By Daniel Hynes
Commodity markets were mixed as signs of tightness via lower inventories was weighed against the gloomy economic backdrop. Sentiment in China’s markets remains positive amid ongoing rumours of an easing in COVID-19 restrictions.
Crude oil rallied amid signs of further tightness. Gasoline inventories in the US tumbled to their lowest level since November 2014, falling 1,257kbbl last week, according to EIA data. Distillate inventories on the East Coast fell to their lowest seasonal level ever. Overall, crude oil inventories fell 3,115kbbl last week. Once again, the strong level of exports was largely behind the drawdown in inventories, as global markets experienced supply side issues. However, US domestic oil production was also lower. With the deadline for Russian oil bans approaching fast, markets are increasingly focused on supply side issues. 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 only half that amount as most producers were already struggling to hit their previous quotas. This should keep supply tight over the coming months.
Supply risks also drove European natural gas prices higher. LNG imports have helped ease concerns of supply shortage and helped fill storage facilities much earlier than expected. That reliance has created some concern about a thin cushion of global supply. Freeport LNG was expected to resume operations this month following a fire earlier this year. However, it has yet to submit a restart plan to federal regulators, stoking speculation it will be delayed further. Dutch front month futures surge as much as 17% before settling 8.3% higher at EUR125.86/MWh. Demand is weak, as warm weather has delayed the start of the heating season, but regulators are still preparing for winter shortages. Germany is expanding aid to consumers, and the UK is testing blackout emergency plans. North Asia LNG prices were largely unchanged amid lacklustre buying. Many importers continue to wait for signs of colder weather before making additional purchases. The spectre of further delays to Freeport LNG’s restart could shift that view, particularly if China returns to the market in a meaningful way. Japan remains concerned about shortages, asking households to conserve energy over winter.
Copper drifted lower as investors braced for another 75bp Fed hike. The rest of the base metals complex pushed higher amid a brightening outlook in China as speculation about an easing of COVID-19 policies persists. Reports that one of China’s vaccine makers were adopting its inhaled product helped keep sentiment positive following yesterday’s rally. This was despite China’s National Health Commission calling for vigilance to prevent and control the pandemic and to firmly adhere to the zero-COVID strategy.
Iron ore extended gains amid the speculation of easing COVID restrictions. The market has been under pressure since the National People’s Congress, where there was no additional support announced for the real estate sector. BHP mirrored these concerns, warning that any recovery in the housing market is likely to lag any recovery in the broader economy. Still, the Australian miner expects China to be a relative source of stability and sees Europe and the UK heading for a recession.
Gold experienced a wild ride following the FOMC meeting. Prices rallied after the Fed announced its rates rise but hinted at a slower pace at future meetings. However, prices gave up those gains after Powel doused hopes of a pivot
Data source: Commodities Wrap