Commodities poised for a volatile 2023

2022 has been an extraordinary year for all markets, including commodities. Russia’s unprovoked attack on Ukraine since February and the subsequent sanctions imposed by the Western governments have heightened supply risks, leading to increased price volatility and elevated prices. However, what started out as a supply concern has now shifted towards growing demand risks as central banks around the world tighten monetary policy in a bid to rein in rampant inflation. Demand from China, the world’s second largest economy and key commodity consumer, is likely to be weak as long as Beijing adheres to a zero-Covid stance, and its metal-intensive housing sector remains in crisis. So as 2022 draws to a close, demand concerns will take the driver’s seat, especially with a number of key economies facing recession. But supply risks have certainly not disappeared. In fact, these risks are growing for 2023, particularly when it comes to energy.

For crude oil, the Group of Seven – the United States, Canada, France, Germany, Italy, Japan and the United Kingdom – together with Australia, plan to ban seaborne Russian oil shipments, and cap the prices that Russia can sell its oil elsewhere, starting on Dec 5. This is intended to limit the Kremlin’s ability to fund the war in Ukraine while also protecting consumers from sky-high energy prices. However, the twin measures could have an uncertain effect on oil price. Russian oil supply may fall over the course of 2023. This, coupled with supply cuts by OPEC and non-OPEC producers, suggest a tighter oil market, and prices should strengthen over the course of the year. 

Europe’s natural gas market has seen a massive amount of disruption this year, as Russia cut off the bulk of supply to the region, leading to significant volatility and record high prices. Weaker demand due to a milder-than-usual winter so far, along with increased liquefied natural gas (LNG) imports, have helped cushion Europe from the loss of Russian supply. But next year, the EU will likely find it much more difficult to refill storage to adequate levels ahead of the next winter. Russian supply losses will be more pronounced and there are limits to how much more LNG Europe can import. Tightness in the market means volatility is not going to disappear.

Metal balances are looking fairly benign for 2023. According to ING, the more comfortable supply and demand balances, along with poor sentiment, suggest that most metal prices will remain under pressure in early 2023. There are still clear supply risks for a number of base metals. Up until now, Russian metals have avoided sanctions but clearly, there is always the risk that these are targeted at a later stage. As for gold, any signs from the US Federal Reserve of a pivot will provide solid support to prices. Agricultural commodities have also seen significant strength this year, particularly grains, due to the disruption in Ukrainian exports along with poorer weather in a number of key growing regions. These markets are going to remain sensitive to developments in the Russia-Ukraine war. 

Overall, there will likely be further downside in the commodity markets in the near term. But once the worst of the demand worries are over by mid-2023, supply concerns are likely to take centrestage again, which will push prices higher.