Industrial metals prices weighed down by trade, demand fears Industrial metals prices weighed down by trade, demand fears Industrial metals prices weighed down by trade, demand fears

Commodity Weekly: Energy and metals diverge ahead of year-end

Ole Hansen

Head of Commodity Strategy

Summary:  The commodity sector has started December with a focus on two major developments driving energy and metals in opposite directions. Crude oil has slumped while copper at the other end has climbed with the difference being driven by diverging growth expectations in China and the rest of the world


The commodity sector started December with a focus on two major developments driving energy and metals in opposite directions. Crude oil has slumped by more than 10% while copper at the other end has climbed 3% with the difference being driven by diverging growth expectations in China and the rest of the world. Growing concerns about the economic outlook for the US, Europe and elsewhere have triggered an exodus out of long-held positions benefitting from higher energy prices while the easing of strict virus curbs in China has given a boost to China-centric commodities from copper and iron ore to soybeans.

Next week the US Federal Reserve is widely expected to deliver a 0.5% rate hike, thereby ending a run of four 0.75% increases. The meeting comes at a time when the market increasingly has become worried about the economic outlook heading into 2023. A development that has driven a gold and silver supportive drop in US ten-year yields back to 3.5%, while the yield curve inversion has reached another 40-year extreme. The agriculture sector meanwhile trades softer on the month with gains in soybeans and sugar being more than offset by losses in wheat, coffee and livestock.

Industrial metals receiving a boost from China reopening hopes

While the energy sector traded lower on concerns about the global economic growth outlook, industrial metals took comfort from the potential for an economic rebound in China, the world’s biggest consumer of metals, after the country continued to loosen Covid-19 controls while rolling out several measures designated to support the beleaguered property sector.

The Bloomberg Industrial metals index trades up 5% on the month so far with gains being led by zinc and copper with iron ore also seeing a strong rebound. While Dr. Copper increasingly in recent years have responded to the health of the Chinese economy, more than the global economy, the strength seen this past month remains impressive. Not least considering an expected supply surplus next year as mine supply is expected to increase and the global economy is expected to go through a soft patch.

However, the market is currently behaving as if the mentioned increase in mine supply may end up weaker than expected, and if that turns out to be correct, the market will instead look towards an emerging supply deficit in the following years supporting prices as renewables related demand picks up speed across the world. Exchange monitored stock levels in New York, London and Shanghai remain near a multi-year low and without the expected increase in mine supply, the shortfall may emerge sooner than currently being priced into the market.

For the second time in a month, HG copper has returned to challenge resistance around the 200-day moving average, currently at $3.925 per pound, with a break above raising the prospect for the metal breaking back above $4, a level that provided support for more than year up until June when renewed China lockdowns saw it tumble below.

Source: Saxo

Wheat looking for a floor; Soybeans supported by China demand

The benchmark wheat futures contract traded in Chicago briefly touched the lowest level since October 2021 before finding support around $7.25 per bushel. The Bloomberg wheat index is currently down close to 10% on the year, after surging around 65% back in March when Russia’s invasion of Ukraine led the panic buying from consumers worried about supply disruptions. 

The price weakness seen since October has been driven by a better-than-expected production outcome from the Northern Hemisphere harvest, especially from Russia. In addition, Ukraine grain export corridor has provided a great deal of relief regarding the availability of high protein wheat for human consumption. Despite floods, Australia is expected to produce a bumper year of crops including record wheat production. All developments posing tough conditions for US exporters already dealing with reduced competitiveness from the strong dollar. Despite the end of year weakness, the price of Chicago wheat remains around a third above the recent average. Soybeans meanwhile has been supported by strong demand led by top importer China, with the prospect for a reopening adding some additional support this past week.

EU gas prices remain subdued despite demand spike from freezing weather

Demand for gas is spiking with the arrival of unseasonably wintry weather in Northwestern Europe likely to spread into continental Europe next week. However, a very mild autumn and start to the winter not only helped delay the beginning of the withdrawal season but also helped ensure a rapid inventory buildup. As a result, European gas inventories at 1,000 TWh are currently 30% above the level seen this time last year.

While elevated storage levels will provide a buffer, they are nowhere near sufficient to get Europe through what may turn out to be a colder than normal winter. With that in mind imports from Norway and via LNG needs to remain elevated and following months of demand weakness from China, easing lockdowns may increase competition for LNG from Asian buyers. Much therefore hinges on consumers’ ability to keep demand in check, primarily by reducing heating in order to conserve supplies.

Following a period of stable trading around €100/MWh, Dutch TTF benchmark gas has moved higher to trade around €140/MWh, but still well below the panic levels above €300 that were reached around August time when Russia cut supplies through its major pipelines supplying gas to Europe. Power generation from wind turbines meanwhile is creating a great deal of volatility given its unpredictability. The need for higher gas usage when the wind speed slows has seen the cost of power surge higher during the past couple of weeks. An example being one-month German power which briefly traded above €400/MWh this week, a doubling in price during a two-week period.

Crude oil dropped to a one-year low with Brent crude briefly trading below $76 and WTI below $72, a loss of more than 10% so far this month. A weakening macroeconomic outlook which has seen the US yield curve inversion extend to levels signaling an incoming recession, has overshadowed the EU embargo on Russian oil and the prospect of a pickup in demand in China as lockdowns continue to ease. Short-term technical traders looking to squeeze existing longs remain in control as the overall level of participation continues to fall ahead of yearend. Next week Russia will announce how it intend to counter the introduced price cap with the risk of a production cut potentially adding fresh support to the market ahead of what looks like a challenging 2023 where supply worries in our opinion will keep prices elevated, despite the risk of lower demand.

Precious metals led by silver, given its link to rising industrial metals, trade up on the month supported by falling treasury yields and a weaker dollar amid worries about an incoming economic slowdown. The market will focus on next Wednesday’s FOMC meeting, and prior to that the release of November CPI data on Tuesday. The metals have both seen a shift in sentiment during the past month with the selling into strength strategy, adopted for months, being replaced by one of buying into strength. In gold we will be looking out for a challenge at key resistance at $1808 with a break setting up the potential for a further gain into 2023.

This week we published Saxo’s annual batch of Outrageous Predictions, titled “2023: The War Economy” and among the ten OP’s we included one that argues that under an extreme set of circumstances, gold could reach $3,000 per ounce in 2023.

Enjoy

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Support Centre
For existing clients, please click here to request support via the Support Centre.

Have a question about our products, platforms or services? Visit the Support Centre to find answers for our most frequently asked questions. If you are still unable to locate an answer to your question, you will also find contact details for your local Saxo office to speak with a representative.

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.