All eyes on the next US fiscal package - Capital Economics
Commodities Overview

All eyes on the next US fiscal package

Commodities Weekly Wrap
Written by Caroline Bain

Mounting signs of a rapid rebound in the Chinese manufacturing and construction sectors, as well as a further depreciation in the US dollar, offered some support to industrial commodity prices this week. However, concerns about rising virus infection numbers in the developed world and renewed lockdown measures capped gains. While we expect Chinese economic activity to fully recover by the end of this year, we think that the persistent uncertainty about the virus will continue to weigh on prices for some time.

Next week is busy on the data front. Market participants will be paying particular attention to the July Caixin manufacturing PMI for China and the US ISM surveys on Monday. We expect a stronger reading than the consensus in both and, if we are right, this should provide a small boost to the prices of industrial commodities. That said, news related to the virus and the fiscal support package currently being debated in the US will probably be the main drivers of market sentiment.

  • Mounting signs of a rapid rebound in the Chinese manufacturing and construction sectors, as well as a further depreciation in the US dollar, offered some support to industrial commodity prices this week. However, concerns about rising virus infection numbers in the developed world and renewed lockdown measures capped gains. While we expect Chinese economic activity to fully recover by the end of this year, we think that the persistent uncertainty about the virus will continue to weigh on prices for some time.
  • Next week is busy on the data front. Market participants will be paying particular attention to the July Caixin manufacturing PMI for China and the US ISM surveys on Monday. We expect a stronger reading than the consensus in both and, if we are right, this should provide a small boost to the prices of industrial commodities. That said, news related to the virus and the fiscal support package currently being debated in the US will probably be the main drivers of market sentiment.

Chart 1: S&P GSCI by Category (1st Jan. 2020 = 100)
(Latest = 30th Jul.)

Chart 2: Selected Price Moves in the Last Week
(24th Jul. – 31st Jul.) (%)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics

Energy & Industrial Metals

Precious Metals & Agriculturals

Short-Term Price Charts & Forecasts

Selected Recent Publications

Energy

  • Despite the depreciation in the US dollar and a large drop in US commercial crude stocks, the price of WTI fell this week. This was in part owing to global demand concerns and tentative signs that US oil production has reached its trough. The US oil rig count ticked up last week for the first time in four months and the latest weekly EIA data showed signs of a revival in lower-48 production. Nevertheless, our price forecasts suggest that it will take some time before US drilling activity and production reach pre-virus levels (3).
  • Meanwhile, the price of European natural gas (TFF) rose by over 5%, primarily on the back of low wind electricity generation in Germany. Even if electricity generated by wind remains persistently weak in Europe, we only expect modest seasonal gains at this time of year in TTF prices over the next few weeks as European gas storage is unseasonably high (4). In addition, a ‘second wave’ of virus infections in Europe would weigh heavily on demand and prices. (See here.)

Chart 3: US Active Oil Drilling Rigs & WTI Price

Chart 4: European Natural Gas Storage Capacity Utilisation (%)

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics

Industrial Metals

  • Industrial metals ticked a little higher this week with some of the gains on Friday following the publication of China’s official July PMI. The survey reading rose to 51.1 from 50.9 in June (5), with particular strength in new orders. (See our China Data Response.) The strength of the recovery in China’s economy is the key reason why we expect industrial metals to outperform energy commodities in the coming months. There are also signs that disruptions to mine supply are set to persist for some time yet.
  • Meanwhile, there have been some large moves in LME stocks in recent weeks. The fall in LME copper stocks has been in the headlines, but there have been some significant builds in stocks of other metals, notably lead and zinc. And total stocks on the LME are high (6). This serves as a reminder that demand in the world ex. China remains extremely weak. Indeed, we think that the drawdown in copper stocks is probably metal going to China rather than a reflection of stronger demand elsewhere.

Chart 5: China Official Manuf. PMI & Industrial Metals Prices

Chart 6: Total LME Stocks (Th. Tonnes)

Source: Refinitiv

Sources: Refinitiv, Capital Economics

Precious Metals

  • This week saw the price of gold continue to grind higher, reaching an all-time high of $1967 per ounce (surpassing the previous record of $1,898 set in September 2011). Investors have rushed into gold ETFs, pushing total inflows to a new record (7). While most of the rally in the gold price can be explained by the slide in real yields, some of its recent strength looks overdone. Indeed, we think that gold is vulnerable to profit-taking in the weeks ahead, though persistently low real yields will act as a floor under prices.
  • Meanwhile, platinum and palladium prices declined w/w (8). The size of the latest moves suggests a deterioration in the fundamental outlook for both metals, but they are volatile and relatively small markets. In fact, the price falls have merely reversed the rally from the first half of July. We suspect that the platinum price will ease back by year-end as a revival in demand is offset by mines re-opening post-lockdown. By contrast, we suspect that the palladium price will pick up as global auto demand continues to recover.

Chart 7: Gold Price & ETF Holdings by Region

Chart 8: Platinum & Palladium Price (US$ per Ounce)

Sources: World Gold Council, Capital Economics

Sources: Refinitiv, Capital Economics

Agriculturals

  • It was a mixed week for agricultural commodities. The worst performers were agriculturals used to make biofuels, such as palm oil, perhaps because oil prices appear stuck in a narrow range between $40-45 per barrel. Sugar bucked this trend, however, rising strongly on the week on news that European demand is showing clear signs of a bounce back. That said, we think the sugar market will move into a big surplus in 2020/21 (9), which will act as a lid on prices in the remainder of this year.
  • Elsewhere, coffee prices rose reflecting concerns about supply and, in the case of arabica, a strengthening of the Brazilian real. The move in the real meant that arabica continued to outperform robusta (10). However, robusta prices may rise in the coming days given a jump in virus infections in Vietnam and social distancing in coffee-growing regions there. Demand for robusta, which is mainly used to make instant coffee, has also been strong, probably because of higher coffee consumption at home.

Chart 9: Sugar Market Balance (Mn. Tonnes)

Chart 10: Coffee Price Spread (2020, US cents per lb)

Sources: USDA, Capital Economics

Sources: Refinitiv, Capital Economics

Short-Term Price Charts & Forecasts

Chart 11: Energy

Chart 12: Industrial Metals (LME, US$ per Tonne)

Chart 13: Precious Metals (US$ per Ounce)

Chart 14: Agriculturals (US Cents per Bushel)

Source: Refinitiv

Key Commodity Price Forecasts

Actual

Forecasts (end-period)

1mth ago

1 wk ago

Latest

2020

2021

30th
Jun.

24th

Jul.

31st

Jul.*

Q3

Q4

Q1

Q2

Q3

Q4

Energy

Crude Oil (Brent, US$ per barrel)

41

43

43

42

45

47

50

53

55

US Natural Gas (US$ per mBtu)

1.75

1.81

1.83

2.25

2.50

2.75

2.60

2.80

3.00

Coal (Newcastle, US$ per tonne)

52

52

52

55

60

60

57

56

55

Industrial Metals

Copper (US$ per tonne)

6,005

6,430

6,447

6,600

6,800

6,900

7,000

7,100

7,200

Aluminium (US$ per tonne)

1,602

1,663

1,686

1,675

1,700

1,725

1,750

1,775

1,800

Iron Ore (US$ per tonne)

101

111

109

105

90

90

85

82

80

Precious Metals

Gold (US$ per ounce)

1,781

1,901

1,961

1,900

1,900

1,900

1,900

1,850

1,850

Silver (US$ per ounce)

18.13

22.74

23.80

22.00

20.00

20.00

20.00

19.00

19.00

Platinum (US$ per ounce)

817

914

896

900

900

900

900

850

850

Agriculturals

Corn (US cents per bushel)

339

326

316

330

350

355

360

365

370

Soybeans (US cents per bushel)

884

905

895

875

885

900

910

920

925

Wheat (US cents per bushel)

490

540

533

500

475

470

465

460

450

Sources: Refinitiv, Bloomberg, Capital Economics *Iron Ore latest price is 30th Jul. 2020

Selected Recent Publications

Date

Publication

Title

Thu 11th Jun.

Precious Metals Update

The surge in China’s PGM imports is misleading

Tue 16th

Energy Update

Renewables take the shine off European fossil fuels

Wed 17th

Energy Data Response

US Weekly Petroleum Status Report

Thu 18th

OPEC Watch

OPEC Monthly Oil Market Report (June)

Energy Update

Launching our coal switching price indicator

Industrial Metals Update

Turning more positive on base metals

Fri 19th

Industrial Metals Update

A minor star called tin

Mon 22nd

Metals Data Response

Global Aluminium Production (May)

Metals Data Response

Global Steel Production (May)

Energy Update

US gasoline demand will take time to fully recover

Wed 24th

Industrial Metals Update

US-Canada aluminium spat could worsen oversupply

Energy Data Response

US Weekly Petroleum Status Report

Thu 25th

Commodities Update

Revisiting our forecasts …

Energy Update

Taking a look at our oil price forecasts

Metals Data Response

China and India Gold Imports (May)

Mon 29th

Commodities Update

Sugar prices to tread water, amid ample supply

Tue 30th

Industrial Metals Update

Chinese imports add to evidence of stronger demand

Wed 1st Jul.

Commodities Update

Rising China PMIs good news for commodities

Energy Data Response

US Weekly Petroleum Status Report

Thu 2nd

Commodities Chart Book

Strong Chinese recovery is good news

Fri 3rd

Energy Update

Libya will not determine prices

Metals Chart Book

A brighter backdrop ahead for industrial metals

Tue 7th

Energy Chart Book

On the way up …

Wed 8th

Energy Data Response

US Weekly Petroleum Status Report

Industrial Metals Update

Still hard to be positive on lead in the long run

Thu 9th

Commodities Update

Strong demand set to keep lumber prices high

Fri 10th

Metals Watch

Assessing the risks of a ‘second wave’ of supply loss

Energy Update

Five key questions about the EU’s hydrogen strategy

Tue 14th

Commodities Update

China’s opportunistic buying has run its course

OPEC Watch

OPEC Monthly Oil Market Report (July)

Wed 15th

Energy Data Response

US Weekly Petroleum Status Report

Thu 16th

Commodities Update

The Siberian heatwave and commodities

Industrial Metals Update

New LME data confirm aluminium stockpile overhang

Fri 17th

Industrial Metals Update

Copper rally not entirely divorced from reality

Mon 20th

Metals Data Response

Global Aluminium Production (Jun.)

Tue 21st

Precious Metals Update

Lower real yields to support a higher gold price

Wed 22nd

Energy Data Response

US Weekly Petroleum Status Report

Thu 23rd

Metals Data Response

Global Steel Production (Jun.

Fri 24th

Energy Update

Little to look forward to this year for US LNG exporters

Commodities Update

Cotton prices to remain subdued

Wed 29th

Commodities Outlook

China to the rescue

Energy Outlook

Energy demand to remain subdued for some time yet

Energy Data Response

US Weekly Petroleum Status Report

Fri 31st

Metals Outlook

Post GFC-style revival to continue, for now …

For copies of any of these reports, please call +44 20 7823 5000 or e-mail sales@capitaleconomics.com


Caroline Bain, Chief Commodities Economist, caroline.bain@capitaleconomics.com
James O’Rourke, Commodities Economist, james.orourke@capitaleconomics.com
Samuel Burman, Assistant Commodities Economist, samuel.burman@capitaleconomics.com
Kieran Clancy, Assistant Commodities Economist, kieran.clancy@capitaleconomics.com
Bethany Beckett, Assistant Economist, bethany.beckett@capitaleconomics.com