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Amid a downturn in commodities, crude oil has been curiously resilient. West Texas Intermediate ended the week at slightly less than US$72 a barrel – a level reached on Tuesday for the first time since October, 2018.

JOHANNES EISELE/AFP/Getty Images

The blistering run in resource prices has fizzled out over the past couple of weeks, raising doubts over whether a commodities supercycle is in the works.

What has been one of the hottest asset classes in the world coming out of the pandemic has run into a number of obstacles, including efforts by Chinese regulators to cool down commodity speculation, as well as a spike in the U.S. dollar.

The downturn has been widespread across precious metals, industrial metals, agricultural commodities and lumber, which has been an unlikely poster child of the commodity boom.

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After hitting a record high of US$1,711.20 per thousand board feet in early May, lumber futures have dropped by nearly 50 per cent. Meanwhile, gold ended last week down by 6 per cent – its biggest weekly decline since the pandemic began. Copper futures are down by 13 per cent in the past month. And contracts tied to corn are down by 17 per cent since the start of June.

And yet, other commodities, such as crude oil, have been curiously resilient. West Texas Intermediate ended the week at slightly less than US$72 a barrel – a level reached on Tuesday for the first time since October, 2018.

The global oil market is still trading off resurgent demand and constrained supply that will likely remain a feature of the postpandemic economy for some time. Other commodities facing the same dynamic should soon resume their bullish trend, said James Telfser, managing partner and portfolio manager at Aventine Investment Counsel.

“An environment where growth and inflation accelerate is wildly positive for commodities, and we think we’re still in that environment,” Mr. Telfser said.

The global commodity complex got over the pandemic almost as soon as it began. In April, 2020, just a month into the first lockdown, the rally got under way. This occurred even as the world was still mired in a brutal economic downturn, which is typically less than ideal for commodity prices. Since then, the Bank of Canada’s commodity price index, which is made up of a variety of energy, metals, forestry and agricultural commodities, has risen a towering 168 per cent.

“What makes this 13-month rally in commodities particularly amazing is that it comes hard on the heels of the deepest global downturn in the postwar era,” Doug Porter, chief economist at Bank of Montreal, wrote in a report last month.

Futures markets have been electrified by bullish investors betting on key beneficiaries of an unusual period of spectacular global growth. Until very recently, those bets have overwhelmingly paid off, as copper, lumber, canola, iron ore and palladium have all registered record high prices in 2021.

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In the Bank of America’s latest global fund manager’s survey, commodities overtook bitcoin as the most “crowded trade.”

In recent months, money has poured into commodity-based mutual funds and exchange-traded funds. “Everybody started to jump on the bandwagon,” Mr. Telfser said. “There’s also a lot of leverage in the system, and that can really whip commodities around.”

With a number of commodities heavily overbought, a few catalysts seemed to set off the recent downturn. Last Wednesday, China announced a plan to release reserves of some metals, including copper, aluminum and zinc, in an attempt to stabilize prices. There were already some other warning signs out of China, including a weakening credit impulse, which is measured by new credit as a percentage of GDP. As the purchaser of 60 per cent of base metals globally, Chinese credit is crucial to global demand.

But even if certain measures of China’s expansion have peaked, there is still plenty of growth to come from the Chinese economy. And the postpandemic revival globally is probably sufficient to support a boom in base-metals demand, Eric Lascelles, chief economist at RBC Global Asset Management, wrote in a note.

For starters, India is growing almost as quickly as China did through its major expansion in the 2000s. Plus, a resource-intensive infrastructure boom is likely on the way in the pandemic’s aftermath. And the shift toward electric cars and solar energy will be an incremental driver of demand for metals such as copper.

“Not only do [base metals] benefit disproportionately from most of the above factors, but there has been chronic underinvestment in the space and it takes a few years to expand a mine and a decade to open an entirely new facility,” Mr. Lascelles said.

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Underinvestment in oil production could also bring on an imbalance in the energy market, as the constraints on the global economy continue to come off. Tight supply combined with soaring demand could even prompt the return of US$100-a-barrel oil, according to recent predictions from some of the world’s largest commodity traders.

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