By Eric Onstad
LONDON (Reuters) - A rebound in commodities prices and investment is poised to extend in coming months as the sector gets its traditional boost during the final stages of the global economic cycle along with other drivers.
While some investors worry about a possible recession, commodities are due to benefit from an expected U.S.-China trade deal, tightening oil supply and potential short-covering in beaten-down U.S. grain futures.
The 19-commodity Thomson Reuters/Core Commodity CRB Index, which has rebounded 10 percent from an 18-month low touched at the end of last year, should also get further support from easier monetary policy that has lifted all financial markets, analysts and traders said.
Graphic: Commodity Prices Clawing Higher From December Lows - https://tmsnrt.rs/2HN3TXg
Commodities along with other financial markets have been buoyed after the U.S. Federal Reserve this month confirmed its three-year drive to tighten monetary policy was at an end.
The dovish change from the Fed and growing stimulus in top commodities consumer China would extend the current positive economic cycle and support commodity prices, JPMorgan (NYSE:JPM) said in a note.
"Late cycles are typically marked by outperformance of commodities," JPMorgan analyst Dominic O'Kane said.
The rise in commodities so far has been partly fueled by hopes for an agreement to end a trade war between Washington and Beijing, helping to spur $2.1 billion of flows so far this year into commodity index funds and exchange-traded funds, data compiled by Citi showed.
Commodity assets under management have climbed to $407 billion, breaching $400 billion for the first time since October, Citi said, based on data through March 5.
Although the energy complex has recovered strongly this year, positioning in crude oil is not overstretched, analysts said.
According to the latest exchange data, hedge funds have bought another 65 million barrels of petroleum futures and options, the biggest one-week increase since the end of August 2018 and a bullish signal.
That was because investors expect prices to be bolstered by supply-side disruptions while OPEC and its allies comply with their plans to cut 1.2 million barrels per day of supply this year.
The funds' net long position in Brent crude has more than doubled from a low hit in early December, but is still less than half of the record high touched in April last year.
"There's plenty of room on the upside," said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen.
Graphic: Hedge Funds' Crude Oil Positions Rebound - https://tmsnrt.rs/2UVGINJ
As part of a proposed trade deal, Beijing has offered to make big-ticket purchases from the United States to help reduce a record trade gap. U.S. President Donald Trump's team has said those purchases would be worth more than a trillion dollars over about six years.
Agricultural exports to China could grow to $30 billion or more a year, Citi analyst Aakash Doshi said in a note. This compares to nearly $20 billion in 2017.
"The CBOT (Chicago Board of Trade) complex ... appears poised for a rebound in 2Q/3Q on the back of a U.S.-Sino trade deal that could meaningfully boost Chinese purchases of soybeans, corn, ethanol, cotton, pork and other agricultural products," he said.
Flooding in the U.S. Midwest makes agricultural futures vulnerable to short-covering after bearish bets hit record levels in recent weeks and this could accelerate if Chinese purchases surge, analysts said.
Graphic: U.S. Agricultural Exports to China - https://tmsnrt.rs/2UXc32t
Industrial metals are moving into their strongest seasonal period when construction activity rises in top consumer China.
"Both the fundamentals and technicals are supportive, so if we can get some concrete news that a trade deal has been successful, these things could really fly," said Robin Bhar, head of metals research at Societe Generale (PA:SOGN).
As seasonal demand is due to climb, most metals should have market deficits this year and in 2020, according to analyst consensus forecasts compiled by Reuters polls.
Graphic: Most Industrial Metals in Deficit - https://tmsnrt.rs/2HMdwpp
