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Stalling growth no hindrance for higher commodity prices

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The commodity sector is showing little sign of global growth and demand worries having a negative impact on prices. In addition, over the past week, the Bloomberg Commodity Sport index — which tracks a basket of major commodities — reached a fresh record high, up 38 per cent on the year. The sectors doing the heavy lifting remain energy and grains, having delivered year-to-date gains of 102 per cent and 33 per cent respectively. The industrial metal sector, which slumped by 25 per cent between March and April when Covid-19 outbreaks locked down parts of the Chinese economy, has made a tentative attempt to recover in recent weeks. However, news of fresh lockdowns in Shanghai highlights the risk of a slower-than-expected recovery in demand from the world’s biggest consumer of metals.

Surging demand for consumer goods during the 2020 to 2021 lockdown period, supported by government handouts and rock bottom interest rates, helped drain the supply of many key commodities from metals to energy. In addition, we have seen years of plenty supply of key food commodities reverse with adverse weather and the war in Ukraine turbocharging prices led by wheat and edible oils. These, and other developments, have seen inflation surge to the highest levels in 40 years. As a result, central banks across the world are now hiking rates in order to reduce liquidity and drive down prices through lower activity.

The result is a challenged outlook for global growth — even in the US where a high frequency GDP tracker monitored by the Federal Reserve is now pointing towards increased risk of zero growth in the second half, potentially resulting in a technical recession which occurs when growth turns negative in two consecutive quarters. In addition, the World Bank this past week slashed global growth, warning of 1970’s-style stagflation.

These developments have naturally raised the question of when the phenomenal rally in commodities since the 2020 Covid bottom will pause. Under normal circumstances, elevated commodity prices tend to drive a response from producers in the shape of rising production, which eventually would support lower prices through increased supply. In addition, the prospect of growth and demand slowing would normally solve the problem of high prices.

Crude oil trades near a three-month high, with the front month contracts of WTI and Brent both trading above $120 per barrel. The recent upside extension is being driven by China’s latest attempt to reopen major cities following Covid-19 lockdowns, a development which is likely to increase demand from the world’s biggest importer at a time where the global supply chains remain stretched due to the war in Ukraine. In addition, the Opec Secretary-General said most members are ‘maxed out’, a comment that helps explain why the recent Opec+ decision to raise production by 50 per cent was ignored by the market in the knowledge the group (already 2.5 million barrel per day below target) will continue to struggle raising production.

Natural gas remains one of the most volatile futures markets, and while some sort of nervous stability has emerged in the European market, the US gas market remains highly volatile with strong hot weather-related demand and strong export growth not being met by rising production. As a result, the price of the Henry Hub gas contract reached a 13-year high this past week before temporarily suffering a sharp correction. This, as after a fire at an LNG export terminal in Quintana, Texas, briefly lowered prices for the fuel in the US while lifting Dutch TTF gas prices from a three-month low.

Gold, rangebound for more than a month traded softer after the US published another strong inflation print at 8.6 per cent, a fresh 40-year high, from 8.3 per cent expected, and after the ECB said it would start raising rates from July, thereby joining other central banks in combating rising inflation. However, the less hawkish outcome of the meeting helped send the euro lower versus the dollar, thereby adding downward pressure on bullion.

[Ole Hansen in Head of Commodity Strategy at Saxo Bank]

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