Commodities face a daunting set of risks in the final stretch of a turbulent year, from demand disruption and Russia’s escalation in Ukraine to extreme weather and deep policy uncertainty in China.
Bloomberg’s raw materials gauge just tumbled to an 8-month low on broad fears of a global economic slowdown. But the fourth quarter carries plenty of challenges for both supply and demand that could drive fresh volatility and greater divergence between commodities. Currency swings loom large, and the long consequences of Russia’s attack on Ukraine are still unfolding across energy, metals and crops.
In the near-term, oil traders are focused on OPEC’s expected new production cuts, while gas markets will be on alert as Moscow escalates tensions with Europe. Hurricane Ian’s impacts are under scrutiny, while China is heading off for a week-long public holiday as the pivotal Communist Party congress looms in mid-October.
Looking further ahead: here’s a rough guide to major commodities themes for the rest of the year.
A Hard Winter
Will Europe’s efforts to shore up fuel supplies and reconfigure gas markets be enough to avoid a debilitating energy crunch? European Union Energy Ministers are gathered in Brussels to agree emergency measures on tackling a crisis that could deepen in coming months. There are already fears that they are not doing enough, even as mysterious undersea blasts at the Nord Stream pipeline add to jitters over energy security.
Europe’s energy turmoil will be top of mind at a conference in London from Tuesday featuring senior executives from Shell, Vitol, E.ON, and TotalEnergies. On the plus side, the region’s gas stockpiles are higher than normal for this time of year, at about 88% of capacity. But much depends on the severity of the winter: a deep freeze will quickly erode inventories, pile pressure on governments for tougher controls on demand and prices.
Crude Cuts
Oil is capping its first quarterly decline in more than two years on demand fears and a rampant dollar, and analysts appear deeply divided on what’s next. A pivotal event happens next week as OPEC and its allies discuss another potential production cut to fight slacker consumption and sinking prices. Some market watchers say the cartel could go for an outsize cut -- perhaps as much as one million barrels -- to deliver a “circuit breaker” for a flagging market.
While Standard Chartered points to a looming “large surplus” of oil, and top trader Trafigura Group sees weakness persisting in the near term, Goldman sees markets tightening as consumers switch from super-expensive gas to oil. Supplies could also narrow as an EU embargo on Russian oil approaches, according to the International Energy Agency. Volatility seems guaranteed.
Beijing Blues
Chinese demand remains a key uncertainty for everything from oil to copper and food. While there have been hints of optimism in recent days, it’s not clear that a muted economic picture will change much even after the Party Congress. President Xi Jinping is highly likely to clinch a third term and reshuffle his top team. That should free up more space for policy maneuvers, but clear shifts are unlikely to emerge before next year.
Demand for metals including copper and steel may show some incremental improvement as infrastructure spending picks up. But it’s the property crisis that’s driven iron ore prices to a long stretch of monthly declines. Beijing’s recent moves to support housing will provide only limited support, and deleveraging real estate remains a signal priority for the government. And on the Covid Zero policy that’s hampered fuel demand, expectations remain low for an easing of restrictions any time soon.
Crops
The United Nations delivers its latest snapshot of global food prices next Friday. The index has fallen every month since a record in March, but food inflation is still elevated and threats to crops remain. The future of the “safe corridor” deal for Ukraine’s exports looks very fragile ahead of its expiry in November, and President Vladimir Putin’s saber-rattling about his nuclear arsenal hint at more dangerous -- if still remote -- outcomes in the breadbasket of Europe.
“We now expect lower supply of grains over the coming months as the Russia-Ukraine war continues to reduce Black Sea exports and extreme weather conditions mean global stocks have been drawn down,” Capital Economics wrote in an emailed note.
Metal Mania
Aluminum’s biggest-ever price spike this week was an interesting twist at the end of a bleak quarter for metals. Bloomberg News reported that the London Metal Exchange will start consultations over a potential ban on Russian metal. While “no action” is an option for the LME, even the launch of talks is a change in tack, and shows how Russia’s war on Ukraine could yet wreak more havoc.
Goldman noted “the geopolitical situation does not incentivize delisting” of metals from the world’s biggest trading platform. But geopolitics are looking fraught, with Putin saber-rattling about his nuclear arsenal as Russia moves to annex Ukraine territory. At the very least, the LME move casts new uncertainty over supply -- especially for aluminum, but also for nickel and copper.
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