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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

Emerging Europe Economics Update

The implications of the Russia-Ukraine crisis

The deadlocked end to talks between Russia, the US and NATO and subsequent hawkish noises from Russian officials have caused a risk premium to emerge on Russian asset prices and will keep the prospect of tighter Western sanctions on the table. The downside risks for the ruble and Russian assets are building, as are the upside risks for European natural gas prices. In view of the wider interest, we are also sending this Emerging Europe Economics Update to clients of our Commodities Overview, Energy, FX Markets and Global Markets services.

14 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

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.

13 January 2022

Commodities Economics Chart Book

Omicron risks receding; energy still in short supply

Two themes have dominated commodity markets at the turn of the year: the ongoing shortage of energy commodities and the global rise in cases of COVID-19. On the former, we think that shortages will start to ease meaningfully later this year, which will weigh on the prices of both energy commodities and other commodities with energy-intensive production processes. However, we think the oil market may be dismissing the Omicron-related hit to demand a little too readily. After all, demand in the US has already softened significantly, and China has imposed new restrictions as part of its ‘zero-COVID’ strategy. As a result, the hit to oil demand may be larger and longer-lived than is currently priced into markets, which could lead to a sharp reversal in oil prices in the near term.

7 January 2022

Commodities Weekly Wrap

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.

7 January 2022

Commodities Update

China PMIs show demand stabilising, not reigniting

The December PMI data for China point to a healthy pick-up in commodity demand. But this only partially reverses the declines from earlier in 2021, and the big picture remains that commodity demand in China is set to struggle this year as headwinds facing the manufacturing and construction sectors intensify.

4 January 2022

Commodities Watch

Commodity supply shortages set to ease in 2022

In this Commodities Watch, we take a closer look at commodity markets where supply shortages during the pandemic have been most severe and, consequently, where price increases have been most extreme. While there isn’t a single cause of these shortages, there is one common theme: in all cases, prices now appear to be close to a peak (if they haven’t peaked already). That said, low stocks will mean that these markets remain vulnerable to a renewed surge in prices for some time yet.

21 December 2021

Commodities Weekly Wrap

More hawkish central banks may put a lid on prices

It was a week of central bank decisions, culminating in ‘Super-Thursday’.  The big picture is that central banks generally sounded more concerned about the rise in inflation, despite the ongoing spread of the Omicron variant. Although there was not a major reaction in commodity markets, the prospect of earlier monetary tightening in the coming years, and the likelihood of a somewhat stronger US dollar, represent headwinds for commodity prices. Next week may be relatively quiet in markets, given the approach of the holiday season. Indeed, this will be our last Commodities Weekly Wrap of 2021. However, it will be a busy few days on our return in early January, with the release of China’s December PMIs and the OPEC+ meeting scheduled for 4th January. And not to forget, given that OPEC+ left the last meeting ‘in session’, there could still be a change in output policy before January if the group perceives a greater risk to demand from the spread of Omicron. – This will be the last Economics Weekly for 2021. The next Weekly will be sent on Friday 7th Jan. 2022 –

17 December 2021

Commodities Weekly Wrap

Renewed surge in Chinese demand still seems unlikely

We are sceptical that commodity demand growth in China is about to reignite, despite this week’s cut to the required reserve ratio (RRR) for most banks and data showing surprisingly strong imports of key commodities in November. After all, both developments are in stark contrast to the ongoing woes in China’s commodity-intensive construction sector, with ratings agency Fitch determining on Thursday that major property developer Evergrande is now in default. Together with the fact that there still appears to be little appetite among policymakers for a sharp rebound in credit growth, we continue to expect growth in China to slow over the coming year. In turn, this is a key reason why we forecast that most commodity prices will fall back by end-2022. The release of China activity data for November (Wednesday) and euro-zone flash PMI data for December (Thursday) will be the main events for commodity markets next week. We think the China activity data will underwhelm, which would add weight to our view that last month’s upturn in imports is a misleading signal of underlying demand for commodities there. Meanwhile, we think that Omicron-related caution will have weighed on the PMI data in the euro-zone which, together with the downturn in mobility indicators there, would bode especially ill for oil demand.

10 December 2021

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