By Daniel Hynes
Commodities rallied on reports that China will ease COVID-19 restrictions. Speculation of a less hawkish Federal Reserve also boosted sentiment.
Copper led the base metals sector higher on speculation that Beijing is preparing to ease China’s stringent COVID-19 rules. News that a committee is being formed to assess scenario on how to exit from its zero-COVID strategy swirled around the market, initially sparked by unverified social media posts. Chinese Foreign Ministry spokesman Zhao Lijian said he was unaware of such a move when asked during a regular press briefing. The market’s reaction to the news shows the extent that the strategy is having on sentiment. Metals have recorded seven consecutive monthly declines fuelled by concerns over weak demand. This is despite ongoing supply issues keeping the base metal markets tight. Copper inventories on exchanges are currently at only 1.95 days of supply, largely due to such issues. Aluminium prices were also supported by reports that smelters in Henan will halt about 110kt/y of capacity during winter due to weak margins.
Sentiment in the iron ore was also boosted by the speculation China is looking to ease COVID-19 restrictions. Prior to that, futures had been under further pressure amid concerns of weak demand. The China Iron and Steel Association said that apparent steel consumption had fallen 4.2% in the first nine months of the year. This comes as the traditionally busy construction season spanning September and October comes to a close.
Gold rebounded as the USD weakened ahead of the FOMC meeting. The move was sparked by speculation that the US Federal Reserve will soon slow down its aggressive monetary tightening. While swap markets are still pricing in a 75bp hike, some strategists in the market believe the end of the Fed’s rapid tightening is hearing an end. Gold rose almost 1% to close just below USD1650/oz.
Crude oil also gained on the China news, with a weaker USD also supporting prices. Potential changes to China’s COVID-19 policy could have significant implications for oil demand. Ongoing restrictions and lockdowns have weighed on demand. This comes amid persistently high inflation which has seen consumers cut back on travel. Gasoline demand in the US has weakened in recent months, and still remains below 2019 levels. The market is also facing significant supply side issues in coming weeks. This week OPEC is scheduled to cut output following its meeting in September. The 2mb/d reduction agreed to at the meeting is likely to be nearly half that amount as most producers were already struggling to hit their previous quotas. European sanctions on Russian oil is also set to kick in on 5 December.
European natural gas extended recent falls as another spell of warm weather delays the heating season. This could persist through to mid-November, according to forecaster Mazar. Fellow forecaster also expects no cold spells in November. This has left inventories in a good shape, with Europe’s storage facilities nearly 95% full. In Germany, they have reached 99%, according to Gas Infrastructure Europe.
North Asia LNG spot prices pared losses after Shell increased bids for a delivery cargo into China. Nevertheless, the market is in a wait-and-see mood, as participants cautiously monitor weather in the coming weeks. Some traders say there is ample supply over winter; however, there are others saying there are limited suppliers able to offer cargoes. Japan still remains concerned of shortages, asking households to conserve energy over winter.
Data source: Commodities Wrap