By Jeremy Schwartz, CFA, Executive Vice President, Global Head of Research, WisdomTree

Last week, we had the pleasure of hosting Ed Morse, head of commodities research at Citi, on our Behind the Markets podcast to discuss his outlook for commodities.

Most commodities today have seen a lack of investment in new exploration, particularly across metals. The incremental demand, with supply constrained, pressures prices higher.

Commodities today are generally in contango, where the futures price is higher than the spot price, but Morse sees this changing to a case of backwardation, where the futures price becomes lower than the current price. This will change the environment for the monthly rolling of futures contracts, going from a cost to a net positive for investors in futures.

This was also the case for the last super cycle for commodities. We had a strong market that was in backwardation, so investors were paid to roll their contract positions forward each month, and commodities prices were going up.

The COVID-19 pandemic delayed this inflection point for roll yields from happening sooner, as it caused less demand for commodities, and transportation fuels in particular. Inventories built up significantly but are now drawing down. In Q4, the supply of oil is down 9%–10% from last year. Some of this production decline is the lack of investment and capital expenditures, particularly in the U.S.

In Q4, Morse sees demand for oil down 4%–5% year-over-year. With supply down 9%–10%, inventories will continue to draw down around five million barrels a day. This is particularly rare in September, when inventories are usually building following the driving season.

Gold’s Rise Is Not Ephemeral: Bullish moves in gold and silver tend to be longer-lasting. Morse sees gold as an inevitable and attractive macro investment in a world of low interest rates,

The raw material markets moved higher in the third quarter of 2020 after the global pandemic caused a deflationary spiral taking the prices of most assets lower in Q1 and a recovery in Q2. The commodity asset class consisting of 29 of the primary commodities that trade on US and UK exchanges moved 17.77% lower in Q1 than the level at the end of the year that ended on December 31, 2019. In Q2, it recovered by 13.75% and added another 12.04% in Q3 but was still 1.08% lower over the first nine months of this year. In 2019, the asset class gained 10.98%. In 2018, the asset class lost 6.82% of its value.

There were twenty double-digit percentage gainers in Q3, with five gaining over twenty-five percent for the three months. A total of nine markets were double-digit percentage gainers over the first nine months of this year. Five commodities markets posted double-digit percentage losses in Q3, but there were seven double-digit losers through the first three quarters of this year, which reflects the high level of volatility in markets. Winners outnumbered losers in the third quarter that ended on September 2020, by a margin of over three to one. Over the first nine months of this year, twenty-one commodities posted gains compared to eighteen products with prices below the level at the end of December 2019.

The U.S. dollar is typically a significant factor when it comes to commodity prices, as it tends to have an inverse value relationship with raw material prices. The dollar index posted a 3.52% loss in Q3 and was 2.22% lower for the year. The dollar index was 0.34% higher in 2019 after moving 4.26% higher in 2018, which followed a 10.23% decline in 2017. The dollar fell in Q2 and Q3 as

Soft commodities can be the most volatile sector of the commodities market as prices routinely double, triple, or halve in value during their pricing cycles. The path of least resistance for the prices of luxury commodities is a function of the weather and crop diseases in the world’s critical growing areas. However, the demand side of the fundamental equation reflects an ever-increasing addressable market for these products. The population of the world is growing by around 20 million people each quarter. Since 2000, the number of people inhabiting our planet has increased by approximately 28.1%, which amounts to over 1.686 billion people, according to the US Census Bureau. More people with more money consume more coffee, cocoa, sugar, cotton, and orange juice each day, which underpins the prices of these commodities. However, the outbreak of Coronavirus in 2020 weighed on all markets, and soft commodities were no exception. In Q2 and Q3, the sector made a comeback.

The composite of five soft commodities, sugar, coffee, cocoa, cotton, and frozen concentrated orange juice, posted an 8.79% loss in Q1. In Q2, it recovered by 4.24%, in Q3, it rose by 7.41%. Soft commodities were 0.26% lower through the first nine months of this year.

The dollar index moved 3.52% lower in Q3, which supported the prices of all commodities. In Q3, the Brazilian real edged marginally lower. Brazil is the world’s leading producer of three of the five commodities in the sector, including sugar, coffee, and oranges. The real did not significantly impact the soft commodity prices in Q3 as the exchange rate against the dollar hardly moved. The dollar is the reserve currency of the world and the benchmark pricing mechanism for most commodities, including those of the soft or tropical variety. However, the weather is always the most critical