and then the prices go up even more,” Hansen said. “But that only lasts until the music stops.”

According to Dave Whitcomb of commodities specialist Peak Trading Research, speculative positions in agricultural futures are just below the record set in early January.

In China, the speculative net long position in copper on the Shanghai Futures Exchange – the difference between bets on rising and falling prices – has jumped sharply since the end of the Lunar New Year holiday.

“As calls for a metals supercycle grow louder, evidence suggests we are in the midst of a cyclical overtaking,” said Bart Melek, chief commodity strategy at TD Securities .

Goldman Sachs and other major investment banks believe copper is heading for its biggest supply shortfall in a decade as production cannot keep pace with demand in China and the rest of the world – in especially as public spending on green infrastructure increases.

However, some analysts fear that policymakers in China are trying to tighten credit conditions to curb asset bubbles. This could undermine its demand for industrial inputs.

“We expect most metals to start falling over the next few months as China accelerates its monetary policy normalization,” said Colin Hamilton of BMO Capital Markets.

The oil rally in recent months has been fueled by a pickup in transport demand as countries relax brakes linked to the virus. But oil producers also strongly supported their production, which drastically reduced production to offset the negative effects on consumption.

Morgan Stanley said this week that it estimates the oil market is now in deep deficit, with demand exceeding supply by 2.8 million barrels a day this year. “The stars have aligned themselves in the oil market even faster than expected,” said Martijn Rats of Morgan Stanley.

While demand for oil is still at least 5 million bpd lower than in 2019, mainly due to the economic fallout from the pandemic, it is expected to rebound once vaccinations against Covid-19 are rolled out.

Opec’s producer group could respond by ramping up production, but oil companies around the world have cut back on investment in new supplies. Some Wall Street banks say demand will continue to outpace supply growth in the years to come, potentially creating one last price spike before EVs cause consumption to spike.

Bank of America analysts said Tuesday that underinvestment in supply could send oil as high as $ 100 a barrel over the next five years. But such a surge would likely be short-lived, they said, predicting that Brent would average $ 50-70 a barrel by 2026.

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