Is this the beginning of the end of commodity rally that started early this year? Developments in the global market in the last few days portend that the bull-run in major commodities such as base metals (copper), precious metals (gold and silver) and agriculture (grains and oilseeds) may be starting to reverse. Energy (crude oil) is likely to be an exception and may fight to stay put at the high levels attained recently.

The sharp fall in commodities followed the US Federal Reserve meeting on Wednesday that turned out to be more-hawkish-than-expected. If the sell-off in commodities was the result of a firming US dollar and higher real yields, the Chinese government assertion of metals sales from its strategic reserves exacerbated the situation.

Speculative activity

Taking a cue, speculative investors have started to liquidate their long positions. The correction shows that the market was driven mainly due to speculation rather than on genuine fundamentals. Clearly, ultra-accommodative monetary policy meant too much money was chasing commodities.

China continues to be a mover and shaker of the market. Economic growth is slowing, inflation is catching up and policy support may be gradually withdrawn. This is sure to have implications for commodities. Weaker than expected activity in May has got market participants worried.

Copper has faced a sharp fall. Friday June 18, copper was trading at $9,289 a ton, down from $9,975/t a week earlier and $10,376/t a month ago. There is further correction in store. The metal may average $8700/t in Q3 this year.

Lead futures set to turn bearish

Precious metals hit

A firming dollar left the prospects of precious metals dented. June 18, gold was trading at $1,792 a troy ounce, down from $1,877/oz a week earlier. Silver ($ 26.36/oz) and platinum ($1,075/oz) moved down in tandem.

Given the greenback’s potential to rise further, the pressure on the precious metals complex is likely to continue in the days ahead. Gold may move closer to $ 1,700/oz and silver to $24/oz.

With improving crop conditions and forecast of cooler weather in the US Midwest, soybean prices have fallen sharply in anticipation of higher yields and output. The question is whether the global market will get into surplus in 2021-22. Falling soybean prices have led to a fall in soyoil and palm oil rates too. With palm in its peak production cycle, there is scope for further easing of the vegoil market.

Will gold bulls continue to outfox bears?

Crude to remain strong

One exception to the general price correction could be crude oil. Although a strong dollar coupled with profit-taking has dragged oil prices down slightly, robust demand and subdued global supply (following disciplined compliance with OPEC+ decision) is expected to keep the market in deficit over the next three months.

The response of Iran’s new president to the US sanctions and the OPEC+ meeting scheduled for early July will come in for close scrutiny. The big question is whether OPEC+ will decide to hike production quotas. In Q3, one can expect Brent to peak at around $75 a barrel.

(The author is a policy commentator and commodities market specialist. Views are personal)