Commodities Outlook: Navigating Uncertainty
- The oil market is currently dominated by demand concerns. A relatively weak global economy for the remainder of the year is set to dilute oil consumption, which is expected to rebound in 2024. On the supply side, OPEC+ has curtailed oil production and extended these cuts into 2023 and 2024. We still see oil prices rising in H2, as financial markets are too pessimistic and inventories are too low (Figure 1) and need to be rebuilt. Our end-2023 WTI forecast is revised down to $85 vs $90 from our previous outlook and for end-2024 we now foresee WTI at $90.
- Copper prices have swung through the year. Price movements have been mostly influenced by global recession fears, expectations on China’s economic performance and the U.S. Fed monetary policy. We maintain our forecast of copper at $8,800 for end-2023 as low inventories outside of China can provide some support to prices. End 2024 is forecast at $9,200 in line with a global recovery.
- Forecast changes: We have revised up our forecast of gold to $2,000 per ounce for end-2023 as central bank demand is expected to continue to remain high. For end-2024 we picture gold at $1,950 due to higher 10 year U.S. yields and lower central bank demand.
- Risk to our views: A mild recession in the United States, a prolonged recession in the Euro Zone or weaker China economic data would hurt demand for commodities. In this scenario, we could see WTI falling to $60 and copper to $7,500 for end-2023.
Figure 1: U.S. Crude Oil Stocks (Million Barrels)
Source: EIA / Continuum Economics
Oil: Negative Sentiments Leading the Market
Demand concerns are the leading factor influencing short-term projections of oil prices. We see three determinants of a downward revision in oil consumption for the second half of 2023, including the weaker than expected recovery of China’s economy, a mild recession in the Euro Zone and stagnation in the U.S. Moreover, while not outweighing the aforementioned factors, seasonal consumptions patterns, higher than anticipated demand from India, jet fuel demand with the ongoing recovery in tourism, and a robust consumption rise from other emerging markets could support the demand for oil.
The near-term outlook of oil supply has been dominated by production cuts from OPEC+, which has already curtailed production quota by 3.66 mb/d since November 2022. In this context, two elements are worth bearing in mind. First, if the second half of the year does not see a pick up in oil demand, we see possible further voluntary production cuts (most likely during OPEC+ 36th ministerial meeting to take place next November). Such a measure could be the result of OPEC+ wanting to secure a floor price of around $80 – in particular Saudi Arabia, which needs this price level to balance its budget according to the IMF. It must be noted, however, that additional cuts might not necessarily be materialized in higher prices, as it would also depend on the strength of global demand. Then, it will be key to monitor the compliance of production quotas and actual cuts, in particular from Russia. High flows of Russian crude oil coupled with an alleged lack of transparency on the country’s data have led Saudi Minister to ask Russia to provide clear information. A defiance to these quotas could lead to a price war.
Diverse elements could threaten our view on the oil market. On the downside, weaker developments in advanced economies than the ones in our baseline scenario could push oil prices as low as $60. Alternatively, on the upside, existing limited inventories in the U.S. (Figure 1) coupled with a faster recovery could pressure prices higher.
As a result of the foreseen global economic slowdown of 2023, we now look WTI at $85 for end-2023 – versus $90 in the March outlook. The current low oil prices are a reflection of pessimism in the financial community; while the physical market has low inventories that should squeeze oil prices higher in H2 2023 (this could include the U.S. SPR). For end-2024, and consistent with the forecasted global economic recovery, we see WTI at $90.
Copper: China and U.S. Fed Dependent
The sentiment on the copper market has fluctuated through the year. During the first six months of 2023 the metal’s price fell from $9,400 per ton in mid-January to $8,400 in the first week of June. This price trajectory reflects the markets’ disappointment on China’s economic performance and highlights that the near-term outlook for copper will be dominated by the degree in which China grows the upcoming months.
Acknowledging that China consumes more than fifty percent of the world’s copper, the resurgence of the country’s property and manufacturing sector will be determinant for the commodity’s price. In this regard, despite of China’s government recent and planned measures to boost the economy, we believe that activity will not pick up sufficiently to return copper’s price to the high levels seen at the beginning of the year.
In the United States, supported by measures such as the Inflation Reduction Act and the adoption of California’s Advanced Clean Cars II rule by more states, copper will likely see a long-term surge in demand as a result of higher electric vehicle sales but some effect should also be evident in 2023. Nevertheless, in the short term, this positive shock could be counterbalanced by a weakened development of the U.S. housing sector. Finally, an end to the Fed tightening cycle will likely hurt the U.S. Dollar, making copper relatively cheaper to other economies.
Copper supply will likely pick up in 2023 and 2024 as new projects (Chile, Russia, Mongolia, and DRC) have either started operations or are expected to do so in the current or next year. However, current levels of inventories are low (compared to pre-pandemic figures), which will give support to copper prices. In the longer term, however, demand-supply imbalances are expected as demand for copper for electric vehicles, construction and electronic devices exceed existing global production.
An assessment of the demand and supply forces leads us to maintain our forecasts from the previous quarter outlook, i.e., $8,800 per ton for end-2023 and $9,200 for end 2024. A recovery in the global economy is the key factor behind the forecast.
Gold: Central Banks Leading the Way
The upward trend of Central Bank demand of gold is expected to continue in 2023 (Figure 2). The current state of interest rates and inflation concerns are listed as the most relevant topics for Central Banks’ management decisions, according to a report from the World Gold Council. Moreover, while the jewelry sector’s gold demand might decrease, as China’s customers change their consumption patterns – temporarily shifting away from jewelry, the tech industry demand in H2-2023 is expected to increase due to seasonal patterns. We continue seeing 10-year U.S. government bond yields within the range of 3.25-4.25% for 2023 and 2024; consequently, we don’t observe large swings in the market arising from this factor.
Gold supply has seen record levels of mine production and is expected to rise in the second half of 2023. The recent levels have been accomplished by important output increases in Mongolia, Brazil and South Africa. Project expansion in the United States plus gold recycling contribute to the rising supply of the metal.
All together, we look gold prices at $2,000 per ounce by the end of 2023. The expected recovery of the economy in 2024 could boost demand from the consumer-side sector, but higher 10 year U.S. yields and an expected decrease in Central Banks demand would push prices down to $1,950 per ounce for end 2024.
Figure 2: Central Bank Net Purchases/Sales of Gold (tons)
Source: World Gold Council / Continuum Economics