Metals and natural gas propel asset class to quarterly gain

Status on the global economy ahead of Q3 2024

Heading into the third quarter, the macroeconomic landscape remains mixed. China remains a concern, despite efforts to bolster activity and address challenges in its property sector, while US economic growth remains robust and around trend growth with historically loose financial conditions, reflected in low credit spreads, despite an aggressive increase in monetary policy rates. The combination of excessive US fiscal policy since the pandemic and strong investments in artificial intelligence, defence, semiconductors, and obesity drug manufacturing has created surprisingly resilient economic growth.

Labour markets in Europe and the US are cooling but still as tight as they were before the pandemic, while inflation in the US and Europe has turned out to persist at a higher level than initially thought. But it is easing to levels that are causing people to recoup some of their lost real income during the inflation spike, creating income-driven economic growth. While some central banks in major economies have changed their tune to signal additional rate hikes amid persistent high inflation, the ECB has made its first cut without committing to more, while the US Federal Reserve is still sitting on the fence, projecting just one 25 basis point rate cut this year as opposed to the market's expectation for two cuts.

Commodities sector performance

Industrial metals topped the table with a second quarter gain of 10% (8% YTD) being driven by strong gains in zinc and tin, and despite giving back half its October to May gain, copper still managed to return around 11%. Precious metals came second, led by silver's 18.5% gain (21% YTD) followed by gold’s 5% (12.5% YTD); the latter reached a fresh record high before settling into a wide range, while silver's rally to an 11-year high, supported by surging copper, saw it break above USD 30 before running out of steam as copper retreated. The energy sector came third, with a strong rally in natural gas being only partly offset by weaker fuel prices and a rangebound crude oil market.

The agriculture sector recorded a quarterly loss driven by continued weakness in grains, down 4% on the quarter and 12% YTD, and pressured by a large carryover of stocks from last year’s harvest. Partly offsetting those losses were a mixed softs sector that saw adverse weather-related gains in coffee being partly offset by ample supply of sugar and cotton, as well as profit-taking in cocoa following its 126% first quarter surge.

Strong natural gas quarter

US and European natural gas were two of the top performers during the quarter, with US prices being supported by the decision by several producers to make temporary production cuts in order to boost prices after the Henry Hub benchmark contract spent a three-month period until April trading below USD 2 per MMBtu (EUR 6.4 MWh). Despite a large carryover of stocks following a mild 2023/24 winter, the Dutch TTF benchmark rose to trade around EUR 35 per MWh (USD 10.9/MMBtu) supported by hot weather demand in southern Europe, concerns about Russian supplies, and not least increased competition with other major gas consumers, especially in Asia, for liquified natural gas cargoes (LNG). A fraught geopolitical situation in Europe could still end up with Russia cutting its remaining supply through Ukraine, and it will force the EU to compete even harder for more LNG, potentially at higher prices.

Rangebound crude

Crude oil futures in New York and London remain stuck in their tightest ranges since 2021, and the narrowing range has during the past year resulted in a succession of lower highs and higher lows. In fact, since Q4-2022 Brent, the global benchmark, has been averaging close to USD 83.50 per barrel, just a few dollars below the current price, and overall it highlights how production restraint by OPEC+ since April last year has helped deliver a period of stable prices, most likely at lower levels than originally anticipated by the group, many of which need prices of Brent, the global benchmark, to trade closer to and preferably above USD 90 per barrel in order to balance their budgets.

From a relatively weak start to the year amid concerns about Chinese demand and the negative impact of high funding costs following the most aggressive rate hiking campaign by the US Federal Reserve in decades, the crude oil market has since moved higher with most of the major movements being driven by the ebb and flow of a geopolitical risk premium, and with that the buying and selling from hedge funds looking for momentum.

We maintain a constructive view on demand into the third quarter amid strong summer demand for fuel towards mobility and cooling, followed by a focus on OPEC+ and their ability to carry out the announced production increase starting October. Overall, a massive gap in the 2024 demand growth expectations between OPEC (2.2mb/d) and the IEA (<1mb/d) needs to narrow, and the price direction will be determined by who is correct. Overall, we see a limited risk of Brent trading outside the USD 80’s in the coming months.