New COVID-19 variant could spark energy price falls

Most commodity prices fell on Friday after South African scientists declared they had identified a new COVID-19 variant on Thursday which may be more transmissible. We think it’s still early days to say what this means for the global economy, but it has raised concerns about weaker demand for some commodities, especially oil if travel restrictions are re-imposed. These developments will make the OPEC+ meeting next week even more intriguing. We now think that there is a much higher risk that OPEC+ decides to slow or halt the gradual return of supply given mounting concerns over demand and the release of reserves. Elsewhere, China will publish its manufacturing PMI data (Tuesday/Wednesday), which we expect to show a slight uptick in manufacturing activity. In addition, we should learn more about the new COVID-19 variant and how governments will respond.
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Commodities Outlook

Sky-high commodity prices on borrowed time

Supply shortages have directly pushed up the prices of energy commodities and have indirectly raised prices of other commodities by boosting production costs. We think this will remain the case for at least another few months. But as we move away from winter in the Northern Hemisphere and these supply shortages ease, we forecast that commodity prices will fall across the board. In the oil market, a rise in both OPEC+ and US supply will be the main factor dragging prices lower, while subdued Chinese demand will be the key factor weighing on the prices of industrial metals. Meanwhile, we now expect the Fed to raise interest rates four times this year, which should mean that the recent move higher in real yields is sustained. Consequently, we are also negative on the outlook for the gold price.

26 January 2022

Commodities Weekly Wrap

Deteriorating risk appetite adds to price headwinds

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.

21 January 2022

Commodities Weekly Wrap

A good start to a bad year for commodity prices

Most commodity prices increased this week, with coal prices leading the pack on the back of Indonesia’s ban on coal exports this month. That said, we don’t see commodity prices rising for much longer. Indeed, Chinese imports of most raw materials fell back in December, with an especially sharp decline in imports of industrial metals. We think this is a sign of things to come in 2022. Weaker Chinese growth is one of the main reasons why we expect most prices to fall this year. Looking ahead, prices of energy and energy-intensive commodities could well be swayed by tensions between Russia and Ukraine and its allies. If tensions continue to build, this could lead to sharp swings in the price of European natural gas in particular. High gas prices in Europe have already led to the curbing of some energy-intensive metals production, including aluminium and zinc. On the data front, China will release Q4 GDP figures on Monday, which we expect to show weaker y/y growth. OPEC will also publish its December oil supply numbers on Tuesday. We expect another month of below-target output.

14 January 2022

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Commodities Weekly Wrap

The energy crisis rumbles on …

This week showed that the energy crisis is not in the rear-view mirror just yet. Germany’s energy regulator suspended its certification process of the Nord Stream 2 pipeline on Tuesday, owing to issues regarding the organisational structure of the pipeline’s ownership (rather than a political energy supply security assessment). Markets took the surprise delay, which was not previously expected to be an issue in the approval process, badly as prices soared by 18%. It is now increasingly unlikely that gas flows through Nord Stream 2 will ease the shortage of stocks in Europe over this winter. What’s more, there is little evidence that flows from Russia have increased as suggested might happen by President Putin. And European stocks are both much lower than normal levels and now falling in line with seasonal norms. As a result, we suspect that gas prices will remain high over the next few months. Looking to the week ahead, the main data release will be November’s batch of flash PMIs on Tuesday. We expect that those in the Euro-zone will soften and show the impact of recent surges in virus cases, which probably dampened international and domestic travel and oil demand.

19 November 2021

Commodities Weekly Wrap

OPEC+ unlikely to ride to the rescue anytime soon

Despite falling short of its targeted increase in output once again in October, we think OPEC+ will continue to snub calls to raise output more rapidly. The week began with comments from the Biden Administration that OPEC+ was imperilling the global economic recovery by sticking to its existing output plan, and that it was considering a release of stocks from its strategic reserve to stem the rise in domestic fuel prices and put pressure on the group to change course. But the reality is that OPEC+ can afford to drag its feet for now. That’s because, whereas in the past when the group would have worried about a loss of market share, other non-OPEC+ producers (most notably in the US) are also struggling to raise output. As a result, we continue to expect oil prices to trend broadly sideways between now and the end of the year.

12 November 2021

Commodities Weekly Wrap

Commodity prices may have peaked

Most commodity prices fell this week, adding to the sense that the recent rally is close to a peak (if it hasn’t peaked already). Either way, we think energy prices will be falling next year on weaker demand growth and greater supply, contributing to lower commodity prices more broadly. Two stories stood out this week. First, OPEC+ stuck to its existing schedule of production increases, despite growing external pressure to raise output faster. This could force the hand of the Biden administration to release more strategic oil reserves, given its concerns about rising gasoline prices. Second, governments from around the world are discussing how to reduce dependence on fossil fuels at the COP26 summit. One of the UK’s main aims as hosts of the summit is “consigning coal power to history”. In line with that, dozens of countries made new commitments to phase out coal use, although there were notable absences such as China, India and the US. Moreover, the commitments are not binding and many of them are dependent on the receipt of financial aid. Looking ahead, we’ll be watching for any new developments in the last week of COP26. On the data front, we expect that China’s trade data out this Sunday will show strong energy imports in October.

5 November 2021
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