Being such an important input to the global economy, a small weekly loss amid rising growth fears from aggressive central bank rate hikes highlights the current predicament of tight supplies, driven by years of lower investments. These have been caused by historically bad returns, high volatility and uncertainty about future demand, ESG (Environmental, Social, Governance) and the green transformation. Several OPEC+ members, for various reasons, included those mentioned are close to being maxed out. With spare capacity being increasingly concentrated among a few Middle East producers, the prospect for a continued rise in demand over the coming years will be challenging.
Sanctions against Russia and other multiple disruptions have led to the OPEC+ group trailing its own production target by more than 2.5 million barrels per day. The risk of even tighter markets was highlighted by the IEA (International Energy Agency) in their monthly update when it said that world oil supply will struggle to meet demand in 2023. A post-Covid resurgent Chinese economy and tighter sanctions on Russia being the main reasons and, despite emerging growth clouds, the Paris-based agency still expect demand to accelerate by 2.2 million barrels per day to 101.6 million barrels per day, only 0.3 million barrels per day above a recent forecast from the US Energy Information Administration.
Following several failed attempts to break resistance in the $125 per barrel area, Brent instead went looking for support at lower prices. However, once again, the setback proved very shallow, with support being found ahead of $115 – a previous resistance-turned-support level.
Industrial metals suffered a fresh setback as the Bloomberg Industrial Metal Spot Index hit a fresh low for the year – down 28.5% since the March record peak. The peak came just before Covid-19 outbreaks in China (the world’s top consumer of metals) helped trigger a sharp reversal. Between May and early June, the index went through a small recovery phase as China began lifting Covid-related restrictions, thereby boosting the prospect for growth initiatives. However, renewed lockdowns in Shanghai, the prospect of restrictions potentially not being lifted until next year as well as renewed focus on a central bank-driven global growth reversal helped send the sector sharply lower this week.
Aluminium dropped to an 11-month low after US data stoked recession fears. This was while copper drifted lower towards key support in the $4 per pound ($8900 per tons) area, thereby setting up the potential for a challenge at a level from where prices have bounced on several occasions during the past fifteen months. As long as inventory levels in exchange monitored warehouses continue to fall, as opposed to rising given the current softness, we maintain our long held bullish view on the direction of the sector.
A break in copper below the mentioned levels may trigger a temporary downward push which, in our opinion and using Fibonacci’s retracement numbers, could trigger a downward extension to $3.86 or in a worst-case scenario drop of around 12% to $3.50.