Commodities Outlook 2021: Let the good times roll

The unprecedented lockdowns that we have seen this year weighed heavily on commodities' demand, while also seeing investors fleeing risk assets at the peak of the pandemic. It was a year where we saw many firsts, including even negative oil prices. However, since the peak lockdown period, we've seen quite the recovery as economies reopen.

Some commodities needed a helping hand to push them higher, such as the OPEC+ production cuts for oil, while others were able to get past demand concerns, only for supply issues to become more pressing - something that was true for much of the metals complex. However, one of the key drivers behind the recovery comes from China.

The country has boosted energy imports, metals and agricultural commodities which, in a year of uncertainty, has undoubtedly helped markets. China’s post-Covid-19 stimulus has led to more infrastructure investment and increasing demand for metals, and ensuring food security through a global pandemic has seen the country boost agricultural imports too. The 'phase-one' trade deal has also played a role in increasing buying appetite.

Looking ahead to 2021, we expect the commodities complex to continue to move higher. A further recovery in economies around the world should prove supportive, while there is the potential for further stimulus. Significant growth in money supply, rock bottom interest rates and fiscal stimulus have boosted inflation expectations; therefore, we expect to see more money flowing into commodities with speculators boosting their long position, notably in metals and agricultural. Oil has also seen some speculative interest, but there is clearly room for more buying in the energy space over 2021.

In addition to these supportive factors, our FX strategy team believes the USD will continue to weaken next year, which should provide a helping hand to the commodities complex.

Looking at fundamentals, OPEC+ production cuts should continue to see the oil market drawdown inventories over 2021, bringing inventories back towards more normal levels, while the rollout of a vaccine should also prove constructive for demand and bring back some semblance of normality along with international air travel. For base metals, we should see fewer supply disruptions over 2021 and the prospect of strong growth demand outside of China should underpin markets. In addition, Covid-19 has led to a renewed push for a greener future - a trend that is constructive for several metals.

Gold managed to trade to record highs this year, with a move to safety amid the uncertainty. Falling yields and a weaker USD only provided a further boost. While vaccine optimism abounds, we still believe gold prices will trend higher next year amid growing inflation expectations and negative real yields.

Finally, agricultural commodities have rallied on the back of strong Chinese buying this year. There are several reasons behind this increased buying, including the trade deal and we think that Chinese demand will remain robust next year, with agreed purchases set to increase during the second year too.

While we generally hold a constructive view on commodity markets over 2021, there are plenty of risks during these uncertain times. Covid-19 vaccines seem to be getting approvals quicker than expected, but the speed at which they will be rolled out on a large scale is still unsure. The key risk going into next year remains the potential for further Covid-19 waves and lockdowns.