Commodities have room to rally on positive fundamentals, UBS’ Marcelli says

Gold prices (XAUUSD:CUR) eased on the day, weighed down by a firmer U.S. dollar, as investors await key inflation data later in the week that could sway expectations for the Federal Reserve’s rate-cut outlook, while oil prices found support.

“We see higher commodity prices ahead, and expect total returns of around 10% for broad commodity indexes over the next six to 12 months,” Solita Marcelli, Chief Investment Officer Americas, UBS Global Wealth Management said.

While the investment bank keeps a preference for oil, it also recommends a “more active investment approach within the asset class, which may help sidestep some execution and passive index risk while still delivering compelling risk-adjusted returns,” Marcelli said.

UBS has held the view that commodities such as oil and gold remain potentially helpful geopolitical hedges, but also retains a positive outlook for the asset class based on fundamentals as well. Year-to-date, the broad commodity UBS CMCI Composite Index has risen nearly 11%.

Overall, likely lower U.S. interest rates this year and a “modest restocking cycle bode well for a more sustained upturn in global industrial activity,” according to UBS.

On the day, oil prices gained on expectations that major producers will extend output cuts at a meeting on Sunday, while traders also kept a close on developments in the Middle East.

The general expectation is for the OPEC+ group, comprising the Organization of the Petroleum Exporting Countries and allies including Russia, to keep voluntary production cuts of about 2.2 million barrels per day (bpd) in place.

“There could also be some positioning ahead of the OPEC+ meeting this weekend. Members are expected to fully rollover their additional voluntary cuts. High expectations of a full rollover mean that OPEC+ needs to ensure it does not disappoint the market; otherwise, it risks an aggressive pullback in prices,” ING analysts said in a note.

Meanwhile on the company side, Reliance Industries, the operator of the world’s biggest refining complex, has signed a one-year deal with Russia’s Rosneft (OTC:RNFTF) to buy at least 3 million barrels of oil a month in roubles, sources told Reuters.

Elsewhere, the consolidation wave in the oil and gas sector is not letting up, with ConocoPhillips (COP) in advanced talks to buy Marathon Oil (MRO) in a potential all-stock deal, FT reports.

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