Commodities Outlook: Slowdown Then Recovery

• Forecast changes: Heavy central bank buying of gold in 2022 will slow, but remain well above average. China wants to diversify U.S. Treasury holdings and gold is one beneficiary. The mystery over the large unidentified central bank buyer also remains. Higher 10yr real U.S. Treasury yields will mean a decline in gold prices, but to $1875 by end 2023 rather than $1750 as we previously forecast (the benefit from banking turbulence will likely only be temporary).
• Risks to our views: Aside from the outcome for global growth, the biggest swing factor is the war in Ukraine. A spillover of the war to other countries would produce a geopolitical spike in commodity prices, while a credible peace deal that removes Russian sanctions (low probability) would hurt oil and gas prices.

Figure 1: OECD Crude Oil and Other Liquid Inventories (Mln Barrels per Day)

Source: IEA 

Oil: Demand but Then Supply Worries 

The factors affecting the 2023 forecast for global oil demand have become more volatile over the last three months. This volatility is due to a combination of factors, including the quicker than expected reopening in China and a banking turbulence, which has caused more pessimistic views of the U.S. and European economies.

Still uncertainty does exist around China. The service sector bias in the reopening should benefit energy more than base metals/bulks, while the expensive nature of gas relative to oil will also be supportive. Upside risks exist to the China oil demand picture, with the risks in the rest of the world being more balanced (we only see a shallow recession in the EZ). Additionally, jet fuel demand should boost global crude oil output, as global tourism finally gets back towards 2019 levels. U.S. EIA and IEA demand forecasts will likely be revised upwards and mean less of a rebuild in OECD inventories (Figure 1).

The response will likely be an increase in prices through 2023 and we forecast $85 on WTI for end 2023. However, upside surprises on China demand can also be partially accommodated by 2022 OPEC production cuts being partly reversed and we pencil in a 0.5mln production quota rise in H2 2023.

The picture for 2024 will likely be dominated by supply more than demand. While the global economy should further recover with DM growth in 2024, this will likely only mean a modest additional demand rise of around 1.25mln barrels per day. The key question is how much OPEC will restore production quota. We would look for the remain 1.5mln of the 2022 production quota cuts to be reversed, but the actual addition to global production will be less due to disruption in Russia and Nigeria. Russia will likely also suffer into the middle of the decade from sanctions that will restrain demand, while the friction from redirecting to new buyers will likely sap demand and then production by 1.0-1.5mln in 2023/24. Outside of OPEC+, new additions to global oil capacity will remain low and are centered on U.S. shale oil, but financial discipline now means less of a supply response to higher oil prices than in the past.

Thus, we expect some further upward pressure in 2024 with WTI end at $95. If OPEC production quotas are not restored, then WTI can exceed $100.

Copper: Medium-term Bullish 

The copper market has discounted most of the reopening benefit in China with the price pick-up in recent months. Some uncertainty, however, still exists on the scale and composition of growth. We expect further refinements of the three red lines for China property developers, and thus, we look for a stabilization rather than rebound in the residential property sector – the market looks too optimistic on this copper demand prospect. Elsewhere, H1 economic weakness will swing towards 2024 global economic recovery, which will help build physical demand.

The supply picture is mixed. New supply is coming on stream in 2023 (Quellaveco in Peru and Quebrada Blanca in Chile). However, political unrest in Peru will likely last and impact production, while Chile also has production issues (low ore grade in certain mines). Financial inventories are low, but China and industrial inventories are reasonable. China reopening should also help more scrap copper to be recycled. Overall, a small surplus is expected and we look for copper prices to end 2023 at $9000. However, the pipeline of new projects has not been materially boosted and we see prices having to go higher in the recovery to spark required mine investment long-term. We now forecast $10000 for end 2024 copper prices. 

Gold: Underpinned by Central Bank Demand

In purely financial terms gold prices are overvalued. Looking at 10yr real U.S. Treasury yields, using breakeven inflation (Figure 2), would suggest that most of the 2019-20 increase in prices should be reversed – we see 10yr real yields remaining positive and close to current levels for the remainder of 2023 and 2024. The $150 boost to gold price from banking turbulence will likely not last as we do not see this as being a 2008 style systemic banking crisis (here). 

Figure 2: Gold Prices and 10yr U.S. Treasury Real Yields Using Breakeven Inflation ($ lhs, % rhs) 

Source: Continuum Economics 

However, long-term prices are being supported by central banks desires to avoid the type of FX reserve sanctions that hit Russia after the invasion of Ukraine. A future invasion of China by Taiwan could see similar sanctions. November to January data from the PBOC shows 77 tonnes bought by China, while the decline in China holdings of U.S. Treasuries continues. The official pace has been slow and this buying will likely pick-up further in 2023 and remain through 2024. Additionally, the large mystery buyer in H2 2022 could continue in 2023, with speculation remaining that this could be China. A repeat of the huge central bank buying of gold in 2022 is unlikely, but should support gold prices and stop them reconnecting with 10yr real yields. We look for gold prices at $1875 by end 2023 and $1800 by end 2024.