Compared to the double-digit growth in the past two years, the commodity market this year appears to be increasingly sluggish.
The Bloomberg Commodity Index has fallen by 10% so far this year. Energy has become the biggest loser, plummeting by 20% year-to-date. Basic metals have remained weak due to the slow global economic recovery, while precious metals such as gold have achieved positive growth.
However, with the prospect of a Fed rate cut becoming increasingly clear and geopolitical uncertainties intensifying, will commodities stage a comeback by 2024?
In the latest commodity outlook by analysts including Natasha Kaneva from J.P. Morgan, a constructive view on precious metals is expressed. It is expected that a Fed rate cut will push gold prices towards the target peak of $2,300 per ounce, with a breakthrough rebound expected around mid-2024.
In terms of energy, J.P. Morgan is more optimistic about crude oil. It is projected that Brent crude oil will remain in the range of $80-90 per barrel next year, about $10 higher than the current level, and is expected to peak by the end of the third quarter of next year.
Although the overall trend of commodities is difficult to predict, J.P. Morgan remains bullish on the future trends of gold and oil in the next two years.
<h2>How much room is there for gold to rise?</h2>
J.P. Morgan continues to hold a structural bullish view on gold and silver.
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Although there may be some final twists and turns in the debate over a Fed rate cut, which may pose a challenge to gold prices from their current high levels in the coming months, central bank and physical demand have already (and may continue to) support the upward trend in gold prices.
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J.P. Morgan predicts that the Fed's rate cut cycle in the second half of 2024 and the first half of 2025 is expected to trigger a breakthrough rebound around mid-year and push gold prices to a new nominal high, with a target peak of $2,300 per ounce by 2025, while silver is expected to rise above $30 per ounce.
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Importantly, we expect the inverse relationship between gold and real yields to strengthen again as real yields decline (and are amplified by investor inflows), which could release some bullish convexity in prices.
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J.P. Morgan predicts that the breakthrough in precious metal prices in the second half of next year will eventually offset high carry costs and may achieve double-digit growth. By the end of 2024, the return rate of the Bloomberg Commodity Precious Metals ER Index is expected to increase by 6% from current levels.
<h2>How will the oil market balance with OPEC+?</h2>
In terms of oil, J.P. Morgan believes that non-OPEC+ supply will be sufficient to fully meet global oil demand in 2023, forcing OPEC+ to cut production to balance the market. Similar situations are expected to occur more frequently by 2024.
First of all, supported by strong emerging markets, resilient US economy, and stable but weak European demand, global oil demand is expected to grow steadily by 1.6 million barrels per day by 2024.
JPMorgan expects that two-thirds of the growth in oil demand may come from overall economic expansion, while one-third of the growth may still be driven by the continued normalization of transportation fuel demand. Non-OPEC+ oil-producing countries are expected to once again drive overall supply growth, reaching 1.7 million barrels per day, surpassing demand growth. In order to maintain balance in the oil market, OPEC+ may need to continue to limit production.
By 2025, JPMorgan expects global oil balance to further relax, and Saudi Arabia and Russia are expected to voluntarily extend their production/export cuts until the first quarter of 2024.
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Based on our assessment of demand in 2024, as long as OPEC+ can maintain the planned daily production cut of 2 million barrels agreed upon in November 2022, and the additional daily production cut of 1.7 million barrels committed by certain member countries in April 2023, Saudi Arabia and Russia can gradually lift their voluntary production cut of 1.3 million barrels per day starting from April 2024.
Assuming Saudi Arabia increases daily production by 250,000 barrels and Russia increases daily exports by 150,000 barrels, global oil inventories may remain stable in 2024 and increase by 1.2 million barrels per day in 2025.
In this scenario, the average price of Brent crude oil will remain at $83 per barrel in 2024 and $75 per barrel in 2025.
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<h2>The overall situation of commodities is still uncertain</h2>
JPMorgan found that the returns of commodities (especially energy) are strongly positively correlated with the US CPI inflation index, making energy one of the preferred hedges against inflation.
Since the beginning of this century, when the overall US CPI is above 2% and in an upward trend, the Bloomberg Commodity ER Index has performed the best (average MoM return +1.4%). For example, when the US CPI is above 2% but declining, the Transportation Index has an average MoM decline of 1.9%.
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Although growth is expected to slow down below potential levels in 2024, JPMorgan believes that the global economy will avoid a recession during the period of 2024-2025, which is consistent with the characteristics of the mid-term economic cycle, where the strength of commodity returns will weaken.
It is important to recognize that it is difficult to distinguish between the signs of global economic slowdown and heading towards a recession and the trend of eventually achieving a soft landing. This makes predictions for commodities complex.
Similarly, JPMorgan believes that commodities are unlikely to benefit from inflation next year. The institution predicts that the global core inflation rate will decrease from 5.9% in 2022 to 4.1% next year, explaining that there may be more cases of deflation.
Despite significant progress in the normalization of commodity and labor markets, the overall deflationary effect is still at play, and the core inflation rate is expected to further decline to 2.9% by 2024. Without the strong combined driving factors of growth and inflation, investors will need to continue to maintain a strategic focus on commodities in 2024.
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Morgan Stanley predicts that the price of gold is expected to rebound significantly in 2024, reaching $2,300. Analysts at Morgan Stanley believe that the Federal Reserve's interest rate cuts and geopolitical uncertainties will drive the price of gold higher. At the same time, Morgan Stanley predicts that Brent crude oil will remain in the range of $80-90 per barrel next year, about $10 higher than the current level. Despite the poor performance of commodities this year, Morgan Stanley remains optimistic about the future trends of gold and oil in the next two years. It is expected that the Federal Reserve's interest rate cuts in the second half of 2024 and the first half of 2025 will trigger a significant rebound in the price of gold, pushing it to new highs. Morgan Stanley predicts that as real yields decline, the price of gold may rise.

J.P. Morgan's 2024 Commodity Outlook: Fed Rate Cuts Boosting Gold, Expected to Break Through $2300