Commodities Outlook: Rising Tides

• Forecast changes: We have revised down our copper forecast to $8,400 for end-2023 and to $8,800 for end-2024. The revision is based on our view that Beijing has not adopted, and will not adopt, aggressive measures to achieve a significant recovery in China’s property and manufacturing sectors.
• Risks to our views: Supply risks are the main threat to our view for 2024. For instance, if voluntary or OPEC+ production cuts remain in place throughout the year, then WTI could surpass $100 by end-2024. 

Oil: Shifting Dynamics in 2024

Delving into next year’s oil outlook, we expect Saudi Arabia’s voluntary cuts and Russia’s export curbs to be lifted during the first quarter of 2024. Likewise, in our baseline scenario, we consider the possibility of OPEC+ to slowly start reversing its production quotas in the second half of next year. This movement would be similar to the one the cartel agreed in mid-2021 after the output cuts related to the pandemic were implemented in 2020. Moreover, the increase in production from the cartel could be considered as a reaction from increasing supply from non-OPEC countries, such as the United States, Brazil, Canada and Norway (Figure 1), as well as a reaction to an increase in demand expected to happen in the second half of 2024.

Demand for oil is predicted to be weak during the first half of next year, which, coupled with the supply outlook discussed above, will help build inventories during H1 2024 and can be reflected in lower prices. The soft demand will be a consequence of the loss of momentum in European and U.S. economies; additionally, the resilience of the consumer sector that China has shown through 2023 is projected to fade away during Q1 2024. However, we anticipate that demand will rise during the second half of next year, and in particular during Q4 2024, as the lagged effects of a monetary easing cycle in the U.S. and Europe slowly start feeding through the economy during this period and would accelerate into 2025. We forecast WTI to reach $90 by the end of 2024.

For the remainder of 2023, we expect inventories to remain tight as supply cuts remain in place. Unlike the previous quarter, when we stated that the financial community was too pessimistic and that low inventories would make oil prices rise (as it happened), we now argue that traders are being overly optimistic. Particularly, we believe that signs of slowdowns in major economies will start to appear by the end of the year and counteract the rally in oil prices seen through August and September of this year. Thus we look for WTI at $85 by end-2023.

Certain risks can threat our view on oil prices. In the short term, if consumption remains resilient among large economies throughout Q4 2023, then low inventories will likely continue supporting a bullish view and WTI might end 2023 above $95. Next year’s threats mainly come from Saudi Arabia’s, Russia’s and OPEC+ decisions to reverse their cuts; in particular, if these do not take place, the oil market can remain tight and oil prices could surpass the $100 by end-2024.

Figure 1: Total World Oil Production (million barrels per day)

Source: EIA / Continuum Economics 

Copper: China's Role and Market Dynamics

As we approach 2024, we expect China’s property and manufacturing developments to continue playing a crucial role in determining copper prices. Our perspective is that Beijing will likely keep introducing measures to stimulate these sectors, which have provided some support to the metal’s price throughout 2023. However, we do not anticipate the implementation of the aggressive policies required to cause copper prices to soar above $9,000. On the upside, our baseline scenario projects a weaker USD for next year, potentially making copper (a USD priced commodity) relatively cheaper. The transition towards electrification and clean energy will continue bolstering the demand for this metal, though the real demand pick-up will come through the middle of the decade.

Copper production is expected to rise during 2024 when compared to 2023’s estimated output. This surge is foreseen in countries such as Russia and the Democratic Republic of Congo, where new projects and existing mines will ramp-up next year’s output. Likewise, operational challenges that have reduced mines’ production estimates for 2023 in countries such as Chile and the United States are not expected to compromise next year’s production. Furthermore, we believe that underinvestment in exploration and lack of construction of copper mines will not yet jeopardize output sufficiently enough to have supply gaps next year; however, these might appear during the second half of the 2020s. We see copper prices at $8,800 by end-2024.

For the last quarter of 2023, we anticipate that several factors will provide some support to prices, although they may not necessarily drive them significantly higher. Seasonal demand in China during the upcoming months will act as a positive sign to the market; nevertheless, such consumption is set to be relatively weak when compared to the same period in previous years. Additionally, copper inventories in the Asian country remain low, posing a risk in case activity unexpectedly spikes. Demand from the rest of the world does not appear to be a factor pushing prices higher either. For instance, high interest rates in the U.S. and weak manufacturing activity in Europe are likely to limit copper consumption. This view is further supported by the observed rise in copper inventories (Figure 2). We revised our end-2023 forecasts for LME copper to $8,400.

Figure 2: Copper Stocks in LME Warehouses (metric ton)

Source: Datastream / Continuum Economics 

Gold: Anticipating a Gold Rush

We foresee gold demand gaining momentum during the first half of 2024 as investors wait for a Fed pivot. In our baseline scenario, we expect this reversal from monetary tightening to occur during the second quarter of next year. In light of this outlook, we anticipate 10-year U.S. government bond yields to fall within to 4.2% by end 2023 and 3.9% by end 2024, which will heighten asset allocators’ interest in gold. Another key driver of gold prices will be central banks’ demand. A survey conducted by the World Gold Council in May of this year revealed that seven out of ten central banks intended to increase their gold holdings in the next twelve months. The People’s Bank of China, one of the largest contributors to central bank demand throughout the year (it has added 217t in its gold reserves during the last 12 months, equivalent to an 11% increase), is expected to continue diversifying its foreign reserves in 2024 and increasing its gold stock. This aligns with Beijing’s ongoing interest in reducing exposure to U.S. treasuries. We now see gold at $2,050 per ounce by end-2024.

For the remainder of 2023 we expect a market behavior similar to what we have witnessed throughout the year. Specifically, we believe that investors’ appetite for gold would remain weak as yields stay high, leading to ETF outflows. Central bank demand is expected to continue to be strong, offering some support to gold’s price, although not reaching the levels of 2022. Jewelry demand remains resilient but below pre-pandemic levels, and we expect this trend to continue for the rest of the year. Our projection places gold prices at $1,940 per ounce by the end of 2023.