11 August 2022, 07:39AM UTC

Chief Investment Office GWM

Investment Research

Commodity markets: Fundamentals still matter

Commodity markets
Authors: Dominic Schnider, CFA, CAIA, Strategist, UBS Switzerland AG; Wayne Gordon, Strategist, UBS AG Singapore Branch; Giovanni Staunovo,
Strategist, UBS Switzerland AG

• Broad commodity indexes trod water in July,

remaining 13% lower than the peak in early June.
Supply issues have given way to demand concerns
over recession fears for the US and Europe, a stronger
US dollar, and China’s housing woes.
• Returns could stay muted in the short term for
industrial metals, but weather risks and ongoing
geopolitical uncertainties—as well as less sensitivity
to demand factors—could bolster agriculture and Source: Gettyimages
energy.
• But the longer-term outlook remains bright: supply-
side constraints should ease and secular demand
drivers should kick in as economic growth stabilizes.
Hence, we retain our positive view on the asset class
driven by almost all sectors. On precious metals (gold),
we remain cautious into the year-end.

Our view
The past two months have been anything but Broad commodity indices have given up some of
straightforward for commodity investors. The UBS CMCI their gains in recent weeks
Index has declined by around 13% since the peak in early Values standardized to 100, TR values
June, but it’s still up 14% year-to-date and was level in July.
Industrial metals are down the most since the peak, while
the fall in energy and agriculture has been broadly in line
with the overall index. Precious metals have lost less than
5% during this period. Livestock is the only sector to have
risen, eking out a modest gain in the low single digits.

In essence, supply-side constraints, which underpinned the

rally in 1H, have taken a back seat to deteriorating global
economic growth prospects, the stronger US dollar, and
China’s housing woes. In fact, the IMF recently downgraded
its global growth outlook again, and has warned risks are
skewed to the downside. Indeed, pessimism is running
high across the world amid forceful central bank actions.
Investors are likely to remain on edge ahead of US inflation
Source: Bloomberg, UBS, as of 10 August 2022
data releases in the coming months, as they direct the Fed’s
reaction function.

This report has been prepared by UBS Switzerland AG and UBS AG Singapore Branch. Please see important
disclaimers and disclosures at the end of the document.
Commodity markets
But supply and demand fundamentals still matter. Energy
demand should remain robust: international travel is
surging, and uptake from China—the world’s largest
importer of commodities—should rise as economic activity
recovers in 2H. Yet, with OPEC+'s spare production capacity
at very low levels, the buffer to address future supply
disruptions is limited. We expect supply-side risks in energy
(and agriculture) to dominate into the year-end.
Further ahead, commodity supply should remain
constrained due to years of underinvestment and to
persistent climate and geopolitical risks. Also, the green
transition and China’s focus on infrastructure as a lever to
stimulate the economy should underpin metal demand for
years to come. As such, the broad commodity cycle should
stay more resilient this time around with room for prices to
recover quickly in the coming quarters.
On an asset class level, we target a spot appreciation of 15–
20% over the next 6-12 months. This should be driven by
Brent crude oil prices moving towards USD 125/bbl by the
end of the year, and most industrial metal prices-—such as
copper—are likely to bounce from current levels over the
next 12 months. Food prices could also stay elevated above
historical averages while precious metal prices come under
renewed downward pressure.
Fundamentals still matter
Historically, commodity returns are highly sensitive to cyclical
downturns—almost half of the returns at the broad index
level can be attributed to swings in economic activity. So,
commodity prices could fall further if the global economy
were to slip into a deep recession.
In a deep recession, commodity prices can fall
substantially
Drawdowns from peak, 100% = historical peak
Source: Bloomberg, UBS, as of 10 August 2022
Broad commodity indexes have declined 30–50% from peak
to trough in recessions or downturns over the past three
decades. The CMCI index has fallen by 16% since the peak
in early June, so theoretically it could drop another 17%
in the event of a deep, protracted contraction in economic
activity.
Aggressive Fed tightening, the impact of high energy prices
on Europe, and China’s property market woes are forceful
headwinds. But our House View assumes a mild slump
is more likely than steep one. We also believe overly-
bearish calls on commodity markets do not fully account
for the supply-side dynamics. In general, commodity supply
is constrained due to years of underinvestment—official
inventories are low across multiple sectors—and because of
weather-related and geopolitical factors. At the same time,
the green transition and China’s focus on infrastructure
as a lever to stimulate the economy should support metal
demand. We think this makes cyclical commodity sectors
more resilient compared to history.
Drawdowns from peak for cyclical commodity
sectors
100% = historical peak
Source: Bloomberg, UBS, as of 10 August 2022
In the following sections, we cover the four key drivers that
impact broad commodity investors before digging deeper
into sector and commodity specific considerations. Overall,
we believe commodities are oversold, and that investors will
inevitably begin to worry less about the immediate growth
concerns and more about the supply-side shortfalls due
to climate change, geopolitics, and rising decarbonization
goals. Therefore, we maintain our expectations for 15–20%
returns for broad commodities over the coming six to 12
months.
Driver #1: China’s climbing out of the hole, but
housing risks linger
China is climbing out of its hole—and we do not expect
its property market woes to scuttle the broader economic
recovery as policy support should lift growth in 2H. However,
the country’s appeal as a counter-cyclical demand hedge is
diminished.
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Commodity markets
News that many developers have had to halt construction
because they have run out of cash have resulted in
buyers suspending their mortgage payments. Highly levered
developers are facing a credit crunch because of China’s
deleveraging campaign. Some distressed developers may
have also misused the presale funds because of supervision
and control loopholes, leading to insufficient funding for
project completion. In the background, the COVID-19
mobility curbs may have hindered project progress as well as
dampened homebuyers’ incomes and mortgage repayment
capability. This situation is also happening as home prices in
many of these cities are under pressure.
The refusal of buyers to pay their mortgages has given
rise to fears of systemic contagion. Should the scale of the
mortgage suspensions grow bigger, more non-performing
mortgage loans for banks could lead to systemic risk for
the financial system. But we do not expect this to happen.
The spread of the boycott is already beginning to slow
thanks to Beijing’s vow to guarantee home deliveries and
reports policymakers are considering a grace period for
mortgage repayments. The government is also moving to
relieve the liquidity stress developers are facing. A CNY 200–
300bn fund has reportedly been set up to support indebted
property developers, by acquiring real estate projects or
buying bonds issued by developers.
Also, the overall impact on China’s banking and financial
system should be manageable. The percentage of mortgage
loans and developer financing in new bank loans has been
declining over the past three years, and the non-performing
loan coverage ratios are at sufficient levels for major banks.
In our base case, we think the supportive policy measures
will eventually help property market activity recover in 2023
after the near-term dust settles.
Economic activity to recover in China
GDP values in %, y/y
Source: UBS, as of 10 August 2022
Overall, we believe China’s economy likely troughed in the
second quarter despite the property woes and a mixed
picture from the country’s PMI readings. China’s factory
activity unexpectedly contracted in July while property sales
continued to shrink, highlighting the fragile nature of the
recovery. The official manufacturing purchasing managers’
index also fell to 49 from 50.2 in June, according to the
National Bureau of Statistics. Separately, data from key
property developers showed the housing market extended
its slump last month.
China PMI linkage with industrial metal prices
Monthly data
Source: Bloomberg, UBS, as of 10 August 2022
On the positive side, the non-manufacturing PMI has held up
well, helped by policy efforts focused on key infrastructure
projects. China's electricity consumption, a key barometer
of economic activity, was up 4.7% y/y in June, versus –1.3%
in both May and April, according to the National Energy
Administration. And the COVID situation is improving at the
national level, with tweaks in Beijing’s stance preventing
a return to extreme lockdowns. High-frequency travel and
congestion data show a return to the pre-March highs.
In sum, China’s rebound remains delicate. Manufacturing
and property data signal that more stimulus is needed.
While a policy “bazooka” seems unlikely, yet government
support will be more forthcoming in the months ahead,
which should stabilize demand for commodities, particularly
for like iron ore and industrial metals.
Driver #2: US recession talks premature
The debate whether the US is already in—or imminently
headed towards—a recession was amplified in recent weeks
by Fed Chair Jerome Powell’s comments at the July press
conference, where he indicated a shift in focus from inflation
to growth. The US 10-year bond yield fell to 2.5% after that
pivot in rhetoric, coupled with a July PMI print in which the
US manufacturing index hit the lowest level since June 2020.
03
Commodity markets
If justified, such a pivot would be a powerful force for
markets as it would bring a peak to interest rates and the
USD, which would be positive for commodities. However,
while we expect the Fed to become more balanced in its
policy narrative towards the end of this year, we believe
the July shift was premature. In fact, several Fed speakers
have since moved to moderate Powell’s comments, with
Bullard, Daly, Evans, and Mester all indicating that the war
on inflation remains at the top of the agenda. Still, money
market participants largely shrugged off these remarks until
last month’s blowout non-farm payrolls data, in which jobs
growth doubled expectations and the unemployment rate
dipped to 3.5%, matching the lowest level in over 50 years.
Gold's correlation to the broad USD remains
strongly negative
In percentage points
Source: Bloomberg, UBS, as of 10 August 2022
The follow-through to the bond market has been swift
with the US 10-year yield up around 15bps. Coming up,
we expect US headline CPI to decline in the July print (10
August), but core measures are likely to moderate at a
slower pace and this will concern the Fed. Additionally, the
strength of the US labor market signals a meaningful US
recession is still some ways off. Therefore, we believe it’s too
early to call for a trend reversal in the USD or US rates. We
forecast EURUSD at 0.98, the 10-year US Treasury yield at
3.25% at end-2022, and a real 10-year yield between 0.5%
and 1.0%. Hence, we remain least preferred on precious
metals, mainly gold and silver.
Driver #3: Two sides to the Europe’s energy crisis
European gas rationing is likely to subdue activity and reduce
plant utilization in sectors like autos, materials, and fertilizer.
Reduced economic activity has negative feedback loops
to goods demand and subsequently commodities. That
said, some commodities could benefit from substitution as
regional factors constrain availability.
As Russia cuts exports of gas to Europe the demand for
liquefied natural gas (LNG), thermal coal, and crude oil
should all rise—but these dynamics are not straightforward.
For example, US natural gas prices are trading at a deep
discount versus prices in Europe and Asia; demand for
US LNG via exports will therefore likely stay elevated.
Meanwhile, crude oil is trading below European and Asian
coal prices on an energy equivalent basis. This should spur
demand for crude oil use in power generation, which should
help, offset weaker European GDP growth to some degree.
Fossil fuel prices, crude getting cheap in a
relative comparison
Values are in USD per barrel of oil equivalent
Source: Bloomberg, UBS, as of August 2022
As discussed, China’s key issues are domestic in nature. For
example, real estate repair and COVID-19 relaxation will
both impact commodity demand, particularly for industrial
metals. Outside China, we think the global slowdown in
trade and demand overall could last from 4Q22 and 1Q23.
Driver #4: Fears about supply shortfalls will likely
return
Industrial metals and steel are at the heart of the
new commodity cycle, and the supplies needed in the
decarbonization process are central to the price recovery.
While this narrative is not new, we believe the world is
still not prepared for the transition-related surge in demand
and despite higher prices, a decade of poor returns and
ESG concerns have curtailed investment in the future supply
growth of key metals like copper. That means output will
struggle to keep pace with rising demand. For example,
the faster rollout and adoption of electric vehicles, which
requires more than 3x more copper than combustion engine
vehicles, is likely to keep copper market in a continued
tightness for a longer time and trigger the needs to
hold structurally more inventories to manage supply risks
effectively.
For oil, OPEC and its allies have fully unwound their
COVID-related production cuts, but many members of
the group have been unable to increase output in line
with the agreements. Only Saudi Arabia and the United
Arab Emirates hold spare capacity and can increase
production significantly from current levels. And though US
oil production is rising, capital discipline and supply chain
04
Commodity markets
constraints limit the growth even as crude prices trade well
above production costs. We also see supply dislocations in
the agricultural commodity space spilling over into 2023,
stemming from the war in Ukraine, high energy prices, labor
shortages, and persistent climate-related challenges.
US crude production is only modestly gravitating
higher
Values are in million barrels per day
Source: EIA, UBS, as of August 2022
Sector specific developments
Energy: Sticking to a constructive outlook for crude oil
Crude oil prices have not been immune to recent market
routs. Demand concerns amid recession fears have likely
pushed some investors out of the oil trade as an inflation
hedge. Falling liquidity—gauged by the decline in open
interest (the sum of long and short positions)—and ongoing
concerns over renewed mobility restrictions in China also
likely added to the storm for crude prices.
But while oil demand in OECD countries has been lackluster
of late, it’s been strong in non-OECD countries. This is
especially evident in China (the second largest consumer),
India (the third largest consumer), and Mexico (the 12th
largest consumer). Meanwhile, crude inventories are still at
multi-year lows and short-term available spare capacity is set
to fall below 2mbpd in August. Preliminary data on Russian
crude exports also suggest crude exports dropped further in
July. And in our view, the European Union’s move to cut their
Russian crude and oil product imports from nearly 3mbpd in
June to near-zero by year-end will tighten the market further.
So, we think oil prices need to rise higher to trigger demand
destruction and bring supply and demand back into balance.
US natural gas prices have been on a roller coaster, with
prices falling from above USD 9/MMBtu in early June to
below USD 6/MMBtu, before rebounding again. The initial
price drop was caused by an explosion at the Freeport LNG
plant, which led to the shutdown of the seventh largest
export terminal in the world and the second largest in the
US. The shutdown of the facility weighed on US prices as
more natural gas stayed in the country.
However, prices have since recovered as summer approaches
and power demand to cool buildings increases. Utilities are
also sticking to natural gas as an alternative to produce
power amid low coal inventories. In the near-term, we
expect prices to stay elevated, though some tightness should
ease over the next six to 12 months. High prices will likely
weigh on industrial demand and US LNG exports will remain
capped next year as capacity only becomes available in
2024. Natural gas produced from oil wells should also
increase over the coming quarters.
Russian crude exports
Values are in million barrels per day
Source: Petro-Logistics, UBS, as of August 2022
Base metals: Short-term risks amid long-term supply
constraints
China remains the key center of gravity for metals demand.
Its metals consumption accounts for more than half of
global demand, with 15–32% of Chinese demand being
linked to property and construction activity. While we
acknowledge that efforts to remedy the housing crisis
may fall short, an acceleration in the issuance of special
local government bonds should stabilize the situation into
2023. Moreover, we anticipate some lift in 2H economic
activity driven by infrastructure, which favors steel-making
materials.
On the supply side, we see ongoing risks to copper output,
putting refined production growth at risk of being closer to
zero than expanding in the low single digits. For example,
disputes with local communities are dragging on at theLas
Bambas copper mine in Peru. Major miner Antofagasta
has cut its full-year production guidance while BHP has
raised concerns with Chile new mining Royalty Bill. Freeport-
McMoRan, the world’s largest publicly traded copper miner,
said that current prices were insufficient to support final
investment decisions on new production.
For aluminum, higher energy prices in Europe are likely to
limit the region’s smelter output in 2022. So far, European
05
Commodity markets
smelters have been hit hardest—and the pain has spread to
the US. According to the International Aluminum Institute,
Western European production of primary aluminum fell
by 11.5% to 1.483mn tons in the first half of the year.
Now, the margin squeeze is extending upstream with major
refiners cutting and/or suspending production. To name a
few, Romanian producer ALUM has halted production for
17 months and Alcoa has cut output at its refinery in Spain.
In the US, Century Aluminum is idling its Hawesville smelter
for 9–12 months after costs to power the plant surged. And
Alcoa will stop one of its production lines at its Warrick
Smelter in Indiana due to operational challenges.
China is the key metal consumer
China share of global demand in total and for the property and
construction
Source: WoodMac, UBS, as of August 2022
On the flip side, China’s aluminum production is rebounding
and continues to surprise to the upside. Chinese exports
of unwrought aluminum and aluminum products reached
607,000 tons in June versus 468,000 tons/month on
average in 2021 amid weaker domestic demand. This
increase in metal availability has helped ease some market
tightness outside of China.
Meanwhile, zinc smelter output this year has been
constrained by logistical challenges and the availability of
concentrate. The elevated energy prices in Europe are also
likely to cap European smelter output and could lead to
an outright contraction in 2022. And there is limited new
capacity in the pipeline, particularly outside of China. These
all put our expectations of improving smelter output in the
coming quarters at risk.
The focus now turns to inventories at hand with supplies
disrupted. Visible exchange inventories for most key
base metals are at depleted levels when compared to
historical levels. In copper, global inventories stand at 247
kilotons (kt) versus the 5-year average of 486kt. However,
stockpiles have notably stopped falling with economic
activity worsening.
In aluminum, exchange inventories stand at just 529kt,
which is significantly below the 5-year average of 1,830kt.
Stockpiles globally have continued to fall despite stronger
Chinese aluminum output, which we think signals sustained
tightness in the market. As for zinc, signals from the
Shanghai Futures Exchange (SHFE) and the London Metal
Exchange (LME) have been mixed. SHFE inventories have
risen by 44kt to 102kt YTD, driven by seasonal build in
China, whereas LME inventories have fallen by 127kt to 72kt
since the beginning of the year.
The nickel market has also tightened with barely 62kt left in
visible exchanges compared to the 5-year average of 281kt.
However, the prospect of stronger output from Indonesia
remains a source of concern for prices and could bring an
end to the steady inventory declines seen in recent quarters.
Global visible inventories are at depleted levels
for most metals
Values in 1,000 tons for LME, SHFE and COMEX exchanges
Source: Bloomberg, UBS, as of August 2022
Precious metals: Too early to buy
Gold and silver remain explicably tied to outlook for US
and European economic growth, central bank guidance,
and as consequence, the direction of the US dollar and real
interest rate expectations. Bullion has dropped by 13% since
its mid-March peak. At the time, the Fed’s hawkish pivot
underpinned a sharp rise in nominal interest rates along with
a drop in inflation expectations, which lifted real rates and
the USD. As said, we believe a meaningful dovish Fed pivot
is some ways off despite a potential peak in US headline
inflation. Hence, we expect higher US interest rates (largely
driven from the real side) and a stronger US dollar likely
suppresses investor appetite into 4Q. The surprise strength
in recent US labor data endorses this view.
According to the World Gold Council data, gold exchange-
traded funds experienced outflows of around 39 metric tons
06
Commodity markets
in 2Q, which is a reversal of the trend seen in 1Q. We
think weak Chinese demand will likely continue while Indian
consumer demand, though resilient, is unlikely to repeat last
year’s strong 2H. Central bank demand, which retained its
solid pace in 2Q, remains one bright spot.
On the supply side, we expect availability to improve as
the global slowdown buoys a lift in recycling and some
liquidation in current holdings. Silver is likely to follow gold’s
direction as usual, even as demand for the metal continues
to benefit from the net-zero emissions push due to its use
in solar panels and other green applications. We expect the
precious metal to broadly underperform gold into the year-
end but see this trend reversing in 1H23 as gold stabilizes.
Headwinds to gold from real interest rates
should intensify into year-end
In USD per ounce
Source: Bloomberg, UBS, as of August 2022
Near-term, we also think platinum and palladium are likely
to be under pressure as industrial demand suffers from
slower economic growth in Europe and aggressive monetary
policy tightening in the US. That said, we expect platinum
to outperform palladium over the next 12 months as the
latter’s price premium is likely to encourage a further shift
to platinum for use in catalytic converters.
Agriculture and livestock: Weather and Ukraine are
key risks
Prices for grains sold off sharply in June amid demand
concerns and as news of a surprise deal between the
Ukraine and Russia, which would allow for grain shipments
via Black Sea ports, eased immediate concerns about
availability. We estimate around 15–20mn tons of grain
remains stuck in Ukraine. The agreement is expected to
facilitate exports of around 5mn metric tons per month,
on top of the 2.5mn metric tons of grains currently being
exported via land and river routes through neighboring
countries.
Looking ahead, there are several uncertainties. The actual
volumes that can be shipped remain up in air, as well as
the condition of the internal grain-handling infrastructure.
Before the war, Ukraine shipped around 3–4mn metric tons
per month of both corn and wheat and typically posted its
seasonal highs in the 2H. The deal does have a great deal of
political support but is only valid for 120 days at this stage.
Extreme heat in key producing regions also remain a big
risk to wheat, corn, and soybean production in 2022–23.
There have been dramatic downgrades to crop output in
the EU, with the French government cutting the country’s
corn output by around 20% y/y. The bloc itself is on track
to produce its smallest harvest since 2018–19. Meanwhile,
limited rainfall and above-normal temperatures during the
critical pollination stage has reduced the crop potential in
western parts of the US corn belt. As of 2 August, 66% of
the US—responsible for around 31% of corn and 28% of
soybean production—was experiencing unusual dryness.
It is crucial for Ukraine to export in coming
months
In million metric tons, weekly wheat exports
Source: Reuters, UBS, as of August 2022
In recent weeks, crop forecaster Michael Cordonnier has cut
his corn yield estimate by three bushels per acre to 174
bushels per acre (below the USDA estimate of 177). He
also lowered his soybean yield forecast by one bushel per
acre to 50.5 (below USDA estimate of 51.5). Meanwhile,
Argentinean wheat production has also been hit with some
major growing regions not seeing rain for two months. Local
exchange Rosario forecast the country’s wheat production
at 17.7mn metric tons (below the USDA estimate of 19.5mn
metric tons).
In soft commodities, sugar prices fell 7% in July due to policy
changes in Brazil, higher production expectations in India,
and a slide in crude oil. The Indian Sugar Mills Association’s
first production estimate indicates another bumper crop of
35.3mn tons amid the government’s cap on exports at 6–
7mn tons for the coming year. Brazil’s crush has gathered
pace in recent weeks with total production now expected to
be around 32mn metric tons (up from our earlier estimate
of around 30mn metric tons). As a result, we have lowed
our price forecast (see below).
07
Commodity markets
Coffee was also under pressure in July as Brazil exports
seasonally rose and prospects for the world economy were
downgraded. We expect robust arabica production of from
Brazil this season. However, certified inventories currently
amount to 0.7mn bags versus 2.2mn bags in 2021— the
lowest since 1999. Overall, we expect prices to remain
elevated for now, but trend lower into 2023.
US corn crop conditions deteriorate further
In %, crop rated good-excellent
Source: NASS, UBS, as of August 2022
On the other hand, cotton prices have made a
strong recovery in recent weeks. Key cooperatives have
downgraded the Texas areas with abandonment rates as
high as 50% in the region. We now expect the US crop to
come in below 15mn bales for 2022–23. Indian production
is also expected to decline by around 20% this year.
Meanwhile, the ban of cotton from Xinjiang continues to
upset supply chains for weavers and garment manufactures
in Southeast Asia. We still see prices shifting higher into year-
end, particularly if India turns from being a net exporter into
a net importer in 2022–23.
Finally, livestock has performed solidly so far. Lean hogs rose
6% month-on-month and live cattle increased 4% m/m.
Strong demand for US beef and pork exports, improvements
in feeding margins and a decline in domestic breeding herds
should support prices this year before shifting higher in
1H23.
Forecast update
We only made incremental changes to our commodity
forecasts, as we generally feel comfortable with our view on
higher commodity prices except for precious metals.
We have lowered our price guidance on the agricultural side
on the prospect that some Ukrainian crop supply may find
their way into global markets. Corn prices were lowered by
USD 0.75 per bushel to USD 7 per bushel in 2H22, and to
USD 6.25 per bushel by end-June 2023. We also cut wheat
forecasts by USD 2 per bushel to USD 9 per bushel in 2H22,
and USD 8.5 per bushel at end-June 2023. Soybean prices
were lowered by roughly USD 1 per bushel across all tenors;
our end-2022 forecast is USD 15.5 per bushel, while we see
prices at USD 14 per bushel by end-June 2023. And sugar
was lowered by USD 0.05 per pound in 2H22; our end-of-
year forecast is USD 0.20 per pound while our end-June
2023 estimate remains unchanged at 0.21 per pound. We
kept our cotton, cocoa, coffee, and livestock forecasts all
broadly unchanged.
We also think the coal market will remain tight. Coal is being
used as an alternative to natural gas in Europe, and the
region is cutting Russian imports while looking to secure
supply elsewhere. Hence, we raised our coal forecasts by
USD 70 per ton across the board and look for prices to stay
higher for longer.
As for silver, we shifted our forecasts down by USD 2/oz
with the near term forecasts now standing at USD 18/oz
for 2H22. A step down in the gold price lower and weaker
industrial application demand should weigh silver prices
lower as well. As for 1H23, we kep the forecasts unchanged
at USD 19/oz with a Fed pivot stabilizing precious metal
prices.
Recommendations
1) Opportunities in commodities
Open: Thematic exposure to an active commodity
strategy, initiated on 15 November 2021
We recommend clients investing in commodities to pursue
an actively managed strategy given the longer-lasting bull
and bear markets, and the unique characteristics and drivers
of individual commodity sectors and structural trends. Our
active commodity strategy (ACS) is designed to capture
these dynamics while improving risk-adjusted returns versus
traditionally passive commodity investments.
2) Opportunities in energy
Open: Thematic exposure to long-term Brent oil
contracts, initiated on 16 February 2021
Longer-dated oil contracts are trading cheaper than spot
prices. While commodity markets tend to price in the
"now," futures curves don't have a lot of predictive power.
Due to falling oil inventories, the futures curve is downward
sloped, meaning longer-dated contracts are cheaper. In our
view, rising oil demand, low investment in new projects, and
vanishing available spare capacity should support longer-
dated contracts.
Open: Yield pickup strategy in Brent crude oil (10%
annual targeted return, six months)
08
Commodity markets
We like to sell Brent’s price downside risks, considering the
tight oil market backdrop likely in the quarters ahead and
option volatility above 40%. We favor strike levels at, or
below, USD 65/bbl, which should provide investors with
a yield of 10% annually over six months. Investors who
followed our previous recommendations to sell the price
downside should keep their positions until maturity.
3) Opportunities in base metals
Open: Yield pickup strategy in copper (8% annual
targeted return, six months)
We expect the copper market to remain under-supplied
by an average market deficit of 87,000 tons in 2022 and
98,000 tons in 2023. As long as global visible inventories
are under downward pressure, we expect copper prices
to reach USD 10,000 per metric ton by 1H23. With this
in mind, we recommend selling price downside risks in
copper. We like strike levels at USD 7,150 per metric ton
over six months and an indicative yield of 8% annually.
Investors who followed our previous recommendations to
sell the price downside (ranging from USD 6,800-9,750/
mt) should keep their positions until maturity. If prices trade
unexpectedly lower, we advise investors to take outright
long exposure to recoup any potential losses.
Open: Yield pickup strategy in aluminum (7.5% annual
targeted return, six months)
Our supply and demand estimates point to a shortfall of
1.6mn tons in 2022 and 1.1mn tons in 2023. With energy
prices expected to remain elevated, higher aluminum prices
are still required to help balance the aluminum market,
particularly in Europe. We think that supply challenges
are here to stay and could push prices higher. Globally,
inventories have continued to fall, which we believe signals
sustained tightness in the market. We recommend investors
sell the price downside risks in the metal. We like levels
at USD 2,250 per metric ton and an indicative yield
of 8% annually. Investors who followed our previous
recommendations to sell the price downside (ranging from
USD 2,200-3,250/mt) should keep their positions until
maturity. If prices trade unexpectedly lower, we advise
investors to take outright long exposure to recoup any
potential losses.
4) Opportunities in precious metals
Open: Yield pickup strategy in platinum (7% p.a.
targeted return, three months)
We believe platinum’s wide discount to palladium should
support substitution in the car industry and prop up prices
over the next 12 months. We recommend investors to sell
the downside price risks in platinum, and we favor strike
levels below USD 835/oz over three months targeting a
yield of 7% p.a. Investors who followed our prior advice
(ranging from USD 850-960/oz) should keep their positions
until maturity.
Closed: Yield pickup strategy in silver
At present, we do not recommend selling volatility in silver.
Currently, there are no open yield pick up strategies in silver.
5) Opportunities in agriculture and livestock
New: Yield pickup strategy in cotton (10% annual
targeted return, six months)
Cotton production is likely to be revised even lower as
weather-related impacts hit crop expectations in the US
and India, which should see cotton prices elevated despite
weaker demand from slower global growth. We target
strikes below USD 0.95 per pound over a six-month tenor.
Open: Yield pickup strategy in soybean oil (10%
annual targeted return, six months)
Continued growth in renewable diesel use should keep
prices correlated with crude oil prices. We like strike levels
at or below USD 0.63 per pound over a six-month tenor.
Investors who followed our prior advice, with strike levels of
USD 0.65-0.68 per pound, should keep their positions until
maturity.
Open: Yield pickup strategy in Sugar (10% targeted
return, six months)
Rising crude oil prices and strong demand for ethanol in
Brazil and India should see ethanol-parity lift sugar prices
into year-end. We expect this to support sugar prices in the
coming six to 12 months. Subsequently, we like strike levels
at or below USD 0.17 per pound over a six- or 12-month
tenor. Investors who followed our prior advice, with strike
levels of USD 0.18 per pound, should keep their positions
until maturity.
Closed: Long live cattle second generation index (10%
target return, 5% stop loss, six months, initiated on 28
Feb 2022). Our stop loss of 5% was triggered on our long
live cattle position and recommendation was closed on 30
June 2022 in Agriculture outlook report.
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Commodity markets

Forecast table

Source: Bloomberg, UBS, as of 10 August 2022; Forecasts refer to end of period; Abbreviations: Hist. Vol. = Historical volatility, Act Fut. = Active Futures,
ESM = Expected spot return in %

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Commodity markets

Appendix
UBS Chief Investment Office's ("CIO") investment views are prepared and published by the Global Wealth Management business of UBS Switzerland
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objective and other principal investment strategies. The returns on a portfolio consisting primarily of sustainable investments may be lower or

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Commodity markets

higher than portfolios where ESG factors, exclusions, or other sustainability issues are not considered by the portfolio manager, and the investment
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