Energy Crisis Fuels Commodity Rally Despite Growth Concerns


In addition to the destruction of price-induced demand and the impact of energy / electricity cost inflation on disposable income, a slowdown in the Chinese real estate market and cuts in industrial production China could be forces that we believe could slow but not dampen further gains in commodities. over the next few months.

Inflation remains a hot topic and after months of range trading the difference between inflation protected bonds and normal bonds has started to increase. The break-even point, which reflects market expectations for inflation in the United States over the next five years, reached 3%, surpassing the previous record of 2005. A rise in the ten-year break-even point to 2 , 70% helped keep real yields down. around –1%, thus supporting a gold market that is increasingly competitive with cryptos, especially after the launch this week of an ETF linked to Bitcoin futures.

Industrial metals have registered the biggest gains so far this month, as the global energy crisis and China’s fight against pollution have dampened production at a time when demand has yet to show a rise. signs of weakness. After hitting a record high last week, the LME Metals Index, which tracks six metals, fell this week as Chinese efforts to cut coal prices negatively impact the prices of energy-intensive metals such as aluminum and zinc. However, the main story of the past week has been the copper market, where a rapid reduction in inventory on hand in warehouses monitored by the LME has contributed to an unprecedented rise in the cost of metals available for immediate delivery.

As the benchmark three-month copper futures contract hit a five-month high on Monday at $ 10,450 / tonne, the spot price at one point surged to trade at a premium of $ 1,100 / tonne. tonne. In recent weeks, large inventory pull orders have seen copper availability drop to just 14,150 tonnes, the lowest since 1974. At the same time, stocks monitored by the Shanghai Futures Exchange fell to 40,000 tonnes, the lowest since 2009.

Concerns about Chinese growth in general, and in particular the health of the Chinese real estate market, have kept copper in a relatively narrow range for several months, but the recent breakout amid the currency-controlled supply tightening could cause it. see consolidate before finally breaking the records of May. In high grade copper, we are already seeing support emerging between $ 4.45 and $ 4.52 per pound.

The combination of rising industrial metal prices, a weaker dollar, and rising inflation expectations pushed silver to a five-week high while supporting a decline in the gold-to-silver ratio below. from 74 to above 80 at the start of the month. . From this we can see that the gold has been dragged higher instead of leading from the front. Although Fed officials have reported no rush for rate hikes, gold has yet to find a supply strong enough to break through key resistance at $ 1,835.

The dollar, which provided many headwinds in September, has stopped rising and after weeks of speculative buying took the dollar long against a basket of G7 IMM currency futures to a two-year high , the greenback is showing signs of a reversal. If it does materialize, rising breakeven points and deeply negative real returns should provide enough ammunition to trigger a pause and with this new buy of technically oriented funds.

Meanwhile, real fund managers continue to show a limited appetite, with the recent decline in equity market volatility once again reducing the focus on the short term and the need for diversification. The reduced sentiment towards gold can be best measured by observing the miners against the spot price of gold. When investors are more bullish on gold, they tend to buy miners (GDX ETF for example) for leverage. When the opposite is true, they would rather hold physical gold or follow ETF spot gold prices. The ratio is currently only 13% above historic bearish lows of 2015 and 87% below the all-time high of 2006 exuberance.

Stagflation, which defines a period of inflation combined with slower growth, tends to support the price of gold. It should be noted that in each of the previous two periods of stagflation, gold prices rose while the federal funds rate also rose. With monetary policy on the way to tightening, the market may eventually need to rethink the negative impact on gold that many are currently assessing.

EU gas and electricity prices traded mostly sideways after the peak in early October, but at five times seasonal average gas prices are still well above levels that will cause economic hardship in the region. region while hampering growth as energy-intensive industries expand to recover production. As temperatures continue to cool in the northern hemisphere, the market remains exposed to price spikes in the event of a colder winter. A 25% drop in coal prices following intervention by several branches of the Chinese government has helped, at least temporarily, to allay some fears of soaring prices.

As China’s electricity crisis shows signs of easing as coal-fired power plants are pushed to produce more electricity, the prospect of more LNG shipments reaching Europe has also garnered some attention. Overall, however, Europe still faces a gloomy winter unless high prices kill demand, the winter turns out mild and windy, and most importantly, Russia decides to ship more. gas. Unfortunately, such a move increasingly appears to be tied to Germany’s swift approval of the controversial Nord Stream 2 pipeline. With this in mind, global energy prices are expected to remain high, with the substitution of gas for oil adding another layer. additional support for several fuels, from furnace oil and diesel to propane.

The six-week rally in crude oil has shown signs of abating in response to falling US gas prices and falling coal prices. From a technical standpoint, the combination of Brent and WTI crude oil reaching both overbought territory and hedge funds turning net sellers into a rally helped trigger long overdue profit taking. According to the latest Commitments of Traders report covering the week of October 12, hedge funds have reduced their exposure to Brent crude, the global benchmark, by 10% to 300 million barrels, less than half of the record 632 million barrels. barrels recorded in 2018, the last time the price traded above $ 80 / bbl.

WTI crude oil meanwhile hit its highest level since 2014 with inventories at Cushing, the major delivery center for WTI crude oil futures, rapidly selling to a 2018 low and well. below average levels. As a result, the futures curve has sunk deeper into the offset, a formation where market tension pushes the spot price higher than the deferred price. One example being the $ 10.4 / bbl spread between the two closest December futures contracts, a level that was last seen in 2013.

In our Q4-2021 outlook released on October 5, we raised our target range for Brent crude oil from $ 10 to $ 75 to $ 85. Having already reached the upper end of this range, and well before the winter developments and the lack of further OPEC + action that could potentially tighten the market further, the risk to our outlook remains clearly on the upside. However, continued sales by hedge funds should be watched as it removes a key source of demand in the “paper” market.

Arabica coffee has settled into a range of around $ 2 / lb, 75% above the average price seen over the previous five years. Rising global demand, a weaker crop in Brazil due to adverse weather conditions and most importantly dislocated supply chains have all supported a strong recovery in recent months. Brazil’s coffee exports posted their weakest September in four years as the intense battle for containers and vessel capacity helped keep prices high while lowering stocks watched by ICE exchanges, especially in European warehouses, as the lack of shipments has forced roasters to look elsewhere for supplies.

With global port and container congestion set to last until 2022, the near-term price outlook will again turn to changing weather conditions in South America. Warnings of yet another La Nina event like the one that hit the mainland last year could provide enough support to maintain and possibly even take advantage of the current high prices.

Iron ore, which halved in value between July and September, has since managed to stabilize around $ 120 per tonne. The near-term outlook given China’s efforts to curb pollution by cutting steel production and concerns about the health of the real estate sector should keep prices lower over the coming months. With the demand outlook in question, the near-term outlook hinges on the supply discipline of the three largest producers Vale, BHP and Rio Tinto who have combined control of a 60% marine market share. So far, they have all responded by reducing their shipping forecasts, a step that should help avoid a collapse in the cost price, currently somewhere in the region just below $ 50 a tonne.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of the Saxo Bank group via RSS feeds on FX Empire

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