Covid and Inflation Dominate the Agenda for Commodities

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Agriculture

The cost of our breakfast and food in general continues to rise, and following a few months of sideways trading, the Bloomberg Agriculture index, which tracks a basket of major food commodity futures, reached a fresh five-year high. According to the UN FAO, the cost of a global basket of key food items has risen by more than 31% during the past year and with the latest surge primarily driven by coffee, soybeans, wheat and sugar, the prospect for food inflation being a major focus in 2022 has not gone away. The UN FAO will release its index for November on December 2.

There are individual reasons behind the strong gains, but what they all have in common has been a troubled weather year, and the prospect for another season’s production being interrupted by La Ninã developments, a post pandemic jump in demand leading to widespread supply chains disruptions and labour shortages, and more recently, rising production costs via surging fertilizer prices and the rising cost of fuels, such as diesel.

Crude oil was heading for a fourth straight week of losses, driven by the threat of the US releasing strategic reserves and a fresh wave of Covid infections spreading across Europe, thereby forcing several nations to reverse reopening policies which again could threaten economic growth and mobility, the latter cutting fuel consumption at a time when consumers are already fretting at paying the highest prices at the pumps in years.

In addition, the latest monthly Oil Market Reports from the EIA and most recently from the IEA points to a reduced risk of higher prices as moderating demand growth due to the another Covid wave and weaker industrial activity, partly due to higher oil and gas prices, combined with a steady rise in supply will support a balanced market sometime in early 2022.

Brent crude oil was heading for a 4% drop on the week, thereby almost fully surrendering the October gains that was driven by the prospect for increased gas-to-oil substitution demand, especially for products such as diesel, heating oil and propane. Having broken below $80 per barrel, the risk has risen of further losses towards trendline support, currently at $73.

The much talked up risk of $100 per barrel anytime soon has evaporated and a more balanced view has emerged. One that is needed to flush out speculative longs, thereby preparing the market for the next rally. We maintain a long-term bullish view on the oil market as it will be facing years of potential under investments with oil majors losing their appetite for big projects, partly due to an uncertain long-term outlook for oil demand, but also increasingly due to lending restrictions being put on banks and investors owing to a focus on ESG and the green transformation.