Commodity supercycle to persist for a few years, Saxo Bank says

Crude benchmarks Brent and WTI are above 30% since the beginning of the year

FILE PHOTO: The sun is seen behind a crude oil pump jack in the Permian Basin in Loving County, Texas, U.S., November 22, 2019. REUTERS/Angus Mordant/File Photo
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A commodity supercycle in global oil and metals markets will last for a number of years, according to Saxo Bank's head of commodity strategy.

The Danish bank expects demand for mining and metals to significantly fuel price appreciation for a number of years.

"The supercycle, or the commodity cycle, has got legs. We are potentially looking at several years of supportive prices," Ole Hansen told reporters during a briefing on Tuesday.

A supercycle refers to a boom in prices for commodities fuelled by aggressive demand and/or inflation, followed by an eventual bust. The phenomenon was last observed when China's growing economy in the early 2000s led to a surge in the price of commodities.

Copper, which is integral to semiconductors and electronic components, reached a nine-year high in February, fuelled by indications of reviving industrial activity across the world.

The price of copper futures has risen by 73 per cent over the past 12 months to $407.10 per lb on the Chicago Mercantile Exchange.

Brent, which hit an all-time high of $148.93 per barrel in 2008, is currently trading around 117 per cent higher than in March last year, following a recovery in demand for crude.

West Texas Intermediate, which slumped to sub-zero levels in April as demand collapsed and storage capacity remained constrained, is now 126 per cent above last year's levels.

Both Brent and WTI have gained 30 per cent since the beginning of the year, when news of vaccine distribution and a weak dollar moved the needle on prices.

Saxo Bank expects Brent to average between $65 to $70 in the second quarter.

"The expectation that demand will pick up could see [Brent] moving in the low $70s range into the second half of the year," said Mr Hansen.

UBS has forecast Brent and WTI will trade at $75 and $72 per barrel, respectively, in the second half of the year, supported by inventory withdrawals and robust Opec+ action.

Earlier this month, the alliance, headed by Saudi Arabia and Russia, agreed to rollover 7.2 million barrels per day of cuts until the end of April. The cuts have been supported by a voluntary agreement by Saudi Arabia to slash 1 million bpd until April.

Opec+ deferred a planned increase in supply of around 2 million bpd since the beginning of the year to factor in sudden lockdown measures and other uncertainties of a pandemic economy.

However, Mr Hansen noted further deferrals from the group will be "price negative".

"The market will take that as a sign that Opec simply don't see demand strong enough to warrant an increase," he said.

"I see Opec+ increasing production by a minimum 1 million bpd and potentially the full 1.5 million bpd (Opec+ 0.5 million bpd and Saudi Arabia 1 million bpd) that was deferred at the March meeting," he added.

The strength of any supercycle depends on demand from China, which has not grown as strongly over the past decade as it did during the last commodities boom in the 2000s, the Institute of International Finance said in a research note on Tuesday.

During that decade, the growth of the world's second-largest economy was also largely investment-focused, whereas now consumption plays a greater part. This has meant demand growth for oil and iron ore – its two biggest commodity imports – has been lower, although copper and gas imports have held up.

"China remains a major source of commodity demand but one that is expanding slower," the IIF's note said.

"A commodity supercycle may still be underway, but it seems unlikely that China will play the same role it did earlier this century."