Commodities: Energy and grains in focus as metals pause

Metal sector takes backseat in Q3

In 2024, we focused on the metal sector as a potential winner for the year and beyond, while highlighting why the year-long consolidation was ending.  As of now, the Bloomberg Commodity Total Return Index is up more than 5% for the year, with all sectors except grains contributing to this rise. Despite a setback in the energy sector during the second quarter due to a deflated geopolitical risk premium, the metal sectors continued higher. Gold and copper reached new record highs before pausing, and silver hit levels not seen in 13 years.

Robust demand, production challenges across key commodities, and the prospect of lower funding costs supports a restocking phase. These factors could drive the Bloomberg Commodity Total Return Index towards a +10% gain for the year. While we maintain a positive outlook for the coming quarter, we see the energy and agriculture sectors as potential winners. Metal sectors are expected to consolidate as investors adapt to higher prices. Industrial metals require a recovery in Chinese demand to justify higher prices at this stage.

Crude supported by OPEC’s line in the sand; grains vulnerable to weather volatility 

The energy sector saw the second-quarter demand for crude oil and fuel ease more than expected. We expect robust demand to return in the third quarter, driven by increased mobility and high energy demand for cooling amid seasonal heatwaves across the Middle East and Asia. This and OPEC production restraints support our positive sector outlook, which includes natural gas, and we see Brent crude remaining in a wide USD 75 to USD 90 range.

The grains sector is showing signs of recovery, after nearly two years of losses. This is partly due to short covering by speculators who held a record net short position just before a challenging start to the current growing season. Adverse weather from southern Brazil to Europe and Russia has raised concerns about rebuilding stock levels. Wheat production in Russia has seen significant downgrades, only partially offset by a positive outlook for US production. Dry weather conditions across key production areas will likely continue to underpin soft commodities from cocoa and coffee to sugar.

Metals take a breather following run to record highs

Copper reached a record high earlier this year. While we believe in the long-term upward trajectory, current soft demand in China, where stock levels have risen to pandemic-era highs, suggests that the timing was off. As Peter Garnry highlighted in his equity outlook, the electrification of the world is a game changer supporting copper, the number one conductor of electricity. However, while the long-term outlook points to higher copper prices, the short-term outlook needs to improve before prices eventually move higher, a development that is unlikely to emerge in earnest before 2025 and beyond, when the funnel of new supply begins to dry out.

The gold and silver surge during the first half year may trigger a period of consolidation, while investors adopt to higher prices. But overall, we see no major change in the reason for owning precious metals, and with the prospect of US rate cuts during the second half inviting back ETF investors, a net selling group since 2022, we see higher prices at year-end. Central bank buying, one of the major engines behind the gold rally in recent years, may also slow in the short-term, as highlighted by the People’s Bank of China, which halted purchases in May after 18 months of non-stop buying. We maintain our end-of-year call for gold at USD 2,500 per ounce, while raising silver to USD 35 per ounce.