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Petroleum led commodity rally in December 2019 as output cut buoyed oil prices

Commodity futures ended 2019 on an upbeat note, with S&P's petroleum index leading the increase as the extension of OPEC's output curb buoyed oil prices.

Following a muted performance in November 2019, the S&P GSCI, an index that tracks futures contracts for a variety of physical commodities, rose 6.6% month over month in December 2019, bringing its 2019 gain to 16.5%.

Crude oil outperformed commodity peers with a 10.7% monthly increase as OPEC and its allies agreed to further cut their production by an additional 500,000 barrels per day through the first quarter of 2020.

U.S. sanctions on Iran and Venezuela, as well as progress on a partial U.S.-China trade deal, also helped lift oil prices, with crude oil posting a 34.5% gain in 2019.

While the conflict between the U.S. and Iran helped extend oil's rally at the start of 2020 amid supply concerns, tensions are likely to be short-lived, according to analysts.

"[E]ven if crude supply will be hurt for a relatively short period of time, we should not forget that the market is well supplied. ... There are ample inventories globally and there are strategic petroleum reserves to catch up any short term issues," said Hans van Cleef, senior energy economist at ABN AMRO.

Meanwhile, natural gas logged the weakest performance among the petroleum complex, with a 4.0% decline month over month, taking its year-to-date losses to 25.5%.

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Agriculture and grains also advanced as China vowed to purchase more American farm products as part of the "phase one" trade agreement with the U.S., which both parties expect to sign in mid-January.

Soybean futures rose 9.0% last month, while lean hogs rose 4.8%.

In precious metals, gold continued to shine despite signs of de-escalation in U.S.-China trade dispute. Gold gained 3.4% in December 2019, while silver rose 4.8%.

"Gold's rise in December was likely due to a light weakening of the U.S. dollar and investors positioning themselves for the end of the calendar year," said Matthew Piggott, head of metals and mining research at S&P Global Market Intelligence.

Gold also found additional support at the start of the year in the U.S.-Iran conflict, though recent price action appears muted.

"The rally in gold prices has taken place in thin market conditions," said Georgette Boele, senior foreign exchange and precious metals strategist at ABN AMRO.

"If the move runs out of steam and/or the risk of a further escalation eases, some investors will probably take profit resulting in lower gold prices. This is because long gold is still a crowded trade," Boele said, adding that gold prices could rally above the year-end target of $1,600 per ounce if tensions rise.

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