WCU: Fuel market surges on China order to “buy at any cost” WCU: Fuel market surges on China order to “buy at any cost” WCU: Fuel market surges on China order to “buy at any cost”

WCU: Fuel market surges on China order to “buy at any cost”

Ole Hansen

Head of Commodity Strategy

Summary:  The main story in commodities remains the continued surge in fuel prices led by gas and coal. Low stockpiles of most fuels across the world, and limited time left to replenish stocks before the peak demand season, has left consumers around the world increasingly exposed to a supply crunch should we end up with a colder than normal winter. Adding to the unease this week was an order from the Chinese government to state owned energy companies to secure supplies at all costs.


The commodity sector saw another week of extreme price developments with the impact of the Chinese and European power crisis reverberating through global energy and commodities markets. In addition, the market had to deal with a rising dollar which, together with rising fuel costs and rising funding costs through higher US Treasury yields, could all end up having a negative impact on growth and stock market valuations. Developments that risk driving some economies towards stagflation which is defining a period of inflation combined with slowing growth.

This combination, which also includes supply-chain bottlenecks and regulatory risks emanating in China, helped send global stock markets to their biggest monthly loss since March 2020, thereby ensuring a rocky start to the final quarter. A quarter which increasingly is at risk of seeing earning downgrades from companies getting hurt by rising input costs, the mentioned supply bottlenecks and fading consumer demand.

The main story in commodities remains the continued surge in fuel prices led by gas and coal. Low stockpiles of most fuels across the world, and limited time left to replenish stocks before the peak demand season, has left consumers around the world increasingly exposed to a supply crunch should we end up with a colder than normal winter. With gas and coal trading at very elevated levels, we are now seeing the next stage of this energy crunch with crude oil prices rising as well. Brent crude oil traded above $80 for the first time in three years this week on the prospect for increased substitution demand for oil-powered generation.

Concerns about fuel shortages this winter increased further after China’s Vice Premier Han Zeng ordered the country’s top state-owned energy companies to secure supplies for this winter at all costs. China is, just like the rest of the world, running low on fuels to get them through the winter. The central bank and government-sponsored overstimulation of the global economy during the past 18 months led to a surge in demand for consumer goods, many of which are produced in China.

The result has been surging shipping costs, supply chain disruptions and a jump in Chinese electricity demand as production surged to meet all the additional orders from consumers around the world. In order to mitigate this emerging energy crises, several regions have been forced to curtailing power to the industrial sector. Over in Europe, we are faced with some of the same problems resulting in record-high prices for gas, power and emissions used to offset the higher usage of coal.

Industrial metals traded lower with the rising cost of fuel and signs of a slowdown in China hurting sentiment. The Bloomberg Industrial Metal Index retraced to a five-week low with HG Copper testing but once again finding support ahead of the key area around $4 per pound. Widespread power shortages in China and the debt crisis within the property sector, together with regulatory risks and anti-pollution measures, have reduced industrial activity, thereby potentially lowering the short-term demand outlook for copper and other metals such as nickel, tin and zinc. The mentioned developments helped drive the first contraction in Chinese Manufacturing PMI in 19 months during September.

Precious metals: Gold had a reasonably good week, at least on a relative measure, considering the limited negative impact of a surging dollar and rising Treasury yields. Some mid-week weakness was led by silver which temporarily dropped below key support in the $22 area. With close to half of the overall silver demand coming from industrial applications, the current worries about a Chinese slowdown has hurt sentiment more than gold as investors look for hedges against rising price pressures seen almost everywhere, most recently in the surging cost of energy.

Gold is not only a metal which tends to respond to movements in the dollar and yields, both of which continue to be price negative. It is also used by fund managers as a hedge or diversifier against risks across financial assets, and following a year of fading interest due to financial assets and market valuations trading near all-time highs, we may see this trend start to reverse given increased uncertainty about the short-term direction of the global economy and with the stock markets and volatility.

For investors believing the current market confidence and subdued inflation outlook to be misplaced, signaled through the bond market, the cost of buying insurance against it continues to get cheaper with gold presently trading near the lower end of its year-long range. Over the coming weeks we will watch yield developments closely with rising yields potentially raising renewed uncertainty across other asset classes, such as interest rate-sensitive growth stocks. Also, the continued surge in the cost of most energy sources may ultimately support our non-transitory views on inflation, and provide gold with the support needed to challenge and eventually break above $1835.

Source: Saxo Group

Crude Oil traded close to unchanged on the week with the prospect of rising demand, not least from consumers substituting expensive gas for refined products such as fuel oil, diesel and propane, being offset by weakness in the stock market, and the first weekly rise in US crude stocks in eight weeks. Responding to these developments, Brent crude initially rose above $80 for the first time since October 2018 before running into profit as risk appetite soured. Rising stock market volatility may also play a role potentially forcing funds targeting a certain level of volatility to make an across-the-board reduction in exposure in order to stay within their mandate.

The Chinese Government’s order to buy energy at all cost having a muted impact on crude oil given the level of state petroleum reserves which could be used if necessary. The focus now turns to the early October OPEC+ meeting with the market speculating the group could opt to hike production by more than the already planned 400,000 barrels per day.

Source: Saxo Group
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 is not intended to and does not change or expand on this. 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/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)


Boulevard Plaza, Tower 1, 30th floor, office 3002
Downtown, P.O. Box 33641 Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. 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

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.