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Commodities price surge raises fears of ‘overshoot’
By: Financial Times | February 23, 2021

From corn to crude and copper, commodities have loved a stellar begin to 2021 as traders scour the marketplace for inflation hedges and bets on the “greening” of the worldwide financial system.

A fierce rally in copper has despatched it above $9,000 a tonne for the primary time since 2011. After a dramatic restoration, Brent crude on Tuesday briefly crossed $66 a barrel, the extent at which it began a tumultuous 2020. And corn is up about 17 per cent for the reason that begin of 2021 to an virtually eight-year excessive of $5.54 a bushel.

The S&P GSCI spot index, which tracks price actions for 24 uncooked supplies, is up 17 per cent this yr.

Predictions of a so-called supercycle — a chronic interval of excessive costs as demand outstrips provide — have lured traders to commodities, based on sector specialists. Others are in search of to purchase actual belongings as safety in opposition to inflation.

“The latest commodity price gains are being driven by money inflows and inflationary expectations, rather than actual physical buyers,” stated Alastair Munro of Marex Spectron, a brokerage.

Inflation is turning into extra of a priority amongst traders, consequently of the unprecedented financial and monetary insurance policies enacted in the course of the disaster. A weakening greenback can also be making commodities cheaper in different currencies, fanning demand.

“There are many signs that economic recovery, combined with massive monetary and fiscal stimulus, could lead to inflation as newly created money finds its way into the real economy rather than just financial assets,” stated Ian Lance, co-manager of Temple Bar Investment Trust.

But some analysts worry that the inflation commerce may change into self-fulfilling.

Ole Hansen, head of commodities technique at Saxo Bank, stated the market risked getting into a “vicious cycle” the place speculators, and traders on the lookout for a hedge in opposition to inflation, fed off one another.

“People are worried about inflation so they buy commodities then the prices go up even more,” Hansen stated. “But that only lasts until the music stops.”

Speculative positions in agricultural futures contacts are just under the document excessive touched in early January, based on Dave Whitcomb of commodity specialist Peak Trading Research.

In China, the web speculative lengthy place in copper on the Shanghai Futures Exchange — the distinction between bets on rising and falling costs — has jumped sharply for the reason that finish of the lunar new yr vacation.

“While calls of a metals supercycle are growing louder, the evidence suggests we’re in the midst of a cyclical overshoot,” stated Bart Melek, head of commodity technique at TD Securities.

Goldman Sachs and different huge funding banks imagine copper is heading for its largest provide deficit in a decade as manufacturing fails to maintain tempo with demand in China and the remaining of the world — particularly as authorities spending on inexperienced infrastructure rises.

However, some analysts are involved that policymakers in China will transfer to tighten credit score circumstances to rein in asset bubbles. That may sap its demand for industrial inputs.

“We expect most metals to start trending lower over the coming months as China speeds up monetary policy normalisation,” stated Colin Hamilton of BMO Capital Markets.

The oil rally in latest months has been stoked by a restoration in transport demand as international locations loosen virus-related curbs. But there has additionally been robust assist offered by oil producers, which have lower output considerably to offset the hit to consumption.

Morgan Stanley stated this week that it estimated the oil market was now in a deep deficit, with demand outstripping provide by as a lot as 2.8m barrels a day this yr. “The stars have aligned for the oil market even faster than expected,” stated Martijn Rats at Morgan Stanley.

While oil demand continues to be not less than 5m b/d decrease than in 2019, primarily attributable to financial fallout from the pandemic, it’s anticipated to rebound as soon as Covid-19 vaccinations are rolled out.

The Opec producer group may reply by elevating manufacturing, however oil firms globally have been slashing investments in new provide. Some Wall Street banks argue that demand will proceed to outstrip provide development within the coming years, probably creating one final price surge earlier than electrical automobiles trigger consumption to peak.

Bank of America analysts stated on Tuesday that under-investment in provide may ship oil as excessive as $100 a barrel within the subsequent 5 years. But such a surge would most likely be shortlived, they stated, forecasting Brent is extra more likely to common $50 to $70 a barrel between now and 2026.

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