2023 was set to be a year of strength for the commodities complex. Commodities were the best-performing asset class in 2021 and 2022, and entering this year, they were a potential contender to be the best performer again, particularly amid fears around gas supply during the European winter. 2022/23 and the increase in geopolitical tensions.
However, this has not been the case as the complex has fallen over the year. Europe had an unusually mild 2022/23 winter, leaving the gas market very comfortable. Markets also underestimated the ability of trade flows to adapt to sanctions and bans related to Russia’s invasion of Ukraine, while China’s reopening has not gone as planned, with a number of weaknesses in the economy, particularly in the real estate sector. Meanwhile, restrictive measures by central banks and a stronger US dollar have created strong headwinds for commodity markets.
We maintain a moderately favorable view on much of the complex through 2024. Fundamentals for most commodities range between neutral and slightly bullish. Additionally, the heightened geopolitical environment is likely to persist into 2024. Expectations that the US Federal Reserve will reverse its policy tightening and begin cutting interest rates next year, coupled with a weaker dollar, should also provide some tailwinds for raw materials. However, there are clear risks to demand given expectations of weaker global growth next year.
For oil, OPEC+ policy will be crucial to the outlook. The group and in particular Saudi Arabia have demonstrated their desire to support prices this year and we do not expect this to change until 2024. It is true that the more cuts OPEC+ makes, the more difficult it will be for the group to agree to deeper cuts. For now, we see the oil market balancing through the first half of 2024 before going into deficit in the second half of the year, which should drive prices higher from current levels. A key risk around oil supplies remains tensions in the Middle East and the possibility of stricter enforcement of US sanctions against Iran. This would leave the oil market much tighter than expected.
We maintain a neutral view on European natural gas, having started the 2023/24 heating season with full storage. We expect storage to come out this winter below last winter’s levels, but still well above average. This should make the task of refilling storage manageable again next summer. The risk of a strong demand response and limited LNG supply in the near term is also why we believe the TTF downside is limited. However, global gas markets will begin to see new LNG export capacity from late 2024, leaving Europe less vulnerable from late 2024.
A large portion of LNG capacity additions in 2024 will be driven by the United States, which will see export demand grow at a time when domestic natural gas production growth is expected to slow. As a result, we have a relatively more constructive view on US natural gas prices next year.
The outlook for metals largely depends on China. The real estate sector is likely to remain weak through 2024, suggesting there will be no significant recovery in metals demand. Additionally, LME base metals inventories have risen slightly in recent months (from multi-decade lows), easing concerns about market stress in the near term, although in historical terms, stock exchange inventories remain being adjusted. By 2024, most base metals markets are expected to be largely balanced or in small surplus, although these balances could turn into deficits quite easily, depending on how demand develops. Constructive long-term fundamentals for several metals and historically tight inventories suggest there is still some upside for most metals in 2024, even though markets are largely balanced.
Among base metals, nickel has the most bearish fundamentals for 2024, and the market will remain in large surplus for several years, driven by strong Indonesian production growth.
Precious metals are likely to rise next year, and we expect gold to trade at new all-time highs in 2024. Expectations that the Federal Reserve will begin cutting rates, coupled with the expectation of a weaker US dollar, should make that investment demand returns, after strong ETF outflows. this year. Greater investment demand, combined with a continuation of central bank purchases, will be a bullish factor for gold prices.
Food protectionist measures are something that emerged after the Russian invasion of Ukraine, with concerns about food security. El Niño has meant that this trend has continued for much of this year. And with elections due in several developing countries next year, food protectionism is likely to persist into 2024.
Grain markets have come under pressure this year despite a drop in Ukrainian grain exports following the suspension of the Black Sea Grains Initiative. Strong supply growth from other key suppliers has offset concerns about declining Ukrainian exports. Looking ahead to 2024, corn prices are likely to remain under pressure due to rising inventories, while we expect soybean prices to decline slightly thanks to strong South American production. We are relatively more supportive of the wheat market, with global stocks expected to continue to decline this season.
Soft commodities have had a volatile year with El Niño and broader weather events raising significant supply concerns. London cocoa has traded at record levels and, with expectations of a third consecutive deficit, the cocoa market is likely to remain volatile through 2024. However, given current stock levels, it is difficult to justify the degree of strength that we have seen in the market. . The sugar market has also performed well this year and El Niño is expected to affect production in Asia and leave the global market in deficit during 2023/24. We see that prices will remain high at least until the start of the next harvest in Central-South Brazil, which will be another great harvest.
Overall, we enter 2024 with a cautiously optimistic view on the commodities complex.