The agriculture market stayed relative immune to these developments with the Bloomberg Agriculture index hitting a fresh seven-year high led by continued gains in coffee and the key crops of wheat, corn and soybeans. There are individual reasons behind the strong gains recently, 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. On December 2, the UN FAO will publish its monthly Food Price Index, and following gains during November, the index is expected to reach a fresh ten-year high.
The top performing commodity, apart from coffee, was iron ore which despite weakness on Friday had managed to recover from a recent slump on signs the Chinese steel industry was picking up speed again, thereby driving demand for the most China-centric of all commodities. Over in Europe, the energy crisis continued with punitively high gas and power prices driven up the cost of the benchmark EU emission futures contract rising to a record high, both in an attempt to support demand for cleaner-burning fuels such as currently-in-short-supply gas and to offset increased demand for higher polluting fuels like coal. With gas flows from Russia not yet showing any signs of picking up, the market did find some comfort from the inflows of LNG reaching a six-month high.
Crude oil was heading for a fifth straight week of losses, with the move primarily driven by worries that the new South African virus strain could once again led to lockdowns and reduced mobility. The Stoxx 600 Travel and Leisure Index has lost 16% during the past three weeks with renewed lockdowns in Europe potentially spreading to other regions. Before then, the US coordinated release of crude oil from strategic reserves had driven prices higher in anticipation of a countermove from OPEC+.
The OPEC+ alliance called the SPR release “unjustified” given current conditions and as a result they may opt to reduce future production hikes, currently running near 12 million barrels per month. The group will meet on December 2, and given the prospect for renewed Covid demand worries adding to the assumption of a balanced oil market early next year, OPEC+ may decide to reduce planned production increases in order to counter and partly offset the U.S. release.
With these developments in mind, the only thing oil traders can be assured of is elevated volatility into the final and often low liquidity weeks of the year. Having broken below the July high at $77.85, little stands in the way of a revisit to trendline support from the 2020 low, currently at $74.75.
However, we maintain a long-term bullish view on the oil market, although now potentially delayed by several months or quarters, 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.