Uranium prices have touched multi-year highs but the rally looks unsustainable into 2022, Morgan Stanley says

• Uranium prices have climbed 60% in four weeks as an investment fund embarked on a buying spree.
• Morgan Stanley commodity strategists say it may be hard to maintain robust investment demand into 2022.
• The Sprott Physical Uranium Trust has purchased a massive 28 million pounds since mid-August.

Uranium prices have shot up about 60% over the past month on the back of big purchases of the nuclear-energy element by an investment fund, but the rally is likely to lose steam next year, Morgan Stanley said this week.

Spot prices for uranium were at 2021 lows in August before they started advancing toward what's become a 58% gain in four weeks. The price traded above $47 on Friday and this week touched $50 for the first time since 2012, according to S&P Global Platts. Morgan Stanley's commodity strategists in Europe said the Sprott Physical Uranium Trust is the driving force behind resurgent interest in uranium. The Canada-based fund is the only one that holds the physical commodity rather than futures contracts.

Stronger investment demand for uranium is adding to a spot market that's already been active because of disruptions in mine supplies by the COVID-19 pandemic. The price rally has further to run but strategists Marius van Straaten and Susan said they are "not yet convinced" it can be sustained into 2022 as investor demand could struggle to maintain momentum.

The Sprott uranium trust has been on a uranium buying binge in the spot market since mid-August following its inception in July. The fund has bought more than 28 million pounds of the radioactive element, including Thursday's massive purchase of 1.45 million pounds of so-called yellowcake.

The trust's investment case for uranium includes its view that nuclear energy is a clean and efficient power source that's gaining favor among policy makers worldwide who are trying to reach carbon-reduction targets.

"It needs to be seen how long the current rate of investment demand can be maintained, but some bulls argue that we won't see the price dipping if fund buying slows, as improved market liquidity has aided price discovery and revealed the 'true' spot price," said Morgan Stanley.

"On the other hand, better visibility of previously hidden uranium stocks could become an overhang to the market, with outflows from physical funds also a potential risk," the strategists added.

Morgan Stanley said uranium has joined a wider price rally in natural resources. But while "coal and natural gas prices are driven up by actual market tightness, uranium's underlying supply-demand fundamentals haven't meaningfully changed over the last few months to warrant this price surge."

The World Nuclear Association sees a balanced market until 2028 through drawdowns in utility inventories and idled-mine supply returning, with the latter requiring that prices rise first. Industry consultancy UxC projects a drawdown in global inventories of as much as 30 million pounds a year.

"Only when these utility inventories are worked off materially, the real need for a higher price to incentivize the return of idled supply will become more pressing, we think," said Morgan Stanley.

The commodity strategists remain bullish on uranium in the medium term and forecast a price high of $49 a pound by 2024. "That said, the current investor-driven rally might not seamlessly transition into a 'real' deficit-driven bull market, and we could see some price weakness in between."

Meanwhile, uranium stocks "finally got noticed by retail investors this week," said Vanda Research, which monitors trading activity among retail investors.

"Purchases were concentrated in the Global X Uranium ETF and Cameco, which also experienced a sharp rise in call volumes - a sign that speculative retail investors are chasing the momentum," it wrote this week. Cameco is a Canadian uranium producer.