Demand fears giving way to supply concerns

The experience of South Africa with the Omicron variant seems to have allayed investors’ fears over commodity demand. Indeed, the net long position held by investors in the oil futures market has begun to rise, indicating an improvement in sentiment. Despite softening oil demand in the US, any expectations of weaker energy demand owing to Omicron have been outweighed by supply concerns, following hits to oil output from pipeline outages in Libya and civil unrest in Kazakhstan. These latest shocks (which add to an already-large list of shocks) will support prices for now, which will mean that the cost of production of other energy-intensive commodities will remain high. With virus fears moved towards the backburner, attention will probably focus further on the supply picture in the coming weeks. China’s trade data for December will be released on Friday, which we expect to show that weak activity in the construction sector led to a softening in commodity imports.