Watch commodity prices in coming weeks for a good understanding of the chances of the re-emerging bear market rally continuing.
The rally is a bet that the slowing pace of rate rises from the Fed will continue to force the value of the US dollar lower, ending the biggest destabilising factor for commodity prices for much of this year.
The strong greenback has overridden the usual price-influencing factors of supply and demand; will China buy more or not; will OPEC cut or produce more as the dollar has followed the Fed’s aggressive rate rises higher this year, battering commodity prices lower after the big rise.
But the better-than-expected inflation data for October seems to have changed that and the US dollar index, which measures the value of the greenback against a group of major currencies, fell 1.6% on Friday and more than 4% last week – a big five day move.
The Aussie dollar provided a good illustration – regaining the 67 US cent level on Friday for a gain of 3.7% over the five days – also a big move.
Investors now believe that US inflation peaked in June at 9.1% so for now the question is do they buy in to set up a base for a big rebound, or sit and wait for more evidence – especially in the battered tech sector where the losses have been greatest and the future gains could be enormous.
And for commodities that translates to gold, silver and other precious metals, and key industrial metals such as copper which have proven to be a traders delight in recent years.
Of course, factors like economic growth – especially in China and Europe – can’t be ignored, while the continuing Russian invasion of Ukraine will be an ongoing destabilising factor – for good or bad, depending on what side of the supply-demand equation you sit.
Gold, copper, iron ore and other commodity prices took a run last week – partly on the China to re-open story which didn’t happen – Covid cases grew to six-month highs and then the very positive reaction to the better than forecast US consumer inflation data for October on Thursday.
Thermal coal prices though slumped more than 14% last week and will again drop under the key $US300 a tonne on the Newcastle ICE exchange. It fell under the $US300 a tonne level last Thursday,
Iron ore prices, though, could pop back above $US100 a tonne this week if last week’s little run up continues.
America’s producer price inflation data for last month will provide another (smaller) test this week, as will the final round of Chinese economic data.
A confirmed report on Friday that China was relaxing the quarantine rules on inbound travellers (the second such relaxation this year after one in June that was not followed by any other changes) helped keep the upbeat story going after Thursday’s inflation news drive.
Brent and US West Texas Intermediate crude prices both rose on Friday which helped trim the losses for the week to 2.62% for Brent (US95.99 a barrel) and nearly 4% for US crude (ending at $US88.96 a barrel).
Gas prices also eased over the week, especially LNG in Asia and Europe where winter gas supplies now seem assured with mild autumn conditions continuing (as they are in much of China and the US).
Thermal coal prices jumped 3.6% on Friday to $US300 a tonne but the December contract still fell 14.4% in one of the biggest weekly drops for some time.
And the SGX iron ore futures prices closed at $US91.05 a tonne, up around 6% over the week from the previous Friday’s $US85.95 a tonne.
Comex copper prices saw a big rise – up more than 6% to $US3.95 a pound while silver price rose 4.1% to end at $US21.64 an ounce and Comex gold added 5.6% to $US1,766 an ounce.
For oil the outlook is mixed – Friday’s moves capped a week where prices wandered lower as reports from China sent confused messages – first China was relaxing, then it wasn’t, then it was – just for inbound travellers and not for other activities – all the while Covid numbers rose to new six-month highs.
The health of the Chinese economy is of greater concern – Reuters reported that a number of Chinese refiners had asked Saudi Aramco to lower December-loading petroleum volumes, implying that Chinese demand is weakening because of a combination of the lockdowns and slowing consumer spending.
China’s October trade data was definitely a big negative, even though oil imports rose – many of those barrels had been bought a month or more earlier and then locked into a import schedule.
Many of those barrels would have been unwanted by the time they arrived last month.
This week’s production, investment and retail sales data (and especially the property investment and pricing data) will be factors to be taken into account.
At the moment, China alone accounts for almost half of the expected growth in oil demand for 2023 and continuing weak data will be a negative for prices.
China’s new Politburo Standing Committee on Thursday called for “more decisive” measures to curb the spread of Covid, which may lead to additional lockdowns and restrictions.
China’s strict Covid Zero strategy has caused lockdowns and weakened energy demand in China as curbed imports of other commodities.
Nomura reported that more than 10% of China’s total gross domestic product was under some form of lockdown as of last Thursday, up from 9.5% last Monday.
That’s roughly half the levels in June and July but it must be confronting to the new Chinese leadership (well, the old one in President Xi) that he can’t just lockdown the country and Covid goes away with a simple decree or carefully scripted set of comments.
OPEC crude production in October rose 30,000 barrels a day (bpd) to a 2-1/2 year high of 29.98 million bpd.
Wednesday’s report from America’s Energy Information Administration EIA report showed that US crude oil production in the week ended November 4 rose +1.7% to 12.1 million barrels per day (bpd), which is only -1.0 million bpd (-7.6%) below the February, 2020 record-high of 13.1 million bpd.
The EIA though has trimmed its 2023 daily production estimate to below 13 million bpd.
Oil services group Baker Hughes reported Friday that active US oil rigs in the week ended last Friday (November 11) rose by +9 rigs to a 2-1/2 year high of 622 rigs. U.S. active oil rigs have more than tripled from the 17-year low of 172 rigs seen in Aug 2020, explaining the recovery in US crude oil production capacity.
In a bullish point for metals, the London Metal Exchange (LME) says it will not ban Russian metal from being traded and stored in its system because for the most part a significant portion of the market is still planning to accept it in 2023.
The exchange started a discussion paper on the subject in October, asking for market views on a ban.
“The LME does not propose at this time to prohibit the warranting of new Russian metal nor to impose thresholds or limits to the amount of Russian stock permitted in LME warehouses,” the exchange said in a statement on Friday.
“While there is evidently an ethical dimension as to the global acceptability of Russian metal, we believe the LME should not seek to take or impose any moral judgements on the broader market.”
The exchange said in its statement that it will continue to monitor the flow of Russian metal in LME warehouses and to provide transparency it will publish regular reports from January 2023 detailing the percentage of warranted Russian metal in LME warehouses.
With Comex prices eyeing $US4 a pound, the LME price remained above $US8,000 a tonne.
