Friday, March 29, 2024 | Ramadan 18, 1445 H
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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

Commodities drop on the darkening growth outlook

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Leading meteorological organisations are warning about the risk of a triple-dip La Ninã event spanning three northern hemisphere winters – a rare occurrence which, according to the BBC, has only occurred twice before. Changing temperatures around the world have led to several climate emergencies in 2022, from historic flooding, above average temperatures and drought. Parts of the world are expected to experience severe weather for the rest of the year and into 2023, as part of a rare "triple dip La Niña" event according to the World Meteorological Organization (WMO).


In Australia, the respected Bureau of Meteorology has declared a La Ninã event is underway and communities in eastern Australia should be prepared for above-average rainfall that may lead to flooding in the coming months. In addition, South America and equatorial Africa could see a repeat of the droughts experienced during the past couple of years. A development that could strengthen concerns about a global food crisis with inventories of several key food items falling to a multi-year low.


In this chilling update, Bloomberg takes a closer look at the rising risks associated with La Ninã – events where waters in the eastern tropical Pacific Ocean are cooler than normal, and waters in the western tropical Pacific Ocean are warmer than normal. This combination causes changes in wind, cloud and pressure patterns over the Pacific. When this change in the atmosphere combines with changes in ocean temperature, it can influence global weather patterns and climate.


These latest developments have added a sense of nervousness to the grains market, the best performing sector this month with all the three major crops of corn, soybeans and wheat trading higher. In their latest World Supply and Demand update, the US Department of Agriculture trimmed ending stocks of US corn and soybeans to a ten and nine year low. Wheat remains supported by Putin’s threat to review some aspects of the Ukraine “grain deal”, which has seen seaborne exports of agriculture products resume, albeit at a much-reduced pace compared with pre-war levels.


Crude oil weakness led by fuel products


Crude oil traded lower in the week, partly driven by losses across fuel products such as gasoline and diesel, but remained within a recently lowered range, with demand concerns once again being the main focus more than offsetting potential supply challenges in the coming months. Growth and demand concerns, as well as the stronger dollar making the cost of fuel increasingly expensive around the world, remains the focus as the market prepares for another growth dampening rate hike from the US FOMC next week.


In addition, demand in China continues to linger after the IEA said the world's largest importer of oil was heading for its biggest annual drop in demand in more than three decades. Meanwhile, the US Department of Energy walked back on its SPR refill stance by saying that it didn’t include a strike price (that was said to be around $80/barrel) and it isn’t likely to occur until after fiscal 2023.


In Europe and increasingly also Asia, elevated prices for gas and power continue to attract substitution demand into fuel products like diesel and heating oil. In addition, the supply side will also be watching the impact of the EU embargo on Russian oil, which will begin impacting supply from December. The IEA in their latest monthly oil market report highlighted the embargo as their reason for lowering Russian supply in early 2023 by 1.9 million barrels per day – a development if not arrested by a peace deal or any other political development in Moscow could see the market turn increasingly tight again. In addition, the current lull in Chinese demand look set to reverse once lockdowns are lifted and, together with the risk of supply tightening, we see potential weakness in Q4 being replaced by renewed strength next year.


Ole S Hansen, Head – Commodity Strategy, Saxo Bank


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