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Article11 Oct 2023

Commodities: Weakness and Weather

A recent report from Citi Research’s Edward Morse and team looks at the challenges that will likely dictate commodities trends into next year, focusing on the wildcards of weather and geopolitics.

Commodities are muddling through economic weakness, weather and politics.  

Citi’s analysts note that commodity demand growth looks likely to significantly fall year on year in the fourth quarter; economic growth and trade are the main drivers of this demand, and Citi sees global growth falling to 1.7% in 2024 while trade continues to stagnate.

The new Citi Research report notes that the U.S., China and the EU are all confronting headwinds following a year that’s seen U.S. growth surprise to the upside, China’s post-pandemic reopening fail to drive a rebound, and euro-area growth come in weaker than projected. Meanwhile, global trade’s early 2023 rebound has slowed, with a de-diversification in trade seen and expected to dominate the rest of the year and much of 2024 alongside the growth slowdown.

To this mix add the wildcards of weather and politics. An Atlantic Basin hurricane entering the Gulf of Mexico could impact global markets for weeks or even months, raising the critical question of whether El Niño weather patterns continue to safeguard this region.

And winter’s severity also stands as an issue of concern. Meanwhile, geopolitics have weighed significantly on commodities, in part because of Russia’s role as the world’s largest and most diversified exporter. The report says events involving Russia can affect natural gas, crude oil, grains, timber, metals, diesel and gasoline prices; Russia’s decision in accord with Saudi Arabia to keep oil off markets through year’s end has been a singular factor in raising oil prices by some $20 a barrel or more.

Given such an environment, the authors note, they expect commodities performance to remain divergent and possibly volatile through the fourth quarter.

Given China’s importance, its situation deserves a closer look. The authors note stronger imports across various commodities, which likely reflect commodity-specific or seasonal factors, such as inventory builds, hot weather and opportunistic buying. Some data signal that China’s manufacturing sector is performing better than expected, but the property market remains weak and the team is uncertain about how effective China’s latest stimulus measures will be.

Energy: Oil prices have rallied in the third quarter due to Saudi Arabia and Russia extending voluntary production cuts through to December. But in projecting global oil balances, the authors expect a swing from a 1.5 million barrels a day stock draw in the third quarter to a stock build of at least 0.2 million barrels a day in the fourth, reflecting more and more oil coming into the market. Higher near-term oil prices could make for more downside next year, and the authors note that demand looks constrained while non-OPEC+ supply is growing. They also point out that bullish risks remain for crude and diesel, with everything from labor strikes and geopolitics to weather as potential factors. But there are bearish risks as well, including mild winter weather and macro risks to demand.

Uranium: Uranium prices crossed $70 a pound earlier than the authors originally thought, with the team’s price outlook revised since global uranium supplies are now expected to be less than previously forecast.

For more information on this subject, if you are a Velocity subscriber, please see the full report, first published on October 2nd here Muddling Through Economic Weakness, Weather and Politics.

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.


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