The global economic rebound, accommodative monetary policies, bad weather, and supply chain disruptions have propelled commodity prices higher to make the complex the top-performing asset class in markets this year.
The S&P Goldman Sachs Commodity Index (INDEXSP: SPGSCI) was up by 36 percent year to date to December 22, compared to 27-percent year-to-date increase in the S&P 500 index (INDEXSP: .INX).
Another strong year is in the cards in 2022, although key downside risks remain, analysts say. These risks include the biggest wild card: how governments will continue to manage COVID and whether the pandemic will lead to more severe restrictions and/or lockdowns. The other major driver of commodities next year will be China’s government policies in containing the virus, procuring commodities, and managing the property crisis following the fallout from the indebted property giant Evergrande.
The property crisis has weighed on the Chinese steel sector in recent months, with global iron ore prices slumping from an all-time high reached in May this year. However, China signaled support for the property sector this month, which lifted iron ore prices that rebounded by 50 percent from an 18-month low hit just six weeks ago, with Chinese steel production expected to increase in December.
"At the end of 2021, a number of fine-tuning measures targeting the sector combined with credit easing sparked optimism about China's policy becoming more supportive," Wenyu Yao, Senior Commodities Strategist at ING, said in early December, expecting China to continue playing a key role in the global iron ore market.
"On average, we expect prices to slide to US$100/t over 2022, with the main upside risks still being potential supply chain disruptions in light of the Omicron variant," ING’s Yao said.
Prices of metals critical to green energy rollouts – including aluminum, copper, nickel, lithium, and cobalt – could edge lower with supply improving next year, but they are likely to remain at levels higher than the long-term averages, according to ING. Tighter monetary policy and an expected stronger U.S. dollar, combined with improved supply for most metals, are set to provide headwinds to prices. Aluminum, however, is headed to a structural deficit and could see a tighter market and higher prices in 2022, the bank noted.
"Inventories are low amongst several metals, whilst sentiment around the outlook for demand in the medium term is constructive due to growing investments in green projects, which happen to be metal intensive," said Warren Patterson, Head of Commodities Strategy at ING.
In the medium to long term, "the energy transition makes a supercycle almost inevitable," Julian Kettle, Senior Vice President, Vice Chair Metals and Mining at Wood Mackenzie, wrote in a report last month.
In energy commodities, COVID developments and Chinese policies will continue to be the key drivers of prices in 2022, alongside OPEC+ supply-management policies.
Natural gas and LNG prices are set to remain at elevated levels even after the winter season in the northern hemisphere ends. The current energy crisis in Europe and a colder winter could leave natural gas stockpiles at historically low levels in the spring, which would keep gas prices higher for most of 2022.
Oil prices could see lower average levels next year, with a surplus expected on the market early into 2022. The extent of the new restrictions due to the Omicron variant and the OPEC+ supply policies will determine how tight (or not) the oil market will be next year. Chinese crude stockpiling policies will also play a prominent role on the oil market, especially if the world’s top oil importer continues to slow down its estimated commercial and strategic stockpiling compared to the massive building of crude reserves in recent years.
In the first quarter of 2022, China could see slowing crude imports. A combination of China’s policies to curb pollution in time for the Winter Olympics, its crackdown on illegal practices at independent refiners, and its zero-COVID policy with intermittent lockdowns are set to slow crude oil imports early next year, industry consultants have told Bloomberg.
Finally, coal prices will likely be supported by what could be a record year of coal demand globally, driven by China and India, despite the numerous net-zero emissions pledges.
The economic rebound from the pandemic is taking coal power generation to a new record high this year, with global coal demand likely hitting another new high next year, undermining net-zero efforts, the International Energy Agency (IEA) said in its annual Coal 2021 report last week.
By Tsvetana Paraskova for Oilprice.com
