Head of Commodity Strategy
Summary: The commodity sector turned sharply lower this week as the market reacted negatively to renewed growth concerns after the Federal Reserve Chairman, Jerome Powell, left the market in no doubt that the US would continue to hike rates and keep them high for a prolonged period in order to combat runaway inflation. Adding to this concerns about the outlook for China after a fresh Covid outbreak shut down another mega city. Losses were led by industrial metals with grains seeing the smallest impact.
The commodity sector turned sharply lower this week as the market reacted negatively to renewed growth concerns after the Federal Reserve Chairman, Jerome Powell, left the market in no doubt that the US and other major central banks would continue to hike rates and keep them high for a prolonged period in order to combat runaway inflation. This development helped to drive stock markets sharply lower, while the dollar reached multi-year highs and bond yields climbed back towards the June high. In addition, we saw renewed growth concerns related to China’s prolonged battle with Covid infections and President Xi’s zero-Covid policy after fresh lockdowns were implemented, the most noticeable being Chengdu, a metropolis of 21 million residents.
Both developments turned the focus in commodities back to demand, which may suffer as economic growth slows and away from a tight supply outlook across several major commodities from corn and coffee to diesel and gas, as well as several industrial metals due to mining and production challenges. Growth and China-dependent commodities, such as industrial metals and cotton, suffered a major setback while the prospect for Gazprom resuming gas supplies through its Nord Stream 1 pipeline from Saturday morning helped drive gas prices in Europe lower. With this, gas oil (diesel) fell on the assumption gas-to-fuel switch demand could slow.
In Europe and increasingly also Asia, elevated prices for gas and power continues to attract substitution demand into fuel products like diesel and heating oil. In the short-term, the price of gas into the autumn months will continue to be dictated by Russian flows, and not least whether Gazprom (and Putin) will resume flows on the Nord Stream 1 pipeline as announced, following the three-day maintenance shutdown that ends at 0100 GMT on September 3.
On the supply side, the market will be watching the impact of the EU embargo on Russian oil, which will begin impacting supply from December and the 180-million-barrel release, at a rate of one million barrel per day from US Strategic Reserves that look set to end on October 21. Finally, an Iran nuclear deal has yet to be reached, and after the US called Iran’s response to the latest effort to revive the 2015 nuclear as “not constructive”, the risk of failure remains. Following a 25% drop in US retail gasoline prices since June and the Democrats not wanting to be seen as going soft on Iran, a deal looks increasingly unlikely, at least in the short term.
With OPEC+ meeting to talk output on September 12 the price of oil is unlikely to fall further with support at $85.50 in WTI and $91.50 in Brent unlikely to be challenged soon.
With EU storages filling up and provided gas returns via NS1, we could see gas prices drop below €200/MWh – a level still high enough to support rationing and demand destruction.
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy