WCU: Covid and inflation dominate the agenda for commodities

WCU: Covid and inflation dominate the agenda for commodities

Ole Hansen

Head of Commodity Strategy

Summary:  The commodity sector traded lower for a fifth straight week with a surging dollar and renewed risk of covid lockdowns adding another dimension to a market already having to deal with surging inflation, tight supply and weather challenges. We take a closer look at the latest developments moving key commodities from crude oil and gas to gold and copper. Also the reasons behind the latest rally in agriculture commodities to a fresh five year high.


The commodity sector traded lower for a fifth straight week with a surging dollar continuing to raise the cost in local currencies of most key commodities. The dollar strength was particularly notable against the euro which dropped to a 16-month low, driven by the rising threat of renewed Covid lockdowns across the continent, punitively high gas and power prices hurting growth, as well as brewing trouble on its eastern borders.

In addition, the market has to deal with surging inflation threatening growth, as well as weather worries and continued bottlenecks in the global supply system driven by labor shortages and port congestions. At the same time, investors have to the weigh the prospect of surging green transformation demand for many key commodities, especially industrial metals, against the risk of a slowdown in China, the world’s top consumer of raw materials.

All of these developments helped create a mixed week which helped drive down the cost of crude oil, fuel products and industrial metals while the agriculture sector went against the trend with the Bloomberg Agriculture Index reaching a five-year high. Precious metals were mixed with gold managing to hold onto the recent gains in response to surging US inflation.

The top performing commodities were once again found in Europe where the Dutch TTF gas benchmark jumped after German regulators suspended the certification process for the controversial Nord Stream 2 pipeline. The delay, which may last until March, combined with a slow recovery in supplies from Russia raised concerns that Europe may struggle to get the supplies needed to get through the coming winter months. As a result, power prices also jumped while the cost of emissions reached a record on the prospect for rising demand for higher polluting coal to substitute any shortfall in gas supplies.

Agriculture: The cost of our breakfast and food in general continues to rise, and following a few months of sideways trading, the Bloomberg Agriculture index, which tracks a basket of major food commodity futures, reached a fresh five-year high. According to the UN FAO, the cost of a global basket of key food items has risen by more than 31% during the past year and with the latest surge primarily driven by coffee, soybeans, wheat and sugar, the prospect for food inflation being a major focus in 2022 has not gone away. The UN FAO will release its index for November on December 2.

There are individual reasons behind the strong gains, but what they all have in common has been a troubled weather year, and the prospect for another season’s production being interrupted by La Ninã developments, a post pandemic jump in demand leading to widespread supply chains disruptions and labour shortages, and more recently, rising production costs via surging fertilizer prices and the rising cost of fuels, such as diesel.

Crude oil was heading for a fourth straight week of losses, driven by the threat of the US releasing strategic reserves and a fresh wave of Covid infections spreading across Europe, thereby forcing several nations to reverse reopening policies which again could threaten economic growth and mobility, the latter cutting fuel consumption at a time when consumers are already fretting at paying the highest prices at the pumps in years.

In addition, the latest monthly Oil Market Reports from the EIA and most recently from the IEA points to a reduced risk of higher prices as moderating demand growth due to the another Covid wave and weaker industrial activity, partly due to higher oil and gas prices, combined with a steady rise in supply will support a balanced market sometime in early 2022.

Brent crude oil was heading for a 4% drop on the week, thereby almost fully surrendering the October gains that was driven by the prospect for increased gas-to-oil substitution demand, especially for products such as diesel, heating oil and propane. Having broken below $80 per barrel, the risk has risen of further losses towards trendline support, currently at $73.

The much talked up risk of $100 per barrel anytime soon has evaporated and a more balanced view has emerged. One that is needed to flush out speculative longs, thereby preparing the market for the next rally. We maintain a long-term bullish view on the oil market as it will be facing years of potential under investments 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.   

Source: Saxo Group

Gold spent the week trading within a relatively narrow range between $1850 and $1870 while awaiting a fresh catalyst following last week’s technical breakout. The impressive rally that occurred despite headwinds from a stronger dollar had started to show signs of stalling with other metals such as silver and platinum both struggling. The renewed risk of Covid-related lockdowns in Europe helped give the yellow metal a fresh bid, with lower bond yields, driven by growth worries helping to offset the mentioned dollar strength. The recent white-hot inflation prints, especially the 6.2% recorded in the US, will likely continue to support gold in its defense against the stronger dollar.

Also, the focus will be on how investors respond via the exchange-traded fund market. Fund managers have increasingly been reducing their gold exposure during the past year as low stock market volatility and rising equity prices reduced the need for diversification and, so far, despite the recent price surge, we have yet to see a pick-up in demand.

In the short term, gold will need a catalyst to drive it higher. If that fails to emerge, there is a risk the metal could reverse lower to challenge but most likely find support in the important $1830-35 area.

Source: Saxo Group

Copper remains rangebound since March and the lack of momentum and conflicting fundamentals have reduced investor interest to the point that the open interest in LME copper futures has fallen to a nine-year low. However, a drop to a five-week low this week was quickly reversed as strong support continue to emerge ahead of $4 per cents in High Grade and $9000 per tons on LME.

The first round election for Chile’s next President will be held on November 21, and given the Chile and its next door neighbor Peru’s high share of global production, the result will be watched closely, given recent speculation that the left leaning candidate will raise taxes on mining companies to promote green hydrogen and reduce social inequality.

In his latest equity update Peter Garnry, our Head of Equity Strategy takes a closer look at the copper sector. He argues that ongoing urbanization in the world driving construction and the green transformation will continue to create a strong demand outlook. With this in mind he highlights six miners with high exposure to copper.

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.