Industrial metals were mixed with HG copper trading lower in response to the general loss of risk appetite and continued worries about the outlook for the Chinese property market, as well as the short-term growth impact from surging omicron cases leading to shutdowns across China. Aluminum, one of the most energy-intensive metals to produce, rose as recent supply disruptions added further fuel to expectations of a growing supply deficit this year. Not least considering the outlook for slowing capacity growth in China as the government steps up its efforts to combat pollution, and ex-China producers for the same reasons being very reluctant to invest in new capacity.
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. Not least considering the prospect of the PBOC and the government, as opposed to the US Federal Reserve, is likely to stimulate the economy, especially with focus on green transformation initiatives that will require industrial metals. With inventories of both copper and aluminum already running low, development could in our opinion be the trigger that sends prices back towards and potentially above the record levels seen last 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 traded higher throughout the first few trading days, thereby extending the end of December rally, while also going against the general trend of risk aversity seen across other commodities and asset classes. Supply disruptions in Libya, down more than 400,000 barrels a day compared with 2021, and geopolitical risks associated with rising fuel protests in Kazakhstan, a 1.9 million barrels a day producer, helped off-set any short-term demand worries related to surging virus cases around the world. Not least in China, where its aggressive handling of its worst Covid-19 outbreak since Wuhan could drive some short-term demand weakness.
OPEC+ agreed to maintain the current pace of monthly increases of 400,000 barrels a day and the market, despite the outlook for an emerging supply surplus this quarter, rose with the prospect of several producers not being able to meet their production targets. Besides the prospect of a global supply surplus, according to both the International Energy Agency as well as OPEC, emerging during the early parts of 2022, the futures market is also sending a signal about reduced participation.
The open interest which measures the total exposure, long and short, held by traders in WTI and Brent has fallen to the lowest in more than five years, and since the December 1 low point it has dropped further in recent weeks despite a price rally close to 20%. Perhaps a sign that many investors and traders remain skeptical about oil’s upside potential, at least during the early parts of 2022.
However, despite these signals we 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.
Global oil demand is not expected to peak anytime soon and that will add further pressure on spare capacity, which is already being reduced on a monthly basis, courtesy of OPEC+ production increases. Adding to this the prospect for a resumption of inventory declines into the second half and the risk of higher energy prices keeping inflation elevated, is the most likely route prices will take in 2022.