Commodity prices on increasingly shaky ground

After sharp falls in the middle of the month, most commodity prices ended August broadly flat. However, we doubt it will be long before the downward pressure on prices intensifies again. After all, economic growth in most major economies now looks to be normalising following its surge from pandemic-induced lows, while growth in key commodity consumer China is entering into an outright decline. As a result, we continue to expect most commodity prices to fall in the remainder of this year.
Caroline Bain Chief Commodities Economist
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Commodities Weekly Wrap

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Despite falls in the prices of most other risky assets, including equities, commodities held up well this week. The prices of equities and commodities tracked each other relatively closely throughout the pandemic, but they have diverged sharply since the start of 2022, with commodities continuing to make gains. However, we expect commodity prices to ease back over the course of the year on the back of slower growth in economic activity and improved supply. Looking ahead to next week, the main event will be the Fed meeting on Tuesday. We expect the Fed to issue a more hawkish statement, which could well include an explicit hint that the first interest rate hike will come in March. This should weigh on commodity prices, although arguably it is already priced into market expectations. Fed tightening is one of the factors feeding into our forecasts, which we will flesh out in more detail in our forthcoming Commodities Overview, Energy and Metals Outlooks.

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Commodities Weekly Wrap

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Commodities Update

Prices to come off the boil in 2022

After a stellar run in 2020-21, we expect the prices of most commodities to ease back this year as economic activity slows, notably in China, and supply bottlenecks start to ease. Drop-In: Neil Shearing will host an online panel of our senior economists to answer your questions and update on macro and markets this Thursday, 13th January (11:00 ET/16:00 GMT). Register for the latest on everything from Omicron to the Fed to our key calls for 2022. Registration here.

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More from Caroline Bain

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Looking for direction

There wasn’t a clear direction in commodity markets this week, with most prices driven by commodity-specific factors. Natural gas and coal prices continued to surge, while the prices of some industrial metals struggled on the back of weaker China PMI data. Oil prices posted a small gain on the week, despite OPEC+ confirming that it will continue to gradually increase output in October, reflecting the fact that such a decision was generally expected. Indeed, the meeting was among the shortest in recent memory. We expect OPEC+ to stick to its current plans to increase production over the next year or so, and this underpins our view that the oil price rally has already peaked. The main focus next week will be on whether the latest set of trade data out of China, due on Tuesday, corroborates the softer PMI data from this week. With high frequency data suggesting that construction activity has dropped back, and foreign demand for Chinese products appearing to level off, we suspect that the recent downward trend in China’s commodity imports continued in August which should have negative implications for prices.

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There was a dramatic turnaround in the fortunes of commodities prices this week, with across-the-board gains as risk appetite picked up and the US dollar eased back. Fed Chair, Jerome Powell, was cautious about imminent Fed tapering at the Jackson Hole symposium on Friday, which added to positive investor sentiment. However, we think that an expectation of tighter Fed policy in response to persistently high inflation will push up US yields and boost the US dollar in the coming months, which will weigh on the prices of all commodities, but particularly gold.

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Energy Data Response

US Weekly Petroleum Status Report

Crude oil stocks fell again last week and implied gasoline demand rose, in broadly positive news for oil prices. For now, US consumers appear to be shrugging off the spread of the Delta variant of COVID-19. However, it seems likely that we are near the peak in US demand, which will act as a lid on oil prices.

25 August 2021
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