Industrial metals, just like precious metals, received a post-FOMC boost but not before once again fending off another downside attempt with copper temporarily falling to a two-month low. Supporting the recovery was news that Chinese production of aluminum for November slowed due to persistent restrictions on energy consumption, thereby driving increased demand for stocks held at LME-monitored warehouses. Copper meanwhile found support after one of Peru’s biggest mines started winding down production amid community protests hampering output.
Annual outlooks and price forecasts from major banks with a commodity operation have started to roll in, and while the outlook for energy and agriculture is generally positive, and precious metals negative, due to expectations for a rise in US short-term rates and long-end yields, the outlook for industrial metals is mixed. While the energy transformation towards a less carbon intensive future is expected to generate strong and rising demand for many key metals, the outlook for China is currently the major unknown, especially for copper where a sizable portion of Chinese demand relates to the property sector.
Considering a weak pipeline of new mining supply, we believe the current macro headwinds from China’s property slowdown will begin to moderate through the early part of 2022, and with inventories of both copper and aluminum already running low, this development could be the trigger that sends prices back towards and potentially above the record levels seen earlier this year. Months of sideways price action has cut the speculative length close to neutral, thereby raising the prospect for renewed buying once the technical outlook improves.
Crude oil dipped on Friday to trade down on the week as Omicron developments continue to impact the short-term demand outlook. A weaker dollar has been offset by tighter monetary policies potentially softening the 2022 growth outlook further. While Europe is dealing with a worsening energy crisis, milder than normal weather in Asia has led to a less demand for fuel products used in power generation and heating. With the clouded outlook we expect most of the trading ahead of New Year to be driven by short-term technical trading strategies.
With the International Energy Agency, as well as OPEC forecasting a balance market during the early months of 2022, the risk of higher prices may have been delayed but not removed. We still maintain a long-term bullish view on the oil market as it will be facing years of likely under investment with oil majors losing their appetite for big projects, partly due to an uncertain long-term outlook for oil demand, but also increasingly due to lending restrictions being put on banks and investors owing to a focus on ESG and the green transformation.
The EU gas and power market surged to a new record high on Thursday before paring back gains on Friday after Gazprom booked some pipeline capacity. Before then, the Dutch TTF gas future had closed above €140/MWh or $45/MMBtu, more than nine times the long/term average, while German Power traded more than six times higher than the long-term averaged at €245/MWh.
A combination French nuclear power plants temporary shutting down due to faults on pipes, an expected cold snap next week and low flows from Russia continue to reduce already-low inventories. Adding to this is US pressure to apply sanctions on Russia over Ukraine and German regulators saying the Nord Stream 2 gas pipeline may not be approved before July.
The market is clearly driven by fears about a February shortage of gas and with this in mind the market will continue to focus intensely on short-term weather developments as well as any signs of increased supplies from Russia. An improvement in both could see prices suffer a sharp correction as current levels are killing growth, raising inflation while creating pockets of fuel poverty across Europe.