Omicron puts demand back in the spotlight

We were already downbeat on the outlook for most commodity prices in 2022, not least because we thought that prices had lost touch with demand fundamentals. The risk of Omicron-related effects on demand just adds weight to our view. In view of the wider interest, we are also sending this Commodities Overview Update to clients of all our Commodities services.  

29 November 2021

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

Backsliding on reforms?

The repeal this month of controversial reforms aimed at liberalising the agriculture sector is arguably the biggest political setback that the Modi government has faced since coming to power in 2014. And while the direct economic impact of abandoning those reforms is limited, the bigger concern is the signal that it sends about the prospects for other contentious reforms that could make a substantial difference to economic growth over the long term. Ahead of a major election early next year in Uttar Pradesh – India’s most populous state with the largest representation in the Rajya Sabha – the ruling BJP is now highly likely to shelve reforms on the labour market that would face stiff popular opposition. A poor performance from the BJP in that election may derail the reform agenda for even longer.

24 November 2021
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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.

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.

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.

Energy to remain in the spotlight

It is perhaps too soon to call the end of the energy price rally, but the prices of European natural gas and Chinese coal took a tumble this week as supply fears were, at least partially, allayed. What’s more, the recent surge in oil prices stalled. Energy commodities will remain in focus next week with the start of the COP26 climate change summit in Glasgow on Sunday and the monthly meeting of OPEC+ on Thursday. Any major COP26 announcements on reducing the role of fossil fuels will have implications for our long-run energy demand and price forecasts. However, the outcome of the OPEC+ meeting is likely to have more of an impact on current oil prices. Despite mounting political pressure (from the US, India and Japan), we think that OPEC+ is likely to stick with its current target of raising output by 400,000 bpd per month until the end of the year. This decision may offer some support to prices, but it will not come as a major surprise. Elsewhere, China is set to publish its October PMIs early in the week which we expect to be little changed from September. Therefore, they are unlikely to move industrial commodity prices.

Energy supply squeeze to delay decline in prices

Low stocks ahead of winter in the Northern Hemisphere have sent energy prices soaring. In turn, higher energy costs have also constrained the production of other commodities, most notably industrial metals. Energy supply is likely to remain tight for at least the remainder of this year, which is a key reason why we have pushed back our forecasts for a broad-based decline in commodity prices into 2022. By then, once demand for energy has cooled and stocks have been rebuilt, commodity prices are likely to be dragged lower as global economic growth continues to slow. We think that industry and construction activity in China are on the cusp of a particularly deep downturn, which will be a key factor weighing on the prices of industrial metals.

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