When the end of the year is around the corner, we often look back at the year that has just passed by and speculate on what lies ahead. 2021 had brought new hope and aspirations but leaves us with many unprecedented challenges on various fronts. The pandemic is still not over and the accompanying economic and social repercussions still dawn upon us. Globally people have learned to live with the new order, and this paradigm shift still evolves as we enter 2022.
2021 was a year in which the commodities market did not fall away. The markets exceeded expectations and 2022 is all geared up to be another great year. With reference to the Bloomberg Commodity Index, the commodities are set to be the best-performing asset class of 2021 with the index up around 25%. The factors for the dramatic rise are the recovering demand following the pandemic, supply chain restrictions, government policy and adverse weather conditions. Market pundits anticipate an improvement in the supply chain thereby smoothening the imbalances in the demand and supply equation in the coming year. Likewise, the prices should remain lower from the current levels but remain above the long-term averages.
After opening at $1899.4 per ounce, gold prices remained within range hitting the highest price of $1959.24 during January before sliding down to $1676.66 per ounce in March. Although prices have dropped by 5% since the beginning of the year, 2021 has been coined as ‘mixed’ for gold traders. Silver, following the trend of gold, opened at $26.36 per ounce for the year before retreating to settle at $22.62 before the end of the year, at the time of this article. Platinum and palladium received bumper openings at the beginning of the year before diving into bearish territories in the latter half. The precious metals bracket is poised to remain within a range market in 2022. The prospect for tightening from central banks around the world along with an appreciating US dollar remains the major attribute for precious metals losing their shine in the ensuing year. One of the factors that could lead to a bullish run is if the major central banks reverse their current stance thereby accelerating the demand for alternative assets. Another potential catalyst would be further severe waves of the coronavirus.
The base metals bracket remained bullish for most parts of the year with copper leading the race. Copper started the year at $3.5173 before reaching the highest price of $4.8953 during May. Although the prices have slid since the prices have stayed on bullish grounds. The underlying inventories are low among various base metals while the sentiment for demand for the upcoming year is constructive due to growing investments in green projects which are metal intensive. Analysts are bullish on the base metals as the global economy recovers further from the global pandemic strengthening the demand for the metals.
Commodities in the energy basket were optimistic throughout the year with economies recovering from the devastating effect of the pandemic the preceding year. Having opened at $48.40 per barrel, crude oil prices increased towards a seven-year high of $85.40 per barrel. Natural gas prices also skyrocketed in the second half of 2021 reaching $6.480 per MMBTU during October, the prices last witnessed in December 2008. As per market analysts, the oil markets are forecast to observe supply growth from non-OPEC nations and along with a further easing in the OPEC+ supply cuts push the global oil markets back into surplus. This should put a stranglehold on rising prices. Contrarily, worries over OPEC capacity and the broader lack of investment in upstream production could provide a ceiling to the market not too far below the current levels. In regard to natural gas prices, it is likely to remain tight through the winter months signalling that the markets could witness plenty of volatility. However, the end of the season could bring weaker prices given the fall in the demand. Likewise, the prices are bound to remain high provided the need to replenish inventory over the upcoming season.
Given adverse weather conditions, agricultural commodities prices are expected to ease but will remain above the long-term averages. Due to the weather hitting the crop productions of major producers, the wheat market traded to a multi-year high. If normal weather is assumed in 2022, wheat could observe a rise in supply which could bring the prices down. With the La Nina weather risks developing in Brazil, there is an obvious uncertainty for sugar and coffee in the next year. Already suffering from drought and frost damage, the magnitude of the impact for the next season will depend on the precipitation levels over the rainy season. This uncertainty will elevate the prices until the market has a better understanding of the next crop season.
The commodities market is on course for their best annual performance in 20 years with the energy markets driving the march forward. The low supplies coupled with the vigilant OPEC+ policies will support the prices in the upcoming year. However, changes are coming. The production levels in various commodities are increasing with each passing day and any economic slowdown, whether it is Covid-related or not, will weigh on the values of the commodities. A higher US dollar and further tightening in the various economies monetary policies will play a significant role. In a nutshell, the outlook looks positive!