Weekly Commodity Update

by: Casper Burgering , Hans van Cleef

Directional commodity differences

The impact of stronger than expected US data was roughly balanced by disappointing Chinese crude imports a few days later. Although the commodity indices found some pressure, the downtrend remained intact. Crude stock withdrawals and ongoing tensions in the Middle East continued to be important oil drivers which proved somewhat supportive for oil prices. Base metals, on the other hand, came under pressure on worries on Chinese demand going forward.

Ferrous metal prices stabilise

Prices of steel (HRC) and coking coal stabilised during the week, while iron ore price managed to gain some support on Tuesday. Iron ore price increased by almost 7% during the week. Ferrous metal pricesThe gain in price can be fully attributed to improving market sentiment, rather than support from underlying fundamentals. The summer season is traditionally a very quiet period and strong gains in prices are not that common. Next to that, steel market conditions across the globe remain sluggish. Demand is generally weak – which is supported by the season lull – and concerns remain high. In the meantime, global steel output continues to increase. Until May, 2% more steel was added (yoy) to the global steel market. While steel output in both the US and the EU decreased by 6%, China managed to increase its steel output in by 8% in the first 5 months of 2013. This does not help the urgent situation of overcapacity in the Chinese market and proves that producer discipline in China is still far-fetched.

Copper price under pressure

Copper prices fell further during the week on disappointing Chinese data, US stimulus concerns and global economic woes. Copper price lost another 3% since the 2nd of July and stood at USD 6,725.50/t on Tuesday. Stocks of copper at LME warehouses decreased by more than 2% last week. As soon as Chinese copper imports picks up and disruptions in supply begin to surface, copper prices will rebound.

WTI rises but impact on Brent is muted

After having traded within small ranges for more than two months (~USD 92-98/barrel), the WTI oil price continued the rally which started last week. Also this week, a significant draw of the weekly American Petroleum Institute (API) crude stocks data resulted in more support for the WTI crude. Especially the combination of the sharper-than-expected draw from the US crude stocks with the better-than-expected US job data resulted in WTI’s first future contract reaching a high of USD 104.79/barrel. Brent crude, on the other, found less support despite ongoing tensions in Egypt and Libya.

The rally of Brent oil was capped due to the release of the lower than expected Chinese import of crude oil during the first half of 2013 (-1.4%, yoy). The fact that WTI rallies much faster than Brent is somewhat remarkable as the Brent crude is seen as the global benchmark. In that respect, WTI tended to follow the market developments in Brent but local drivers seem to outpace the global drivers at this moment. Brent - WTI spreadAs a result, the Brent/WTI spread narrowed to ‘only’ USD 3.50. This spread reflects a risk premium which is priced on top of the Brent oil price, as well as a discount on WTI for the large inventories which must find its (more expensive) way to the US refineries at the USGC. The discount is diminishing as more and more pipelines from Cushing, Oklahoma towards the Gulf of Mexico become operational, and the risk premium declines as the tensions with Iran eased somewhat after the elections. As a result, the price difference dropped to the lowest level since 31 December 2010. Therefore, the US economic advantage of the discount on WTI is disappearing. The risk premium, however, will most likely remain for the time being as tensions in the Middle East continues to stir worries about possible supply disruptions in the region which produces about 30-35% of the global oil production. Saudi Arabia and the UAE offered USD 8 billion of aid to Egypt to support the Egypt economy in an attempt to ease tensions within the region.