Commodities traded mostly higher during a week where the focus altered between optimism over China reopening and an extended rate hike cycle in the US having a negative impact on global growth and demand. In addition, the energy market continues to focus on the price-supportive impact of Opec+ production cuts and upcoming EU sanctions against Russian crude sales. Overall, the Bloomberg Commodity Index which tracks a basket of major commodity futures spread evenly between energy, metals, and agriculture, traded higher by more than 4% near a three-week high.
Following Wednesdays expected 75 basis point rate hike, the fourth in this cycle, Fed Chair Powell went on to deliver what turned out to be a temporary hammer-blow to sentiment across markets after saying that any talk of a pause is “very premature”. However, it is also clear that the FOMC will be economic data driven, and any signs of weakness could alter this view after the Fed in its statement raised the prospect of pausing to assess the” cumulative tightening” impact.
The time lag between rate hikes and the economic impact remains a worry that the bond market is trying to price through an increasingly inverted US yield curve. This week, the 2–10-year spread jumped to -61 basis points, the most inverted we have seen it since the 1980’s and it highlights the risk of a central bank policy mistake leading to weaker growth without successfully managing to get inflation under control. These developments helped support gold and silver, both bouncing strongly on short covering following an initial and failed attempt to drive them lower through key support.
Crude oil remains on track for a third week of gains with Brent and WTI crude oil both approaching the top of their established ranges with the focus on the supply impact of Opec+ production cuts and upcoming EU sanctions against Russian oil as well as a tight product market while the demand side is torn between the prospect of a pickup in Chinese demand once Covid restrictions are lifted and worries that global economic activity will continue to weaken in the coming months.
While crude oil has been mostly rangebound since July, the fuel product market has continued to tighten as supplies in Europe and the US have become increasingly scarce, thereby driving up refinery margins for gasoline and distillate products such as diesel, heating oil, and jet fuel. The focus in terms of tightness remains on the northern hemisphere product market where low stocks of diesel and heating oil continue to raise concerns. The market has been uprooted by the war in Ukraine and sanctions against Russia, a major supplier of refined products to Europe. In addition, the high cost of gas has supported increased switching activity from gas to other fuels, especially diesel and heating oil.
This tight market situation is now being made worse by the Opec+ ill-timed decision to cut production from this month. While the continued release of US (light sweet) crude from its strategic reserves will support the production of gasoline, the Opec+ production cuts will primarily be provided by Saudi Arabia, Kuwait, and the UAE – all producers of the medium/heavy crude which yields the highest amount of distillate.
As long as the product market remains this tight, the risk of seeing lower crude oil prices — despite the current worry about recession — seems to be low so we maintain our forecast for a price range in Brent for this quarter between $85 and $100, with the tightening product market increasingly skewing the risk to the upside. (The author is Head of Commodity Strategy, Saxo Bank)