- From oil to gold, prices likely to ease from historic highs seen in 2022
According to Nikkei Asia article published on January 9, 2023, monetary policy and China's reopening will be key variables in global commodity markets this year, after multiple commodities set historical highs in 2022, driven by the Ukraine war and sharp inflation, more broadly.
While analysts' predictions range from bullish to bearish, one thing that they agree on is that most commodities are unlikely to soar above the level they reached last year.
Take crude oil, for example. The benchmark West Texas Intermediate (WTI) rose to $122 per barrel in June last year as the world's third-largest producer, Russia, was sanctioned by the West over its invasion of Ukraine. That was the highest price since 2008 when WTI hit an all-time high of $145 a barrel. As of early January, WTI is trading around $76.
Tatsufumi Okoshi, a senior economist at Nomura Securities, forecasts WTI will rise to the $90 level, given that global oil demand is expected to expand as China ends its strict zero-COVID policy and international travel recovers. The country lifted mandatory quarantines for international travelers on Jan. 8.
"Even if China's economic recovery is subdued and prices fall, OPEC+ countries are likely to cut output to keep the price above $70," Okoshi said.
Gas prices also soared in 2022. Asia's benchmark for liquefied natural gas Japan Korea Marker (JKM) in August hit a record $69 per million BTU. The price stood around $29 as of early January on the back of relatively high inventories in Europe and Japan. Okoshi predicts JKM could rise to $40 or higher on as China's economy recovers.
Despite an explosion of new COVID-19 cases, China's outbreak is expected to peak on Jan. 13 at 3.7 million cases a day, according to U.K. health analytics company Airfinity. "After new infections peak, China is likely to step up stimulus measures to bolster the economy in the April to June quarter," Okoshi said, adding that such a move would impact global demand and flow of the commodities.
Copper is especially sensitive to Chinese demand, with the country accounting for half of the global total. Benchmark futures on the London Metal Exchange rose to $10,375 per tonne in March, lifted by geopolitical uncertainty and the worldwide decarbonization push. Copper currently trades around $8,300.
Takayuki Honma, chief economist at Sumitomo Corporation Global Research, forecast the metal's price will range from $7,000 to $9,000 this year, adding that it is unlikely to soar above the $10,000 level seen last year.
U.S. monetary policy will be another key to forecasting copper and other commodity trends. Against a backdrop of inflation, the Federal Reserve Board hiked interest rates throughout 2022, strengthening the dollar, which dominates commodity markets.
"We expect a stimulus-support recovery form zero COVID in China, and a Fed pivot to facilitate a bounceto $8,500 per ton by end of 2023," economists at Citi Research said in December.
Gold is especially responsive to interest rate changes, as the metal itself offers no interest yield. Rate hikes often spur investors to sell gold. Benchmark gold futures in New York are around $1,860 per ounce, down from $2,058 in March 2022.
Uncertainty remains over whether the Fed will cut rates this year, though analysts say that as long as inflation continues, such a move is unlikely, even if the economy slows.
"By the Federal Open Market Committee meeting in March, we will have an idea of roughly when the Fed will stop raising rates," said gold market analyst Koichiro Kamei at Tokyo's Market Strategy Institute. Kamei expects gold prices to range from $1,770 to $2,100 this year as the dollar weakens.
Other factors may also impact the commodity market.
Honma of Sumitomo Corporation Global Research warned that "resource nationalism" could gain momentum in some countries, creating supply disruptions for key minerals. Most recently, Indonesia announced in December that it would ban bauxite exports starting in June as part of an ongoing effort to boost its domestic minerals industry.
A lack of investment in the commodity sector is another concern.
"We expectto be shaped by underinvestment in 2023," said economists at Goldman Sachs. "While markets are divesting today, what's more startling is the lack of investment in commodities for tomorrow."
"The majority of the commodity deflation came from central bankers raising the cost of capital and draining market liquidity, both physically and financially, which is not a long-term fundamental solution," they added.
"Without sufficient capex to create spare supply capacity, commodities will remain stuck in a state of long-run shortages, with higher and more volatile prices."
