Updated: Jan 12
Looming food shortages and high oil prices continued to wreak havoc on international markets, adding to inflationary pressures already well entrenched. The unenviable challenge facing central bankers and key policy makers - how to cool inflation and avoid recession - is causing the market to price in a tempering of central banks aggressive hiking stances. China is planning for years of Covid Zero strategy and the resultant closures will continue to add to the murky outlook for markets and commodity prices in general.
Russia’s actions in Ukraine continue to underpin oil prices, and, at the risk of sounding like a broken record, continued low investment in fossil fuel infrastructure and record low spare capacity remains supportive of high prices for the near future. The steeply backwardated curve highlights the tight supply conditions prevailing and is likely to continue into 2023. Diesel in particular remains under severe pressure at a time when the northern hemisphere’s summer season starts to get underway. On the speculative trading front, the bulls are in charge with calls outnumbering puts by 4:1. Saudi Arabia’s Aramco hiking its July formula prices for Asian buyers could be signalling concerns that supply might be lower than expected. Add to this that most OPEC+ members are producing below their quotas, and you can see why the bulls are in charge. Both Brent and London Gasoil enjoyed a strong month and continue to gain.
Metals enjoyed a torrid May ending broadly in the red. Covid lockdowns in China were mostly to blame and talk of easing conditions in the worlds second largest economy is beginning to filter through to base metal prices. Copper is benefiting from supply concerns with the Chilean Central Bank announcing that copper exports printed down ~18% in May. LME warehouse stocks are at the lowest level since 14 April. Futures forward curves for aluminium, zinc, steel rebar and iron ore are all indicating prices trending lower for the rest of 2022.
Gold is at an inflection point and could drop to $1,800 or test $1,900. Prices are expected to remain range bound pending the Feds rate hike on 15 June. The metal’s outlook remains vulnerable to aggressive interest rate hikes by central banks, although recession fears may temper the outlook. Palladium and platinum are at a crossroads with Russia causing a dislocation between the two main palladium markets. Companies have begun substituting platinum for palladium and we may see good demand growth in platinum.
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