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Citi’s Morse Sees Better Commodities Year But Flags 7 Risks

Aluminum ingots in a warehouse at the foundry at the the Krasnoyarsk aluminum smelter, operated by United Co. Rusal, in Krasnoyarsk, Russia, September 3, 2018.

Expectations of global growth, particularly in emerging markets mean this year is likely to be positive for commodities but with a number of wild cards, according to Citigroup Inc.

The U.S. and China, which hold outsized sway over the world’s economic fortunes, both may have policies that skew toward higher global growth, strategists led by global head of commodities research Edward Morse wrote in a year-ahead outlook report. That would lead to greater demand for commodities, and in turn could attract investor inflows, which would support higher prices along with fundamentals.

“2020 is shaping up to be a better year for commodities than previously feared,” Morse wrote. “Many commodities should see demand squeezing the limits of supply and pushing prices higher.”

While the underlying geopolitics, especially in the Middle East, could bring dramatic ups and downs in commodity pricing, a trade policy breakthrough between the world’s top two economies has the potential to add more than 500,000 barrels a day of global demand for oil as well as increase consumption of metals and agriculture, the strategists said.

Brent crude surged to near $72 a barrel on Wednesday after Iran fired missiles at Iraqi bases housing U.S. forces in retaliation to an American airstrike that killed a top Iranian general. Prices retreated as the potential for war receded and are trading at about $65 after capping a 5.3% decline last week.

‘Big Risks’

Still, Morse cautions about “significant stumbling blocks” ahead, and flags “seven big risks” for the year:

  • Any U.S. “Green New Deal” could drive a wide range of outcomes; the difference in energy and environmental policies depending on the outcome of the U.S. presidential and Congressional elections in November could be significant
  • Lower Chinese growth; if the economy falls below expectations, industrial commodity prices could go “lower for longer”
  • U.S.-China trade relations; further trade-war resolution would boost commodities demand via normalized supply chains, but significant escalation “would likely increase the probability of a commodity bear market and global recession”
  • OPEC+ surprises by extending, deepening or ending cuts in the near-term; the latest agreement for deepened cuts face risks of non-compliance, and a collapse of the deal is possible as “higher prices make a Russian peel-off more likely,” while the deal may be extended if lower oil prices emerge
  • Acute, underpriced geopolitics boost potential for an oil-price spike; for instance, the attacks on Saudi Arabian oil fields in September and the recent U.S.-Iran tensions “highlight how precarious the Middle East and North Africa region is, putting the oil supplies of traditional producers at potential risk”
  • For some commodities, capital expenditure cycles are coming up shorter and sooner; with demand tapering off even with lower spendings, new supplies might not be urgent
  • A world food-price inflation spike driven by China protein tightness will persist through this year. While less meat supply globally should be positive for exporters such as the U.S. and Brazil, higher prices could prompt a food inflation shock in some Asian emerging markets
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