Commodity Weekly: Energy and metals diverge ahead of year-end

Industrial metals receiving a boost from China reopening hopes

While the energy sector traded lower on concerns about the global economic growth outlook, industrial metals took comfort from the potential for an economic rebound in China, the world’s biggest consumer of metals, after the country continued to loosen Covid-19 controls while rolling out several measures designated to support the beleaguered property sector.

The Bloomberg Industrial metals index trades up 5% on the month so far with gains being led by zinc and copper with iron ore also seeing a strong rebound. While Dr. Copper increasingly in recent years have responded to the health of the Chinese economy, more than the global economy, the strength seen this past month remains impressive. Not least considering an expected supply surplus next year as mine supply is expected to increase and the global economy is expected to go through a soft patch.

However, the market is currently behaving as if the mentioned increase in mine supply may end up weaker than expected, and if that turns out to be correct, the market will instead look towards an emerging supply deficit in the following years supporting prices as renewables related demand picks up speed across the world. Exchange monitored stock levels in New York, London and Shanghai remain near a multi-year low and without the expected increase in mine supply, the shortfall may emerge sooner than currently being priced into the market.

For the second time in a month, HG copper has returned to challenge resistance around the 200-day moving average, currently at $3.925 per pound, with a break above raising the prospect for the metal breaking back above $4, a level that provided support for more than year up until June when renewed China lockdowns saw it tumble below.

EU gas prices remain subdued despite demand spike from freezing weather

Demand for gas is spiking with the arrival of unseasonably wintry weather in Northwestern Europe likely to spread into continental Europe next week. However, a very mild autumn and start to the winter not only helped delay the beginning of the withdrawal season but also helped ensure a rapid inventory buildup. As a result, European gas inventories at 1,000 TWh are currently 30% above the level seen this time last year.

While elevated storage levels will provide a buffer, they are nowhere near sufficient to get Europe through what may turn out to be a colder than normal winter. With that in mind imports from Norway and via LNG needs to remain elevated and following months of demand weakness from China, easing lockdowns may increase competition for LNG from Asian buyers. Much therefore hinges on consumers’ ability to keep demand in check, primarily by reducing heating in order to conserve supplies.

Following a period of stable trading around €100/MWh, Dutch TTF benchmark gas has moved higher to trade around €140/MWh, but still well below the panic levels above €300 that were reached around August time when Russia cut supplies through its major pipelines supplying gas to Europe. Power generation from wind turbines meanwhile is creating a great deal of volatility given its unpredictability. The need for higher gas usage when the wind speed slows has seen the cost of power surge higher during the past couple of weeks. An example being one-month German power which briefly traded above €400/MWh this week, a doubling in price during a two-week period.

Crude oil dropped to a one-year low with Brent crude briefly trading below $76 and WTI below $72, a loss of more than 10% so far this month. A weakening macroeconomic outlook which has seen the US yield curve inversion extend to levels signaling an incoming recession, has overshadowed the EU embargo on Russian oil and the prospect of a pickup in demand in China as lockdowns continue to ease. Short-term technical traders looking to squeeze existing longs remain in control as the overall level of participation continues to fall ahead of yearend. Next week Russia will announce how it intend to counter the introduced price cap with the risk of a production cut potentially adding fresh support to the market ahead of what looks like a challenging 2023 where supply worries in our opinion will keep prices elevated, despite the risk of lower demand.

Precious metals led by silver, given its link to rising industrial metals, trade up on the month supported by falling treasury yields and a weaker dollar amid worries about an incoming economic slowdown. The market will focus on next Wednesday’s FOMC meeting, and prior to that the release of November CPI data on Tuesday. The metals have both seen a shift in sentiment during the past month with the selling into strength strategy, adopted for months, being replaced by one of buying into strength. In gold we will be looking out for a challenge at key resistance at $1808 with a break setting up the potential for a further gain into 2023.

This week we published Saxo’s annual batch of Outrageous Predictions, titled “2023: The War Economy” and among the ten OP’s we included one that argues that under an extreme set of circumstances, gold could reach $3,000 per ounce in 2023.

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