Three key developments to keep an eye on

Most commodity prices ground higher this week. And, stepping back, we think events this week highlight three key themes to watch in the months ahead. First, natural gas prices show no sign of easing back, and are likely to remain high until early next year. Prices continued to surge this week on the back of ongoing supply disruptions and unseasonably strong demand in Asia. And, even if both these tailwinds fade, a rebuilding of stocks from their current lows should continue to support prices. Second, the growing divergence between industrial metals prices and underlying demand could set the stage for a sharp correction before the year is out. Despite the weaker-than-expected activity data out of China, industrial metals prices were a mixed bag this week. Nonetheless, they still remain close to multi-year highs. And finally, calls for OPEC+ to fully unwind its output cut before the end of next year (as is currently planned) look set to grow louder. The Biden Administration has already called for this and China has announced crude sales from its strategic reserve in an apparent bid to stem the rise in prices. The main event for commodity markets next week will be the Fed’s FOMC meeting (Tuesday/Wednesday). While we expect the Fed will fall short of formally announcing tapering QE, they may prepare the ground for it at the meeting. A repeat of the June meeting’s hawkish surprise could set the tone and drive a dollar rally, which would weigh on the prices of all commodities but particularly on some of the precious metals, which have tracked the dollar closely this year.
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Commodities Weekly Wrap

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.

26 November 2021

Commodities Update

The slump in the Baltic Dry Index is all about iron ore

Some commentators have pointed to the slump in the Baltic Dry Index as a sign that shipping bottlenecks are easing. But we think it is more a symptom of lower Chinese steel output and plunging iron ore prices.

25 November 2021

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

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Commodities Weekly Wrap

Delta to continue to weigh on prices

Commodity prices mostly fell this week on the back of a stronger US dollar as well as mounting concerns over the demand outlook. China’s July activity and spending data, published on Monday, were weaker than consensus forecasts, and the ongoing spread of the Delta variant of COVID-19 is leading to restrictions on mobility and activity globally, but notably in Asia.

20 August 2021

Commodities Weekly Wrap

Delta variant taking centre stage

Concerns surrounding the spread of the Delta variant of COVID-19 were the main driver of prices this week, but the impact on prices was far from uniform. Not surprisingly, oil prices slumped as many countries in Asia, including China, tightened travel restrictions and most industrial metals prices also fell. By contrast, the prices of natural gas and coal continued to soar on constrained supply, and the prices of some agriculturals also ticked up amid supply concerns related to the possibility of virus-related labour shortages in producing countries. While we haven’t explicitly factored renewed lockdowns into the forecasts published in our latest Commodities Outlook, additional restrictions only provide further support to our view that the prices of most energy commodities and industrial metals will fall over the next year or so. The key data release over the next week will be the China trade data for July, which is due on Saturday. We expect total imports to have picked up as some supply bottlenecks eased, but a sharp fall in the construction PMI suggests that imports of many industrial commodities may have dropped back and preliminary data released this week showed a further fall in China’s crude oil imports. Elsewhere, the US bipartisan infrastructure package faces a crucial vote in the Senate over the weekend. While this could provide a boost to industrial commodity prices at the margin, developments in China are likely to have a much larger effect on prices over the coming years.

6 August 2021

Commodities Outlook

Price rallies to give way soon to broad-based declines

We think that the widespread rallies in commodity prices from their pandemic-induced lows are now close to, or in some cases already past, their peak. Most notably, we anticipate that Q3 will be as good as it gets for the oil price, and that it will start to ease back by the end of the year as OPEC+ continue to unwind their collective output cut and demand growth slows. Meanwhile, the rally in industrial metals prices already seems to have fizzled out, and we think this will soon give way to a protracted decline in prices as economic growth in China disappoints over the next couple of years.

29 July 2021
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