Updated: Jan 12
Three themes dominated March, the war in Ukraine, Chinese Covid restrictions and Fed rate hikes. As expected, sanctions on Russia played havoc with commodity markets at a time of severe supply capacity constraints and further sanctions are in the wings as the civilian fatalities become clearer. Volatility is now the new normal. Higher energy prices continue to fuel inflation and the Fed now must contend with a possible recession. The tighter US monetary policy should translate into a stronger Dollar as UST yields climb. Chinese growth concerns together with tighter US monetary policy are subduing the bulls.
The scale of Russian supply in the energy market and potential sanctions being discussed by the EU and its partners continue to underpin energy prices. Efforts by Biden and other governments to quell high oil prices through the release of strategic reserves are not having the expected impact as they coincide with a capacity deficit which has its origins as far back as 2014. The oil industry has been severely underinvesting for eight years now, and this underinvestment has been exacerbated by the Green agenda, driving investors and lenders away. Like it or loath it, our modern way of life is so tightly aligned with fossil fuels, that any failure to maintain investment must and will translate into higher energy prices. The most likely impact of the unprecedented release of 180 million barrels of crude oil by the Biden administration will be a muted short-term impact resulting in the White House selling at $100 and buying back at $150. Remember, strategic reserves need to be replenished. Expect energy price volatility to remain with large two-way price changes.
New Covid restrictions in China are dampening demand at what is normally a peak period for base metal demand. Copper is only up 18% YoY. The bell weather metal for industrial activity may be underestimating potential Russian supply disruption with the country producing around 4% of global refined production. Goldman Sachs argues that copper is "mispricing Russian supply risk", the super-cycle bull keeping its elevated target of $12,000 per tonne over a 12-month timeframe. ("Copper Convergence Rally Begins", March 3, 2022). After a chaotic suspension in March, the LME nickel contract is trading again, but open interest has plunged to levels last seen in 2013. Nickel prices are still strong and big short positions hang over the market. Rapidly dwindling participation risks opening up a liquidity vacuum and a volatility trap.
The gold price continues to hold steady in spite of US Dollar and Treasury yields strengthening. Its safe haven appeal continues as the conflict in Ukraine rolls on. After hitting the crucial resistance level of 1,950.50 on the last day of March, it has been trading between 1,941.84 and 1,915.86. At the time of writing, it was hovering around the range’s upper border at 1,940.64. On a daily chart, it is hovering around the 25-day EMA while remaining above the 50-day EMA. After registering a record high earlier in March, palladium prices had a sharp correction as concerns over Russian sanctions declined. However, Russia accounts for 40% of global production, and sanctions may yet target all Russian exports.
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