Commodities Weekly

Reducing upside across the commodities complex

Global commodities

While it is tempting to blame the 8% year-to-date sell-off in commodities on financial liquidation given extraordinary paper market selling (see here), physical weakness is also beginning to appear in the data. Purveyors of conventional wisdom would have you believe that the sell-off was due to softening demand on recessionary angst. However, overall demand and inventory data across the commodity complex has exceeded expectations (see here). Yet, prices remain bearish, prompting questions of the rationale behind the skittishness. The real challenge in today’s commodities complex is in fact too much supply. We have recently lowered our 2023 Brent oil average forecasts to USD81/b (from USD88/b previously) to reflect higher supply from sanctioned OPEC+ countries (see here). Elsewhere, despite the recent rally in European natural gas (TTF) prices, we believe the risks to our constructive H2 2023 price forecasts remain skewed to the downside with “tank top” natural gas scenarios a real possibility before the start of the winter heating season this October given higher LNG inflows (see here). Furthermore, supply for metals – especially aluminium, copper and iron ore – across key markets remains buoyant, suggesting prices could remain lower-for-longer. The only bright spot in a period of elevated uncertainty are precious metals – notably gold and silver – as we are gradually moving past Fed hawkishness with the US seemingly slowing without derailing growth elsewhere.

 

Energy                                                                                                       

Drip-feed Chinese stimulus continues to underwhelm, failing to spur any meaningful oil support. The critical backdrop to explain the inability to sustain any oil rally remains focused on excess supply from sanctioned OPEC+ countries (see here). Meanwhile, the recent short-covering-driven rally in European natural gas (TTF) prices illustrated how quickly prices can move when triggered by unforeseen events. However, while positioning-driven spikes can be significant, with TTF nearly reaching EUR50/MWh in intraday price action last week, we believe prices cannot be sustained at such high levels unless a tightening of fundamentals can support them there.

 

Base metals

A negative technical signal warns of a potential overreaction from the global economy’s bellwether – copper – if China’s stimulus falls short of lofty expectations. Copper prices have edged lower this week after cruising to a run of three weekly gains, with that prior upswing spurred by constructive Chinese news flow.

 

Precious metals

Gold markets remain on Japan watch with the likelihood of the Bank of Japan (BoJ) intervening to arrest the yen’s slump ticking higher, and should the authorities wade in, bullion would stands to gain. The playbook was in action in October 2022 when the BoJ loaded up on yen, when gold spiked.

 

Bulk commodities

Steel production in China has contracted once again (May data), accentuating just why government stimulus has risen to the top of the agenda in the world’s largest producer. Even with the lowering of loan prime rates, iron ore’s risks remain to the downside with the seaborne market amply-supplied at present as mines in Brazil and Australia in fine form.

 

Agriculture

This year’s most explosive rally in commodities – robusta coffee – has more room to run with the futures curve now in backwardation (signalling supply tightness). Hot weather angst at the fore, especially in Asian growers, with temperatures during the first half of June hitting the highest level on record for this time of the year.

 

Core indicators

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