Tuesday, 31 January 2023 / Published in Commodity Insights

Crude oil prices trade in negative territory for a third consecutive trading session in a row, with Brent and WTI prices falling as low as $83/b and $76.50/b respectively on Tuesday morning on growing worries for more supplies from Russia, and further interest rate hikes by major central banks ahead in the week.

Brent crude futures lost $1.20/b, or 1.50% to $83/b so far in the day, after falling by more than 2% on Monday, and adding from another dip by 2% last Friday when it was trading to as high as $88/b on optimism over Chinese reopening, and a softer dollar.

Russia oil exports at any price:

Both Brent and WTI crude oil prices lost over 2% on Monday following reports that Russian President Putin has allowed local energy companies to sell however many barrels at whatever price they can get in the market.

Why is bearish for the oil markets? Because Putin gave the green light to the oil companies to apply any discount necessary to sell their oil to any customer in the world, without setting any floor price for exports.

This event could create headaches within the OPEC group since the cartel declined its overall crude production by 2 million bpd last year to support the falling prices amid the fear of an economic recession.

Interest rate hikes ahead:

Adding pressure on the recent selloff, energy investors are worrying about the coming interest rate hikes from the three largest central banks in the world, which threatens to slow further global economic growth and weaken demand for petroleum products.

Federal Reserve is widely expected to hike interest rates by 25 basis points to 4.50% on Wednesday, Feb. 01, followed by a 50 basis points increase by the European Central Bank and the Bank of England to 3% and 4% respectively on Thursday, Feb. 02, to curb the 40-year record high inflation.

Taking support from the coming Fed’s rate hike, the DXY-U.S. dollar index which tracks the greenback against six major currencies, managed to bounce off from its 7-month low of 101.50 mark hit last week, to just over 102.50, adding extra pressure on the dollar-denominated crude oil prices.

Thursday, 26 January 2023 / Published in Commodity Insights

The U.S.-based Henry hub natural gas prices broke below the much-advertised $3/mmBtu support level, while the European natural gas price of Dutch TTF extended recent losses toward the $55/MWh level, amid a combination of actors such as milder-than-normal weather, lower demand, record-high production, Freeport online, and plenty of LNG supplies.

In contrast to what energy analysts were expecting for the gas prices at the beginning of the winter in the Northern Hemisphere a few months ago, the natural gas price on both sides of the Atlantic has been posting significant losses following a broader selloff in the gas market.

The falling gas prices will have a significant impact on reducing what businesses and households pay for electricity and reducing the effects of energy-driven inflation.

Henry hub gas prices break below $3/mmBtu:

The front-month contract on the New York Mercantile Exchange’s Henry Hub is moving in a range of $2.70-$2.90/mmBtu (or million metric British thermal units), its lowest level since June 2021, and trading nearly 62% down from 14-year high of $10/mmBtu on August 24, 2022.

The sell-off in the U.S.-based gas prices was triggered by the record-high output of more than 100 bcf/d (or billion cubic feet per day), in the last quarter of 2022, the almost full U.S. gas storage, while the higher-than-normal temperatures continued to reduce demand for heating in houses and buildings.

Adding to the negative sentiment, energy traders sold gas contracts after the news that the 2 bcf/d of gas-capacity Texas-based LNG export terminal Freeport is reported to be readying to resume operations in February, after its sudden closure in June, increasing the gas supply in the already over-supplied U.S. market.

European Dutch TTF gas prices plunged on milder weather:

Sellers have also dominated the European gas market lately, with the Amsterdam-based Dutch TTF gas prices trading in a range of €51-€57/MWh (or per megawatt hour), the lowest level since September 2021, and trading nearly 83% down from an all-time high of €342/MWh on August 26, 2022, after Russia cut the gas flows to Europe via Nord Stream 1 pipeline for maintenance reasons.

Dutch TTF prices, Weekly chart

Europe’s wholesale natural gas prices extended losses below their lowest levels since Russia invaded Ukraine on February 24, 2022, as the warmer weather across the continent and the declining industrial activity have weakened the demand for heating and gas-powered energy by more than 15%.

The lower-than-anticipated gas demand has enabled EU countries to use less gas from storage that was built up in anticipation of cuts in supplies from Russia, which was Europe’s main supplier before the war by 40%.

The milder weather has allowed countries to store more gas in their inventory facilities, which stood at nearly 84% at the begging of 2023, importing mainly LNG from the U.S. and Qatar, coupled with gas from Norway, Algeria, and Azerbaijan via pipelines.

The storage levels stand some 30% higher than in 2021 and more than 10% higher than the average of the previous five years.

Friday, 20 January 2023 / Published in Commodity Insights

The price of the yellow metal broke above the $1,930/oz level on Friday morning for the first time since end-April 2022, driven by some safe-haven demand, a softer dollar and yields, and weaker-than-expected U.S. macroeconomic data.

Investors have been moving some funds into the safety of Gold in recent weeks on the prospect of a global economic slowdown, as record-high inflation, energy crunch, and soaring interest rates could hit hard economic activity, and consumer confidence.

Gold is heading for a fifth straight week of gains allowing it to add almost $300/oz, or up nearly 20% off November’s low of $1,620/oz, rallying in tandem with a sharp drop in the U.S. dollar for the same period over the path of Fed’s monetary policy.

The prospect of smaller rate hikes by the Federal Reserve has pulled out steam from the hawkish Fed-led 2022’s greenback rally, letting the dollar-denominated gold recover toward the $2,000 key psychological level.

DXY, Daily chart

DXY-U.S. dollar index which tracks the value of the greenback against six major currencies, hit a fresh seven-month low of 101.57 on Wednesday, while the yields on the 10-year U.S. bond fell to nearly 3,35%, on hopes of less-aggressive U.S. rate hikes by the Federal Reserve.

Economists expect the Federal Reserve to hike its benchmark borrowing rate by 0.50 percentage points on February 1st; a 0.25 increase will demonstrate a slowing from what has been a blistering pace in 2022, possibly hinting to no more raises or even cuts by year end. The Fed hiked the rate by 0.75 percentage point four straight times last year before approving a 0.5 percentage point move in December.

The yellow metal also gained some traction after a series of weaker-than-expected corporate earnings and U.S. macroeconomic data this week, such as retail sales, and the PPI-Producing Price Index, which drove up the expectations for a lower U.S. inflation reading ahead, and an eventual pivot in the Federal Reserve’s hawkish rhetoric.

Thursday, 12 January 2023 / Published in Commodity Insights

China’s reopening optimism, the hopes for an economic rebound in China together with tight copper supplies, and low global inventories have been driving up the price of the red metal recently, gaining nearly 30% since July 2022.

The China-led large-scale optimism on the metal market has pushed copper prices as high as $4.17 per pound, or $9,18 per tonne on Wednesday, recording their highest levels since mid-June 2022, despite the growing concerns about rising covid-19 cases in China and weakening global manufacturing and construction activity.

Dollar-denominated copper also receives support from the softer U.S. dollar, which has slid to near a seven-month low against major peers as forex traders see the Federal Reserve turning less hawkish after cooler inflation and employment data.

Robust demand for copper:

Metal traders turned bullish on copper in late December 2022, as they believe that Chinese demand for industrial metals will rebound after the country eased most of its anti-Covid measures, improving the demand growth outlook for copper.

According to Chinese state media CCTV, the southern manufacturing hub of Guangzhou plans 1,722 projects in 2023 worth nearly $1 trillion, lifting demand for copper throughout the year.

China is the world’s largest consumer of copper and the resurgence of industrial activity in the country will lift the demand for the red metal at a time when the copper market is experiencing tight supplies, and mining is becoming increasingly difficult and expensive due to the rising operational costs (fuel and raw materials).

Hence, the demand for copper is soaring amid the green transition, as metal is one of the main components for EV batteries and other renewable technologies.

Tight supplies:

On the supply side, prices were pushed further after news that the global copper smelting activity-especially in China and Chile- dipped in December as smelters shut for maintenance after a year of slow activity.

Overall, the global smelting activity for 2022 fell to its lowest level in the six-year history of data from SAVANT, the satellite analytics service Marex launched with Earth-I, tightening further the copper market.

The supply problem is worsened as many of the easily accessible copper deposits have already been mined around the world, while there have been several supply chain disruptions last year due to military and geopolitical instability (Ukraine war, Russian sanctions) or natural disasters in countries that are the major producers of copper (Chile, Kongo, Zambia).

Low copper inventories:

The supporting catalysts for copper prices continue at the stockpile front as well, with stockpiles holing by metal exchanges remaining low after a year when copper production was hit by energy shortages in Europe and China.

All these main catalysts are contributing to a tight supply-demand balance for copper, leading to higher prices and potential shortages in the next years as the falling supply won’t be able to match soaring demand.

Monday, 09 January 2023 / Published in Commodity Insights

The precious metals have extended last year’s rally into 2023, driven by the ongoing weakness in the U.S. dollar, and the falling bond yields on hopes for a less hawkish Federal Reserve in the next months, coupled with safe-haven demand amid fears of a potential economic recession in 2023.

The price of Gold touched the $1,880/oz key level this morning, its highest since early May 2022, while Silver traded above the $24/oz key resistance level, its highest since late April 2022.

Gold prices jumped from $1,830/oz to near $1,870/oz, or up 2% last Friday, boosted by softer U.S. jobs data (U.S. NFP-nonfarm payrolls grew at their slowest pace in a year in December), which pushed up the expectations for a lower U.S. inflation reading this week and an eventual change in the Federal Reserve’s hawkish rhetoric.

The softer NFP reading calmed concerns of the market participants an overheated U.S. employment market will prevent inflation from easing further this year and pushed up expectations that the Federal Reserve will soften its hawkish stance sooner than expected, letting up pressure on gold and other non-yielding assets.

On top of that, the dollar softened further on Monday morning as forex traders turned bearish on the greenback, with the DXY-U.S. dollar index hitting a fresh six-month low of 103.50 this morning while the yields on the 10-year U.S. bond fell to near 3,60%, on hopes of less-aggressive U.S. rate hikes by the Federal Reserve, making the dollar-denominated gold and silver further cheaper for overseas buyers.

The bullish outlook for precious metals is supported by the expectation that the Fed is ready to further slow its pace of interest rate hikes, with most of the traders pricing in only a 25-basis point hike in February, despite the warnings from the central bankers for higher rates for longer to bring back the inflation to Fed’s target of 2%.