Commodities hold their breath

The commodity sector continues to consolidate following the September to early October price surge, and this week the Bloomberg Commodity Index traded lower for a third straight week. Investors have become more risk adverse given the amount of incoming data pointing to pausing growth expectations, most notably in China, where a manufacturing slowdown, mounting debt risks in the country’s property sector and nationwide power shortage all point to lower activity. In addition, a recent government-driven collapse in Chinese coal prices have helped support lower prices across some of the most energy-intensive metals led by aluminium.

Crude oil is increasingly showing signs of having entered a period of consolidation and, following a two-month rally which up until recently had lifted the price of Brent and WTI crude oil by close to one-third, it could be argued it was overdue. However, we only expect this phase to be temporary with the strong fundamental reasons which supported the surge not gone away. With this in mind, we still see the risk of even higher prices towards year-end and into 2022.

Some of the reasons why oil prices have softened recently are highlighted below. It is worth keeping in mind that several of these could quickly turn around and become price supportive again.

• The prospect for Opec+ continuing to increase monthly production at a rate of 400,000 barrels per day.

• Stalled Iran nuclear talks will resume on November 29, and in the yet unlikely event of a breakthrough, Iran would be able to ramp up production.

• Stabilising gas prices, albeit at elevated levels, in anticipation of an imminent increase in flows from Russia reducing the recent gas-to-oil boost to fuel prices.

• Renewed worries about another Covid-related demand disruption, not least in China, the world’s biggest importer.

• A seasonal expected increase in US crude oil stocks due to reduced demand from refineries as they go through their annual maintenance season.

• The US government continuing and potentially accelerating crude oil releases from its strategic reserve. During the past two months, they’ve been averaging 1.1 million barrels per week.

• Selling from technical traders and speculators in response to this week’s break below recent support, in WTI most notably the uptrend from August low.

Against these mostly short-term developments, the oil market will still be facing years of potential under investments with oil majors losing their appetite for big projects, partly due to an uncertain long-term outlook for oil demand but increasingly also due to lending restrictions being put on banks and investors due to ESG and the green transformation focus.

Whether the short-term trading range in Brent will be $80 to $85 or potentially some three to four dollars lower, will to a high degree be determined by US action to curb prices, Covid-19 developments and next week by the gas market when we will find out if Russia, as promised, will boost gas supplies to Europe, thereby potential softening prices further.

World food prices hit a fresh 10-year high last month according to the UN FAO which saw their Global Food Price Index rise by 3%. The index, which tracks 95 different price quotes, has risen by more than 30% during the past year with gains seen across all five food sectors. Vegetable oil prices hit a record high last month after rising almost 10%, thereby bringing the annual rise to +74%. Other sectors seeing strong annual gains are sugar (+41%) and cereals such as wheat, corn and rice at 22%. Apart from weather woes and strong demand, the UN FAO also mentioned labour shortages in parts of the world as a driver pushing up the cost of production and transportation of food.