Weekly Commodity Update

by: Hans van Cleef , Casper Burgering

Mixed drivers keep commodity market in control

Commodity indices traded more or less within small ranges despite larger moves in underlying individual commodities. Energy markets were supported by a rise in demand and increased geopolitical tensions. Corn prices were under significant pressure due to the predictions by the USDA for a record harvest this year. The focus will be on the ECB statement and on the outcome of the US Employment Report which could result in direction for commodity prices.

WTI touches highest level in 14-months

US Crude (West Texas Intermediate or WTI) rallied to the highest level since May 2012 after the API weekly crude stocks declined with 9.358 million barrels (versus -2.317 million expected). CW brtWTI traded above USD 101/barrel. The reasons for the big decline were the rise in demand due to warm weather conditions and increased refinery demand. On top of that, oil prices (not only WTI, but also Brent) were supported on the back of the increased tensions in Egypt. These tensions, combined with the ongoing unrest in Syria and Libya, resulted in worries regarding possible supply disruptions in the Middle East. In Libya, several oil fields are shut down, which results in a 35% drop of crude production, as protesters demand a change in policy. Other events which could affect the oil prices are the release of the EIA weekly crude stocks data (Wednesday), the ECB meeting on Thursday and the US job report, scheduled for Friday. More short term support could be seen if tensions in Egypt continue, stocks decline faster than expected, the ECB hints for higher yields and more USD support is seen. These moves, however, possibly lead to a rise in price volatility, but the oil prices are expected to remain neutral within the longer term bandwidth.

Nervousness on industrial metals demand

Sentiment in practically all industrial metals markets (both ferrous and base metals) is weak. Prices are dictated by economic uncertainty and volatility. The recent deterioration of prices (from the 4th of June onward) was caused by numerous factors, such as worries about weakening (Chinese) demand and economic growth perspectives, poor manufacturing data across the globe and continuing overcapacity in certain markets. Until the 28th of June, base metal prices lost 9% on average. Recently, base metal prices gained on positive data from the US and Eurozone on manufacturing. comment CWThe outlook for the global steel sector is still unfavorable. Overcapacity is the key issue and a recent report the OECD expressed their concerns on excess capacity. The report stated that “prospects are quite bleak… and it is difficult for markets to grow out of this situation”. At the same time, the steel oversupply will also affect market conditions for iron ore. Some initiatives to tackle overcapacity have already been taken by the steel sector (EU and China), but it will clearly take some time before they have an effect. Until then, we do not expect any significant improvements in the global iron ore market.

Gas prices lifted by higher temperatures

Last Friday, the US natural gas prices (Henry Hub) dropped to USD 3.526/mmBtu, the lowest point since early March, due to  stock building. After the weekend, gas prices started to appreciate as a heat wave hit the US West Coast which resulted in a rise of electricity demand. In fact, California power prices hit a 5-year high, supporting regional gas prices (Thomson Reuters). Nevertheless, with mild weather conditions expected for the mid-continent and gas inventories being at high levels, the upside seems to be relatively limited.

EU Parliament votes for new Carbon plan

The European Parliament voted in favor of a weakened carbon plan but limited it to a one-off measure. The lawmakers set a 900 million permits limit after the initial plan was rejected in April. The measure shows confidence that there is a future for carbon trading. Nevertheless, the actual impact will need some time to emerge. After all, the watered down plan may prove not to be enough yet to push carbon emission prices significantly higher in the near term and must therefore be seen as a first step. The plan includes a delay of the sale of some carbon permits, which will be back loaded to the market after one year. This would be a one-time intervention of 600 million permits, compared with 900 million permits with a three-year delay in the original draft. Now approved, negotiations with representatives of national governments on the final wording of the legislation can start. It will likely take another several months before a final version can be presented. In the meantime, prices may continue to recover from their record low in April as the intention to restructure the carbon market is there. Whether a price rally in the coming months will be strong enough to actually change the energy production policy (a switch from coal to gas, or even renewables) should be strongly doubted.