London — Key commodities such as oil and copper remain on track for a multi-year bull market due to tightening fundamentals but could be set for a near-term correction after investors "jumped the gun" over the anticipated demand rebound as the world emerges from the COIVD-19 pandemic, according to Saxo Bank's head of commodity strategy Ole Hansen.
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The global commodities price rally from late 2020 has been fueled by expectations that post-COVID demand recovery will outstrip supply after years of underinvestment in capacity.
Copper prices broke through $9,000/mt last month for the first time since 2011 and Brent crude oil futures recently traded back above $70/b after collapsing to $16/b in 2020. The energy-heavy S&P GSCI Commodity Index has gained over 18% since the start of the year.
But the price rally has been driven more by speculative investment, or "paper" demand, in a rush to benefit from the expected recovery, than an actual physical demand recovery from the lows of 2020, Hansen said.
"Overall, we're bullish on copper but we also think, just like oil, it's in desperate need of a consolidation period," Hansen told S&P Global Platts in an interview. "Right now we're rallying mostly on behalf of on high expectations for a strong pickup in demand [but] it has yet really to materialize... I think the correction is probably unfolding already because I think investors probably jumped the gun a little bit."
With commodities futures curves flipping into backwardation after years of mostly contango markets, so-called "rolling yields" on commodities futures are also attracting investors.
Bond yields in the US have been moving higher in recent weeks fueled by expectations of massive fiscal stimulus spending to kickstart the world's biggest economy. Inflationary concerns are also being underpinned by COVID-19 vaccine rollouts and encouraging economic data.
At the same time, the prospect of demand-side inflationary pressures has also pulled more investors into commodities as they seek to hedge against the effects of rising bond yields.
"Inflation is one thing we worry about, we think that the market is not pricing inflation," Hansen said. "The simulated real yields breakevens are simply not reflecting the kind of inflation levels we see could be coming over the coming months."
Hansen said he sees the potential for 10% downside risk in copper prices from current levels if either bond yields move higher or the price backwardation starts to ease.
Further out, Hansen said he sees the potential for a supply crunch in some metals and oil due to underinvestment in new production in recent years.
"We've had five, six years of markets, in general, being in contango and now suddenly it's reverting. That basically means that we're going to see companies struggling to rebuild proper channels of new supply," he said.
Hansen said he also sees potential "dangers" in the commodity market rally from a huge spending boost from government stimulus packages and the green investment plans in Europe and China.
"We are seeing these economies becoming overstimulated creating the perfect storm, I'd say of both real demand but also investment demand," he said.
Hansen's comments echo those of Goldman Sachs' global head of commodities research Jeffrey Currie, who in December said the world was entering a "long-lasting bull market" for commodities similar to those in the mid-1960s and 1970s, with prices set to benefit as recent underinvestment, dollar weakness, government spending and the energy transition boost demand across the board.
In the oil market, Hansen said he doesn't believe global oil demand has peaked despite a growing consensus that an acceleration of the energy transition away from fossil fuels will slow the demand growth outlook.
In the near team, Hansen said he expects a strong oil demand rebound this year as curbs are lifted on international travel for work and holidays while OPEC+ continues to constrain supplies.
"Crude is being supported quite aggressively by OPEC+ at a time when demand has yet to show its potential. I think we're all just sitting on a coiled spring waiting to be released... obviously, fuel demand will go pretty aggressively up when we see all these lockdown starting to ease," he said.
Outside OPEC, however, Hansen said he sees the potential for a faster than expected rebound in US shale oil as producers respond to current price levels around $65/b to put the massive slump in capex spending last year behind them.
"I think the temptation to get back into an expansionary mode is most certainly there with these kinds of prices, which are which are already higher than where they were this time last year."
Platts Analytics expects global oil demand to grow by 5.9 million b/d this year to 98.9 million b/d, after contracting nearly 9 million b/d in 2020. Average oil demand in 2021 will still remain some 3.1 million b/d below 2019 and will only recover to 2019 levels by year-end 2022, Platts Analytics believes.