Commodities should recover despite demand concerns

Concerns over sluggish Chinese demand have weighed on commodity prices in recent weeks. Brent crude oil is trading some 7% lower than its early July levels, while prices of industrial metals have fallen nearly 9%. China’s second-quarter GDP came in well below market expectations, and the country’s twice-a-decade Third Plenum last week failed to inspire investors as officials signaled policy continuity instead of more stimulus.

However, we continue to see higher commodity prices ahead due to solid demand and limited supply, and we expect the asset class to deliver strong diversification benefits in a portfolio context.

Oil exports are lower amid otherwise healthy demand. The latest available data showed that Russian crude oil exports in the first two and half weeks of July fell to a multi-year low. While Russian domestic oil demand typically increases during the summer period, the drop appears larger than just the usual seasonal pattern. In our view, this suggests that Russia has made some compensation production cuts to comply with the OPEC+ decision, as Russia’s refinery runs have recovered from several drone attacks. Separately, crude exports from OPEC were lower in July from already low June levels amid hot weather in the Middle East, and demand overall remains healthy. We think lower OPEC+ crude exports should help tighten the oil market, and maintain our year-end Brent target at USD 87 per barrel.

Gold has more room to rally. Gold took a breather after hitting a new all-time high last week, but the drivers for the rally remain in place, including strong central bank buying, ongoing geopolitical uncertainty, and the likely Federal Reserve move to cut interest rates in the coming months. We expect the yellow metal to reach USD 2,600/oz by the end of the year and USD 2,700/oz by mid-2025, from USD 2,415/oz today. For investors, an allocation to gold within a portfolio can be an attractive diversifier and a hedge, in our view.

Copper prices should find support in an undersupplied market. Copper prices have held up relatively well, even though disappointing manufacturing data across the globe and China’s uneven recovery kept industrial metals under pressure. We reiterate our target of USD 12,000/mt for LME copper over the next 12 months as energy-related transition demand remains strong while supply disappointments continue. Our call for a broader manufacturing lift in the second half of the year and in 2025 should also be supportive for a market in deficit.

So, we recommend investors consider opportunities in the commodity space to enhance and diversify portfolio returns. In addition, an active strategy on broad commodities can also help investors navigate the markets effectively with potentially improved risk-adjusted returns.