Updated: Jan 12
Inflation containment remains the driving force with even the ECB joining the party with a whopping 75bps (by EU standards) and more to follow. The move is in line with the more hawkish tone adopted by most central banks post the Jackson Hole meeting in late August. The Fed and BoE are expected to raise by a further 75bps at their respective upcoming meetings. Fears of recession have been placed on the backburner as the inflation dragon comes under intense scrutiny. China’s zero Covid continues to add to the sea of red for commodities.
Economic concerns and Chinese lockdowns have continued to drag oil lower, although OPEC+ comments regarding cuts and low inventories continue to provide a floor. Just how much of an energy crisis is looming in Europe as Russia shuts off the gas remains to be seen but should impact diesel and HFO demand as alternative fuels are used to replace gas shortages. Diesel has been well supported in any event as supplies remain constrained, with the London Gasoil benchmark remaining north of 80% up for the prior 52-week period. Globally coal prices are at all-time highs and could rally further.
Brent hit a 7- month low at the start of September and will be looking to the Fed decision on 21 September for further direction, although markets have priced in at least 50bps. Key OPEC players will begin showing their hands as the likes of Saudi Arabia and Iraq approach their fiscal breakeven levels and should try to keep prices pegged between $90 and $100 per barrel.
And for those expecting Iran to come to the market’s aid, news is the nuclear deal is falling apart again. This was never going to be an easy fix. How can you take assurances that their programme is exclusively peaceful? That would be like telling Ukraine “Vlad just wants a chat!”
Recession fears have kept base metals on the backfoot. A strong USD is also keeping base metal prices under pressure with Aluminium sinking to its lowest since April 2021. Stocks of these metals are very low but for now the market remains fixated on demand weakness and Dollar strength. Copper may climb higher as production costs, specifically energy head upwards. Indeed, the entire metal complex in Europe is at risk due to the gravity of the energy crisis. On a slightly positive note, iron ore is recovering on the back of hopes for further stimulus in China as it seeks to support its lockdown ravaged economy.
Gold continues to trade cautiously as the market awaits the next round of inflation data. As gold offers no yield, any increased Fed hawkishness will impact negatively on the yellow metal. Palladium demand has not returned to pre-pandemic levels, and prices should remain pegged at these levels given how low stocks are. Any upward momentum will be driven by demand outlook. Now, car sales are under pressure as the various rounds of interest rate hikes begin to play out, impacting both aluminium and platinum demand.
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