Energy commodities dragged the S&P GSCI index down to a second consecutive month of decline in October as several countries across Europe reimposed stringent lockdown measures, while agriculture commodities continued to find support from a return of Chinese demand.
The index, which tracks futures for 24 raw materials, fell 2.7% month over month in October following a 2.2% drop in September, widening its year-to-date loss to nearly 22%.
Energy commodities drove the decline, with the petroleum index down more than 10% on the month. A fresh surge of COVID-19 cases forced several major European countries to bring back strict containment measures late last month, adding downward pressure on crude demand.
"The situation this time around will likely prove less dramatic but still quite severe," said commodity analysts at J.P. Morgan in an Oct. 30 research note, adding that road fuel demand in the region is likely to take a hit as mobility drops. In the U.S., localized outbreaks are expected to broaden and weigh on mobility ahead of the winter season despite a lack of government-imposed lockdown measures.
While demand expectations contributed to the energy sell-off, the outlook on supply was the main driver of the decline, TD Securities analysts, led by head of commodity strategy Bart Melek, said in a Nov. 2 note.
OPEC and its allies are set to meet later this month to decide on production policy amid talks from Russia about the possibility of extending current supply cuts by another three months. Libya, which is exempt from the OPEC+ deal, also saw a rapid recovery in oil production, creating further pressure on prices.
"OPEC+ may hold the right key to support markets from falling further," the TD Securities analysts said.
Uncertainty over the U.S. presidential election also weighed on the oil markets as traders assessed the implications of a potential victory by Democratic candidate Joe Biden over President Donald Trump.
"A Biden victory could see the U.S. taking a less hawkish stance with Iran, and so raising the possibility that we see oil sanctions against Iran removed," ING commodity analysts wrote in a note a day before the Nov. 3 election. "While it is still unclear how high Iran would be on Biden's priority list, a win for the Democrats could put some downward pressure on oil prices."
Agriculture finds support from China
The grains index advanced 4.3% on the month, with corn and soybean futures up 5.1% and 3.2%, respectively.
Strong demand from China and weather concerns in South America were the main catalysts for global agricultural commodities, Stefan Vogel, head of agri commodity markets at Rabobank, told S&P Global Market Intelligence via email. A recovery from African swine fever in China helped drive demand for feedgrains and soybeans, he said.
Vogel added that global agricultural commodity prices will continue to rely on China's import demand in 2021, with soybean imports and crush expected to hit record highs.
Meanwhile, livestock futures slipped into the red after a decline in live cattle and feeder cattle offset an increase in lean hogs.
Precious metals muted
In the metals space, silver was little changed, while gold was marginally lower despite some weakness in the U.S. dollar and signs of waning risk appetite among traders. Both precious metals retained their double-digit growth on a year-to-date basis, and analysts believe gold will continue to rise regardless of the U.S. election outcome as interest rates remain low.
"We think that gold will primarily take direction from the path of U.S. real yields in the coming year, rather than any U.S. election uncertainty," James O'Rourke, commodities economist at Capital Economics, told Market Intelligence via email. "We expect real yields to drift a little lower, which will provide a boost to the gold price."
Global monetary and fiscal stimulus is expected to continue as the coronavirus pandemic drags on. Such support, according to Ole Hansen, Saxo Bank's head of commodity strategy, may eventually boost inflation and push the dollar down, ultimately driving gold toward $2,000 per ounce and above.
Meanwhile, the S&P GSCI Industrial Metals index rebounded last month amid the ongoing recovery in China's economic activity.
The Asian country's "strong stimulus-fueled rebound" is likely to continue into 2021 and help keep the price of industrial metals supported, O'Rourke said, adding that the global economic recovery should also boost demand, albeit slowly.