The year 2019 has been a rollercoaster ride for commodities market, however, we are ending on a promising note. Reuters/CRB commodities index has gained 10 per cent this year, the highest since 2010.
Palladium tops the list of gainers and has risen more than 55 percent. Some of the other best performing commodities which have given a return above 15 percent this year include Crude oil, Nickel, Soy oil, Gold and Silver.
Platinum has rallied sharply this year and tested record high level supported by deficit concerns amid slowdown in South African production. Crude oil rallied sharply in 2019 supported by OPEC’s production cuts, robust Chinese demand and higher US exports. Nickel has benefited from supply concerns relating to Indonesia as it halted ore exports. Soy oil gained amid robust Indian and Chinese demand and falling palm supplies. Gold and Silver benefitted from sharp ETF inflows and monetary easing by major central banks.
On the flip side, natural gas slumped sharply as higher US gas production and subdued demand more than offset growth in US gas exports. Zinc price also weakened amid expectations of increase in mine supply.
The recent upward momentum has rebuilt confidence that commodities may perform well in 2010 as well. But the biggest challenge would be the US-China trade deal. Commodities have rallied on expectations that US and China are close to signing phase 1 of trade deal in January. If there is a delay in finalizing the deal or even a fallout in talks, market confidence may crumble easily.
Global economic outlook could be another hurdle. Economic indicators in last few months have shown some improvement in Chinese, US and European economies however growth concerns are far from over. China being a major commodity consumer, demand outlook may not improve significantly unless economy strengthens.
Market players have also taken heart from the fact that Fed may keep interest rate unchanged till end of 2020. However, Fed’s open-ended stance indicates that a lot is riding on outlook for US economy. If the US economy strengthens, market players may be quick to assume that Fed’s next step would be rate hike. While these factors will affect general market sentiment, commodity specific factors may also play a major role in price performance. Crude oil’s rally hinges on success of OPEC’s production while gold and silver have a lot of reliance on ETF flows.