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Implications for commodities from the US elections

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

 

SOOJIN KIM
Research Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: soojin.kim@ae.mufg.jp

 

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Global commodities

With five months to go until the US presidential elections, we assess the key policies that could change under a new administration and the impact on commodities. The key transmission channels are set to be on energy (clean and conventional) as well as utility sub-sectors given the potential reverberations on the 2022 Inflation Reduction Act (IRA) – the largest climate legislation in US history. In principle, under Trump 2.0, it is unlikely that the IRA law would be materially altered, given than ~75% of investments in clean energy manufacturing pledged since passage is destined for states with Republican governors and 83% to Republican-held congressional districts. Tax credit policy for clean electricity and large-scale renewable power production, along with investment incentives for carbon capture, nuclear, hydrogen, sustainable aviation fuel (SAF) and biofuels are the least at-risk parts of the IRA. However, a Trump administration will likely attempt to scale back the consumer dimensions of the IRA, such as incentives for the purchase of electric vehicles, tax credits for individuals and businesses to install charging infrastructure, as well as improve the energy efficiency of their homes. In conventional energy, a Trump administration would likely see a major realignment of federal energy policy via executive actions to lighten the regulatory burden on oil and gas companies – especially in the up/mid-stream segments, including the LNG export permit pause, EPA standards and federal pipeline permits. Though, we do not base case any material changes for both US oil and natural gas production during the next presidential term, irrespective of the presidential outcome.

Energy

Oil prices have retraced nearly all of its abrupt post-OPEC+ 2 June meeting losses, reinforcing our conviction we catalogued last week that skittish algorithmic traders’ pivot towards net short positioning (rather than the OPEC+ meeting alone) was behind early June’s leg lower. Oil’s recovery is also thrusting up inflation swaps, and with the US summer driving season now underway, combined with shipping freight rates surging to post-COVID highs as well as labour trouble brewing at US posts, this collectively reinforces the higher-for-longer US rates narrative amid uncertainty that cost pressures have convincingly been controlled.

Base metals

Copper is recovering from its lowest level in seven weeks with profit-taking driving gains following recent angst over the steady increase in global inventories. We continue to reiterate that absent any near-term mine supply solver, copper’s path to scarcity remains unfazed with the only way to maintain market function being via demand destruction. Copper remains our most bullish long-term structural commodity conviction, and we have been cataloguing its unparalleled fundamentals – its central role in the energy transition (best conductor of electricity), in AI (vital for catalysing datacentres) and in military spending (in a deglobalised world) – since 2022.

Precious metals

In a surprising development, the People’s Bank of China (PBoC) halted its 18 month (dedollarisation-led and safe haven demand induced) unprecedented gold purchasing spree in May – a sign that gold’s relentless price surge may be taking its toll. We maintain our 2024 commodities outlook call that gold is our most favourite trade this year on a trifecta of (eventual) Fed cuts, (still) supportive central bank demand and bullion’s role as the geopolitical hedge of last resort (see here).

Bulk commodities

Iron ore is cautiously rising from the lowest level since April, buoyed by cautious optimism over signs of recovery in China’s property market. The country’s daily transaction volume is new homes increased more than 60% between 8-10 June from the May Day holiday, and further strength is expected for the remainder of this month.

Agriculture

China’s appetite for overseas wheat and corn is dwindling speedily, which is likely to heap pressure on global grain markets that have grown accustomed to robust demand from the world’s largest agricultural importer. Whilst traders believe this trend is likely to continue into Q3 2024, the International Grains Council and the US Department of Agriculture (USDA) are still estimating significant Chinese purchasers in H2 2024 and into 2025.

Core indicators

Price performance and forecasts, flows, market positioning, timespreads, futures, inventories, storage and products performance are covered in the report.