These concerns were discussed at a 121 Mining Investment event in Melbourne, as concerns grow that the world will not be able to produce enough copper, lithium, aluminium, and other metals vital for electrifying the world. In an update from the event, Reuters wrote that most speakers made the same point: there is not enough production to meet anticipated demand, there are not enough projects in the pipeline, and even when new mineral deposits are discovered, the regulatory and financial barriers to developing them take years to navigate.
Overall, however, with multiple uncertainties from recession risks, the direction of the US short-term rates, the dollar and not least developments in China, our expectations for higher industrial metal prices will likely not materialise until answers are found to some of these questions, potentially not until later this year or early next year.
Gold remains challenged in the short-term as peak rates are delayed.
Gold was heading for its biggest weekly drop in almost four months after recent weakness extended below $1950 following reports that the US economy continues to show resilience and while inflation shows signs of becoming sticky at a level too high for the FOMC to ignore – thereby raising the risk of further rate hikes and with that a postponement of a gold supportive peak rate situation. An upward revision to US Q1 GDP, lower-than-expected jobless data together with a pick up in inflation and consumer spending saw traders increase bets on a July rate hike while the prospect for rate cuts this year continued to evaporate. Support is currently found at $1933, while a break back above $2000 will be needed to improve sentiment.
Crude oil rangebound ahead of June OPEC+ meeting
Crude oil prices trade rangebound and considering the recent news flow which, on balance, has been mostly price negative, it may indicate the month-long sell-off has run its course with consolidation the focus ahead of a bounce back later.
News flow has primarily centred on recent dollar strength, as the hike or no hike debate attracts increased attention. In addition, the US debt debacle, recession risks and a weaker than expected Chinese recovery have also played their part. However, with traders already holding the weakest exposure for more than ten years in the five major crude oil and product futures, one may argue that these potential headwinds are now close to being fully priced in. In addition we are seeing refinery margins, led by gasoline, starting to pick up following the April slump, a development that bodes well for crude oil demand going forward.
In the week to May 16, the combined gross short in WTI and Brent, held by money managers and other reportables, reached a near two-year high at 233 million barrels – marking a 111 million barrel increase in the last five weeks and 40 million barrels higher than the gross short that was registered ahead of the April 2 production cut. The return of short-sellers has once again left the market exposed to upside moves on any sudden change in the news flow – such as the response from Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman whom, when asked about the involvement of financial-commodity traders, once again said the they should “watch out”.
His comments highlight growing unease about the weakness seen during the past month, some of which has been driven by the return of these short sellers. His comments helped lift prices before a sudden turnaround after Russia’s Deputy Prime Minister Novak said OPEC+ was likely to stick to current production targets at their June meeting. Overall, the crude oil market is likely to remain rangebound with sharply lower prices unlikely to go unnoticed by OPEC while the upside potential can only be achieved once the economic outlook becomes clearer. In Brent, $80 remains the big level to break before talking about a change in direction.
Corn futures pop on dry US soil conditions
Corn futures in Chicago are on track for their biggest weekly rally in almost a year as dry weather threatens emerging crops in the US, the world’s biggest producer. Cool and dry weather favours planting of the remaining corn and soybean acreage, but lack of topsoil moisture is becoming more apparent. The July front month contract trades up 7.3% this week to $5.95/bushel, with short covering from hedge funds, who often concentrate their activity at the front and most liquid part of the futures curve, and providing some additional positive momentum. As a result, the December contract, which represents the crop that is being planted this spring for harvest in the fall, ‘only’ trades up 5% on the week.