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Commodities Monthly Roundup ~ May-2022

Updated: Jan 12, 2023

The three dominant themes for April were the ongoing Ukraine invasion, China’s draconian Covid lockdowns and Fed tightening. As Putin prepares to “celebrate” VE day with his laughable assertion the invasion was necessary as a pre-emptive move to ward off NATO aggression, the conflict continues with no end in sight. The economic fallout will no doubt be with us for years and is contributing to inflationary pressures already highly elevated following supply chain pressures post Covid 19. The EU is moving ever closer to banning Russian oil and this is keeping energy prices under pressure even as Chinese demand faulters. The Fed raised rates by 50bps on 4 May as inflation hit a 40-year high and the market is eagerly awaiting new US inflation data due on 11 May, following a strong NFP on 6 May, which prompted Fed chair Jerome Powell to state “the labour market is extremely tight, and inflation is much too high”. The statement has encouraged economists and traders to anticipate a possible Fed rate rise above the neutral rate, with the 10yr US yield jumping to 3.16%. China’s zero Covid strategy is strangling the economy with joblessness rising to 5.8% in March, the highest level since May 2020 and China may already be in recession.


With China being the worlds largest importer of oil, the zero Covid strategy is dampening demand, but it remains unclear if this demand destruction is temporary and whether it is enough to cushion supply shortages. Potential additional bans on Russian crude and other fossil fuels poses a significant challenge to energy supply chains, with negative news or even rumours driving energy prices higher. Oil prices have remained volatile at the start of May, fluctuating between bearish Chinese economic news and bullish sanctions news.

Readers should note the dislocation between Brent, only up 62% Yoy and Diesel (London Gasoil) which is up by a whopping 101% Yoy. The Ukraine conflict has had a direct effect on diesel prices which make a significant contribution to supply chain costs. Diesel is also less likely to see demand destruction as the global economy is too reliant on it and the size of the supply chain backlog is likely to prop up demand for quite some time. Diesel is used in all walks of life, from agriculture to Amazon home deliveries. Europe is highly reliant on Russian diesel supply, with over 0.75m barrels a day used in heavy machinery, transportation, farming, fishing and power and heating.

With Russia behaving ever more irrationally, oil prices will remain exposed to large potential spikes, and I have no doubt that the West will continue to bring increased pressure to bear on the Russian economy, including banning crude purchases and the phasing out of gas purchases. This could not come at a worse time in terms of a lack of capacity. Take for example OPEC+s latest meeting on 5 May where they agreed to leave their production plan unchanged, aiming to boost crude production by 432k bpd. Notably many of its members are not pumping to their quotas and the group is approximately 1.5m bpd below their overall quota. Furthermore, OPEC told the EU this week that current and future sanctions on Russia could create one of the worlds worst ever oil supply shocks and that it would be impossible to replace those volumes. OPEC further stated they would not pump more oil to replace the Russian crude, this no doubt due to both capacity constraints and solidarity with their OPEC+ partner.


With China currently the worlds largest manufacturer it is no surprise that the lockdowns and falling manufacturing activity are causing industrial metals prices such as copper to fall. April was a red month for most of the base metals complex. Tighter monetary policy across the globe are also driving prices lower. The electric vehicle sector helped nickel to hold onto modest losses for April and maintain a 52 week gain of almost 70%.

Precious Metals

Gold has failed so far to benefit from a flight to safety as the rhetoric from Russia turns ever more toxic on the nuclear front, with investors preferring the USD and US treasury yields. Indeed the whole precious metals front is likely to remain Dollar focused for the near term, with buyers focussing on the dips.

News Links

OPEC+ Agrees To Boost Production By 432,000 Bpd In June View Article

Diesel shortage in Europe threatens to slow economic growth View Article

OPEC tells EU it's not possible to replace potential Russian oil supply loss View Article

Why diesel prices are soaring beyond crude and gasoline, and are likely to continue that way View Article

Copper, aluminium, other metals crash on Chinese Covid curbs View Article

Copper in Worst Run Since 2020 as Covid Dims China Outlook View Article

Copper in a soft patch, but should rally once China recovers from Covid View Article

CME explores nickel contract after LME trade chaos View Article

Gold futures slip as traders pick dollar as haven for Fed rate hike cycle View Article

Platinum Price News: XPT/USD refreshes 12-day top near $1,000 as bulls cheer Fed decision View Article

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