Best 3 commodities to watch in Q3

Commodities trading has seen an explosion in popularity over the past few years. The pandemic mini crash followed by the ensuing bull run saw most commodities experience seriously volatile price swings.

Russia’s invasion of Ukraine in March 2022 compounded this volatility — with two-way sanctions and wartime logistical problems seeing oil, gas, wheat, gold, palladium, nickel, and steel hit record or near-record highs.

In just one example, oil went negative for the first time ever in April 2020, and then rose to multi-year highs in 2022. Brent Crude is still trading for $74 per barrel — elevated by historical norms.

When considering the best commodities to trade in Q3, the two most popular candidates are oil and gas. However, the trajectory of these two commodities is currently difficult to predict. OPEC cuts to reduce supply, combined with recessionary fears and uncertain Chinese output weakening demand, means that in the short-term both hard commodities could go either way.

Three commodities — orange juice, copper, and gold — could be better trades. All three may be experiencing rising demand, and demand could be set to continue increasing.

Best commodities for Q3

Orange Juice

Orange Juice rose from circa $90/lbs at the start of 2020 to over $285/lbs last month. While the traditional breakfast drink has now fallen back to $255/lbs, further moves upwards could be imminent. This is becoming a problem for many governments which rely on cheap OJ to get Vitamin C into the general population.

This rise has been driven by several factors, but the key issue is falling production in the US state of Florida. The US agriculture department predicts that the state will see production fall by 61% in this season to just 16 million 90lb boxes of oranges. Brazil — the world’s largest orange juice exporter – has stepped up to fill the export gap, this has come with price increases.

University of Florida research shows that the citrus industry brings in about $6.6 billion per year but was dealt significant damage by Hurricane Ian last September, with this one weather event dealing $247 million in damages alone. Despite government grants, poor weather — including past hurricanes Nicole and Irma — continue to plague Floridian production.

In addition, the state continues to suffer from the citrus greening ‘Huanglongbing’ pandemic, where insects infect orange trees with bacteria that causes them to produce unsellable fruit, and eventually die.

This is a huge, growing problem — especially when considering that while Brazil and Mexico make up most of the market, Florida accounts for most of the premium not-from-concentrate market, and therefore its production disproportionately weighs on orange juice’s price. Florida’s orange supply has reportedly halved in a decade — and as Florida Citrus Mutual trade association CEO Matt Joyner notes, ‘it’s a five-year process to get trees back up and productive.’

California has stepped up, with USDA data showing that the state should surpass Floridian production in the 2022-23 season. However, the insects which originally caused greening disease in Florida have traversed the continent and are now infecting California.

Orange juice price rises may just be getting started.

Copper

21 million metric tons of Copper are mined every single year. But this is not going to be enough to meet the growing demand. The ductile material is essentially irreplaceable in electrical products, including within EVs, phones, wind turbines, and solar panels.

Over the next two decades, the International Energy Agency expects copper to become a dominant mineral alongside graphite and nickel, with demand expected to triple by 2040. Codelco,
the world’s largest copper producer, concurs, arguing that there could be an eight-million tonne shortage by 2032.

Similar figures are cited by S&P Global which sees a deficit of 10 million tons by 2035, and Bloomberg Intelligence, which sees the shortage gap growing to 14 million tons by 2040. For context, 2021’s shortage gap came to just 2% of global production but saw copper prices rise by 25%.

This copper supply gap is being highlighted by BHP’s recent takeover of Oz and Glencore’s pursuit of Teck. There’s then the recently agreed Newmont-Newcrest tie-up; while most analysts have focused on the gold opportunities, Newmont will now benefit from a sizeable copper portfolio.

Kostas Bintas, co-head of the world’s largest copper trader Trafigura, thinks copper could reach a record $12,000/tonne over the next 12 months. He has already highlighted the metal ‘as the most critical metal globally given the shortage in the market,’ noting that the world ‘only had 3.5 days of copper stock equivalent at the end of last year.’

Goldman Sachs commodities head Jeff Currie has warned that ‘the forward outlook is extraordinarily positive. We’ll be at the lowest observable inventories that have ever been recorded at 125,000 tonnes. We have peak supply occurring in 2024…near term we put (the copper price) at $10,500 and longer term our price target is $15,000 a tonne.’

Meanwhile, Rio Tinto’s copper chief, Bold Baatar, argues that even the very short-term outlook for the critical mineral is looking ‘pretty healthy’ as ‘physical stocks of inventories of copper are at multi-year lows’ even as South American supply reduces.

Gold

Gold has historically served as a reliable ‘safe haven’ asset and inflationary hedge during times of severe economic stress, and this trend has continued reliably in 2023. Central banks have recognized this, as evidenced by their substantial purchase of 1,136 tonnes of gold worth $70 billion in 2022, the highest amount since records began in 1950. This has marked a notable departure from the trend of selling gold in previous decades.

The appeal of gold lies in its characteristic as an asset that is not tied to any specific issuer or government, providing diversification for central banks away from other traditionally safe assets such as the US Dollar or US treasuries. While gold does not provide a direct return, its independence from any one government or issuer contributes to its attractiveness as a store of value — and this is especially pertinent as the US debt ceiling crisis rumbles on.

The relationship between gold prices and the US Dollar is closely intertwined. The expectation of further interest rate hikes typically depresses gold prices, as the US Dollar becomes a safer haven compared to the precious metal. However, as Chair Jerome Powell has indicated a possible slowdown or pause in tightening monetary policy, gold prices could potentially reach new record highs.

During the 2008 financial crisis, gold demonstrated its resilience as an asset, with a 24% increase while the S&P 500, considered a benchmark for the US economy, dropped by 37%. Notably, this occurred as the Federal Reserve expanded its balance sheet through quantitative easing, leading to an increased supply of US Dollars and driving up the relative value of gold.

But with monetary policy far from certain, and gold near record highs, a gold trade is perhaps not low risk.