Commodities Weekly

Parameterising global oil demand to gauge signs of the bottom in oil markets

 

Global commodities

With crude oil up 5% from its early April lows, there are nascent signs that the oil market may have bottomed out. Beyond the bullishness stemming from the US administration’s recent announcement that it will start refilling its Strategic Petroleum Reserves (SPR), physical oil demand is surging. We parameterise the state of global oil demand to determine whether there is enough impetus to drive oil prices higher – assuming our supply-side profile remains constant. Our core conclusion is that whilst weakness in the global manufacturing sector is of concern, it is the resilient services sector – constituting nearly two-thirds of global oil demand (and global GDP) – that is set to offer constructive support to prices as we head into the second half of the year wherein we anticipate large market tightness. Moreover, it is telling that despite recessionary angst, US banking stress, debt ceiling risks and aggressive rate hikes by developed market central banks, the IEA in fact lifted its forecast for global oil demand growth in 2023 by 2.2m b/d – to a record 102m b/d – this week. On net, we are dealing with a cynical global oil market today with buoyant service-led demand yet to show up in front-end oil prices – we recommend leaning long as the market pivots into deficit.

 

Energy

Oil has found a firmer tone after the US administration said it’s seeking bids for crude to help refill the much-depleted Strategic Petroleum Reserves (SPR). While the volume in question is modest (3 million barrels for August delivery – a mere 0.5% of total capacity), it’s a reminder the task at hand is significant which should support prices and offset the drag from any US slowdown. Meanwhile, European natural gas (TTF) prices have modestly risen from two year lows after an extended outage at Norway’s Hammerfest LNG facility.

 

Base metals

Bearish signs surrounding copper abound, which could push prices below USD8,000/MT as we catalogued last week (see here). The latest headwind came out of the Chinese property market this week, with April home price growth slowing. Whilst we acknowledge near-term demand angst, we still believe that the market deficit in copper will serve to reinforce the market tightness and eventual necessity for a scarcity price spike to the upside.

 

Precious metals

Gold is holding onto its two week low as traders tracked talks to resolve the US debt ceiling impasse and dissected comments from a slew of Fed officials on the outlook for interest rates. Gold remains one of the best performing major commodities thus far this year (up ~9%), underpinned by speculation that the Fed’s tightening campaign is now done, paving the way for a weaker US dollar and lower Treasury demand – which aid bullion.

 

Bulk commodities

Iron ore prices are struggling to remain above a floor of USD100/MT during China’s peak spring construction season, as the country’s steel market continued to underperform with weak China’s industrial production figures underscoring the pain. Meanwhile, European coal prices have fallen below USD100/MT – the lowest in almost two years – as a drop in power output and gas prices curbs demand.

 

Agriculture

The Ukraine-Russia Black Sea grain deal is set to be extended, keeping open a major trade route. Despite this promising extension wheat prices remain elevated due to prolonged droughts in the US, highlighting the potential risks of underestimating food inflationary pressures.

 

Core indicators

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

 

 

CHART OF THE WEEK: OIL IS CLOSELY SHADOWING ITS 2007-10 PROFILE