World bank forecasts: will 2023 be a year of commodities?

3 factors to watch in 2023

Factor 1: Interest rates

Inflation is still the number one economic issue globally. At least in the first half of the year, most markets expect interest rates to continue to rise. Major players such as the ECB, the Fed, and the Bank of England will also step in. High interest rates may have a negative impact on global economic growth for 2023. The World Bank has even lowered its outlook for global GDP growth for 2023 from 3% to 1.7%. Of course, global demand for commodities is closely linked to the health of the economy. As economic growth slows, we can expect lower demand for energy commodities as well as industrial metals such as copper and silver.

 

Factor 2: The Chinese Dragon back in action

The very positive news from the beginning of the year was the opening of the Chinese economy. The country had been struggling with the coronavirus for a long time, but finally decided to take the path of collective immunity and open its borders. China is the largest importer and consumer of several commodities and the health of its economy is thus crucial to the commodities market. For 2022, China recorded its lowest growth since 1976 (excluding 2020) and its GDP grew by 3%. However, this significantly exceeded market expectations. The latter was also pleased with the growth in investment in the real estate sector - which is key for commodities. GDP is currently expected to grow at around 5% by 2023. However, China is by no means out of the woods yet - loosening the bridle on coronavirus could turn into a national health crisis and new mutations could be created.

 

Factor 3: The end of the dollar rally?

The U.S. dollar has been virtually immortal over the past year wearing the imaginary crown of the global markets. It is the currency in which most commodities are denominated, making the strength of the US dollar crucial to commodity markets. However, since the beginning of October, the dollar has begun to weaken significantly, which has provided a major boost to commodity markets. For 2023, the consensus favors a continuation of this trend. The US dollar did not react significantly positively to the hawkish comments by Fed officials on further interest rate developments and rather weakened further. However, in the event of a global recession, the dollar could fare better than other currencies due to its reputation as a safe haven and the level of interest rates. However, a global recession would impact some commodities regardless of the strength of the US dollar.
 

_{Dollar Index DXY on the D1 timeframe on the MT4 platform. The chart shows a significant rise following the outbreak of the war in Ukraine and the subsequent weakening of the USD as October began.}

What to expect from the most important commodities in 2023?

Oil at $75 or $105?

The year 2022 will probably be remembered as the one marked by the energy crisis. It saw oil and gas prices soar to levels not seen in years. While they have fallen significantly since then, they still remain above average. But now, let's focus on oil first. Oil is one of the most sensitive commodities to global economic developments. If there is a deep recession, oil prices could fall massively. We saw this in 2008, for example, when the price of oil fell from USD 140 per barrel to USD 40. However, the market is not expecting a similarly deep recession; according to the OPEC cartel, oil demand could even rise by 2.3% this year. Around half of this increase is expected to come from China. Traders should therefore keep a close eye on any news about the Chinese economy.

A big question mark still hangs over Russian production, which is expected to fall by around 600 000 barrels per day this year. Below are the expected Brent and WTI oil prices for 2023 from major banks and financial institutions. Whatever level oil ends 2023 at, the road to it is sure to be full of bumps. This will make oil one of the most attractive commodities for traders this year as well.

Natural gas

Here we focus on US natural gas, which is commonly traded using CFDs and futures. Its price rises and falls with the temperature outside, we have seen this several times during this winter. However, there is also interest in US natural gas in Europe. This could increase the average price of natural gas on the market. For 2023, Fitch expects a price of USD 5.90/MMBtu (million British thermal units), while the World Bank expects a price of USD 6.20/MMBtu. The EIA expects an average price for 2023 of USD 5.00 and Citibank even USD 4.90. However, natural gas will continue to respond primarily to temperatures and we can expect significant volatility going forward. While European natural gas is of particular interest to us, it is not very tradable using futures or CFDs.
 

_{US natural gas on the D1 chart in MT4 platform. We shouldn't see prices similar to 2022 this year, but the average price will be higher than the current price.}

 

Copper as a litmus test of the global economy

Copper is a typical industrial metal whose price is highly dependent on the health of major economies. According to Fitch Solutions, copper could trade at USD 8,400 per tonne in 2023. The World Bank also expects copper prices to fall to USD 7,300. However, the bank expects copper to bounce back to US$7,361 in 2024. Bank of America projects the copper price to average USD 8 625 per tonne in 2023. ANZ Research was bullish and expected the metal to rise to US$10,000 in December 2023 and US$12,000 in December 2024. Thus, financial institutions' forecasts for the most part copper prices to fall, which would correspond with the expected global recession.
 

Gold above 2000 USD again?

We have written a lot about gold and its price outlook in Purple Trading. For 2023, we expected the gold price to rise, which the well-known safe haven really did earlier this year. As a result, it is currently trading at its highest since last April, and a rise above the $2,000 mark is not out of the question.

Gold is being helped by the weakening US dollar and also by the growth in Chinese demand, which is building its reserves by leaps and bounds. In addition, geopolitical tensions remain high. All of these factors are expected to persist through most of 2023.

The question, however, is the behaviour of gold in a possible recession. Gold may work as an asset to which investors will move their capital. However, we must also not forget the use of gold in the jewellery industry - an industry that may undergo a major downturn should the crisis come. Even gold's response to the last two crises has been different. In the great financial crisis of 2008, the price of gold fell by around 30%. In the 2020 crash, the gold price fell from USD 1700 to USD 1450 in a flash, but then quickly reached an all-time high of USD 2100. What do the major financial institutions expect to see in gold?

 

Which characteristic of silver will prevail?

Silver can be described by two characteristics - a means to store value and an industrial metal. Like gold, palladium and platinum, silver is a precious metal. However, compared to gold, silver does not perform the role of a safe haven as well. Silver is much more abundant and it is also a metal that is widely used in industry due to its properties. So every trader has to look at this metal from two sides. If gold does well, the same factors can help silver prices.

However, silver will be much more sensitive to a global recession than gold. The World Bank expects the price of silver to be stable at $21 per ounce in 2023 and 2024, essentially the same value it projected a year earlier. Bank of America was more bullish, expecting the precious metal to rise to US$23 in 2023. ANZ Research was even more optimistic, forecasting silver to rise to US$25.33 in December 2023 and stay at that level until December 2024.
 

_{Silver price on D1 timeframe in MT4 platform}

Wheat and coffee

Agricultural commodities have been among the most affected by the war in Ukraine. The country is a major exporter of wheat, rapeseed, barley, and maize. The price of wheat, for example, has at times reached USD 1 400 per tonne. We have not seen such a price on the market since 2008. However, according to major financial institutions, agricultural commodity prices could fall in 2023. According to the World Bank's forecast, wheat could trade at USD 410 per tonne in 2023 and fall further to USD 405 in 2024. Fitch Solutions also forecasts that wheat could fall to USD 860/t in 2023. However, the average price would still be significantly higher than the 2018 to 2021 prices, according to the forecast. In its commodity outlook, ANZ Research predicted that wheat would rise to US$860/t by December 2023.

The price of coffee is expected to reach $1.90 per pound in 2023, down from $2.15 per pound a year earlier, according to Fitch. According to the World Bank's commodity forecast, higher-quality arabica coffee beans will trade at US$5.5 per kilogram in 2023 and US$5.41 in 2024.