There is much to encourage commodity investors next year, if they can keep a wary eye out for wildcards including China, according to Citigroup yesterday.

Demand gains will be sustained through next year and in 2019, lifted by emerging markets as well as advanced economies, the bank said in a report.

While there may be a slowdown in China, the top consumer of metals and energy and grains, stricter environmental standards and pressure to support bank balance sheets by eliminating overcapacity and curbing a glut could lead to tightness in some commodities, according to Citigroup.

The Bloomberg Commodity Index has surged almost 10 per cent since the second half of June on signs of tighter supply and stronger demand in everything from crude to cotton and petrol to industrial metals.

Raw material assets under management in the second half this year grew nearly 20 per cent to US$417 billion (S$562 billion) through end-October, the highest since June 2014, driven by oil, Citigroup said, adding that inflows will be supported in the short-term.

"Both year-to-date commodity performance and expected higher global growth point to potentially tighter balances across many commodities," analysts including Mr Ed Morse said in Citigroup's annual report on the outlook for the market.

"But uncertainties about China's 'New Economy' and the lingering impacts of its commodity intensive 'Old Economy' create bumps."

Growth in China, the world's second-biggest economy, is dialling back amid a pledge by President Xi Jinping to focus on the quality of expansion rather than the pace of it.

While it should still partially rely on its "old economy" drivers for now, no combination of countries seems big enough to pick up the potential slack in boosting commodity demand, Citigroup said.

"Nonetheless, our base case sees China-sensitive commodities posting positive demand growth in 2018," according to Citigroup.

The country's moves to curb pollution and shrink an oversupply as well as cut bloated capacity may tighten iron ore and zinc markets.

Even as crude markets continue to rebalance into next year, Citi expects growing non-Opec supply to meet almost all incremental demand by year-end, leaving little room for a return to higher output by the Organisation of Petroleum Exporting Countries and Russia.

That may hurt prices into the second half of next year and 2019, the bank said.

"Yet geopolitical risks in Opec producers point to a greater likelihood of disruption risk, especially from weaker states (Iran, Iraq, Libya, Nigeria, et cetera) than a likelihood of higher supply going into next year," Citi said in the e-mailed report.

BLOOMBERG