Russian aggression and the potential invasion of Ukraine dominated commodity markets in January, with prices further supported by waning Covid19 fears as the Omicron variant proved to be milder than feared. Anticipation of FED rate hikes and quantitative easing played a roll too. The Bloomberg Commodity Index closed at 107.86 on 31 January, a gain of 7% for the month. As anticipated, a return to normal consumption in a post Covid19 world is translating into spare capacity and supply chain challenges. Whilst some in the West are increasingly optimistic that the pandemic is waning China is in the midst of further draconian lockdown measures. We have probably not seen the last of this horror virus.
The energy price complex has continued its meteoric rise from the lows of 2020 with highs last seen in 2014. Improving demand and spare capacity shortages have given the bulls a free range, the bears have almost disappeared, with those holding bullish bets outweighing the bears by over twelve to one. Most of the world’s global spare capacity is currently held by Saudi Arabia and the UAE. Both producers have the potential to raise their output but they are doing so at the expense of declining spare capacity. Low spare capacity could set the stage for a prolonged oil price rally as the world would have a lower buffer to offset sudden supply disruptions, for example Russian oil sanctions.
Prices for European low sulphur gasoil (diesel) surged in recent weeks. On 31 January, gasoil traded at USD 796.25 per metric ton, a Mom increase of 19.38% and 77.24% Yoy. Easing concerns over the economic impact of the Omicron variant supported gasoil over the past month, with prices hitting a multi-year high on 14 January.
Many respected players are calling oil at $100 plus for 2022.
Metals endured a more mixed January with aluminium, nickel and tin enjoying strong price gains. Copper, the global bellwether for economic growth had a poor showing for January although it was 25% up Yoy. Expectations of softening Chinese production growth and news of a possible nationalisation of Chile’s copper industry added to bearish sentiment for the metal. Covid19 factory lockdowns also played a part. Volatility in base metal prices are expected to stem from negative macro factors such as a stronger USD as the market gears itself for a faster removal of liquidity by the FED. Base metals are however likely to remain in deficit in 2022, with demand exceeding supply.
The outperformer in the precious metals complex for January was palladium, ending the month up almost 23%. Russia is the leading producer at about 40% and so it is no surprise that the ongoing standoff with Ukraine has traders concerned about a possible tightening of supply. Gold on the other hand is caught between market angst concerning FED tightening and rising US Treasuries, and a safe haven asset in the event of an escalation in Russia v. Ukraine tensions. Upbeat corporate earnings have brought the risk on trade back and gold has retreated, but the metal is challenging the Fibonacci 61.8% level of the daily range at $1,802 on renewed upside.
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