The commodity sector, led by crude oil and fuel products, continued to show strength despite ongoing concerns that central banks’ battles against inflation through aggressively hiking rates will tip the global economy into a deeper slowdown than already seen. Not least in Europe, where the “hybrid war” with Russia has driven gas and power prices sharply higher. This is while there are raised concerns ahead of the February 2023 implementation of an embargo on fuel supplies from Russia.
While US inflation is expected to start slowing soon, thereby providing some relief to global economies hurt by a strong dollar, the market will have to wait at least another month – after the September print came in higher than expected. With US consumers remain in good shape and are still spending, the global economy will continue to be challenged by the US FOMC hiking into strength while others are being forced to hike into weakness – supporting the strength of the dollar. This will be the case until we reach peak hawkishness from where US yields – we focus on two-year notes, currently at a 15-year high – and the dollar begin to recede.
Russia’s war in Ukraine and the actions taken by the West to counter Putin’s behaviour remain a key source of support for several commodities, including wheat, aluminium and diesel, thereby offsetting the potential risk of a slowdown in demand. In addition, the contentious decision by OPEC+ – led by Saudi Arabia and Russia – to cut production, despite the risks of such action further damaging the global growth outlook, has supported a strong recovery in crude oil.
Meanwhile, the industrial metal sector remains stuck near an 18-month low as Chinese lockdowns have hurt demand. However, during the past couple of weeks, the market has become more balanced. Lower visible stock levels in China indicated a pick-up in demand, while the risk of sanctions against Russia’s industrial metal industry could see supply for aluminium and other metals drop.
The Chinese Communist Party meets on October 16 at its twice-a-decade National Congress. The decisions being taken will be watched closely by commodity traders considering the importance of China as the world’s biggest consumer of raw materials. Apart from the general risk to global growth, another source of price weakness remains China. This is where the government’s firm belief in its zero-Covid policy has reduced growth and consumption, while an ongoing property crisis has also clouded the economic outlook.
The focus will be on General Secretary Xi Jinping’s speech on October 16 when he presents the Work Report of the 19th Central Committee. The market is looking to the leadership and the report for a route that will steer the nation out of its current economic slump. However, any hopes that China might loosen its zero-Covid measures received a setback this past week when the People’s Daily newspaper defended the strategy three days in a row. Nevertheless, the market will be looking for additional economic support and stimulus, primarily towards infrastructure and energy transition projects, all of which are supportive for the industrial metal sector.
Multiple uncertainties, as seen through the continued level of volatility and falling liquidity, will continue to impact most commodities ahead of the year end. While the recession drums will continue to bang ever louder, the sector is unlikely to suffer a major setback before picking up speed again during 2023. Our forecast for stable or potentially even higher prices led by pockets of strength in key commodities across all three sectors of energy, metals and agriculture will be driven by sanctions, upstream cost inflation, adverse weather, low investment appetite and continued tightness across many key commodities from diesel and gasoline to grains and industrial metals.
Crude oil traded softer on the week in response to renewed demand concerns, but still higher on the month after OPEC+’s decision to cut their baseline production by 2 million barrels per day from November. The decision was heavily criticised by consuming nations for being premature and ill-timed and it triggered an unusually strong rebuke from the International Energy Agency who, in their monthly oil market report, said the cut would increase energy security risks worldwide, thereby leading to higher prices and volatility, and potentially ending up being the tipping point for a global economy already on the brink of recession. (The writer is Head of Commodity Strategy – Saxo Bank)