By Daniel Hynes
Fears of weaker demand gripped commodity markets, pushing the metals and energy sectors lower. Slightly weaker USD and safe haven demand helped push the precious metals sector higher.
Crude oil extended losses as concerns of weaker demand weighed on sentiment. This week’s EIA report that showed US stockpiles of gasoline rose by 3.5mbbls last week continued to hang over the market. This has been driven by weaker demand, despite being in the middle of the US driving season. At 8.52mb/d, demand is at its lowest seasonal level since 2008, as high gasoline prices take their toll on consumers. This has subsequently weighed on US gasoline crack spread, which has halved from its peak in early June to below USD30/bbl. This comes as some supply side disruptions ease. Libya’s National Oil Corporation said that crude output will recover to 1.2mb/d in about a week to 10 days from the current level of 700kb/d.
European gas gained as the Nord Stream pipeline restarted slowly. Gas flows from Russia to Germany are at about 40% of capacity after it returned from 10 days of schedule maintenance on Thursday. The resumption eased fears that gas flows would not resume at all; however current flows remain insufficient to fill storage facilities prior to the peak winter heating season. Traders are also concerned flows could retreat if a part for a key turbine is not returned. Following the release from Canada, it’s currently stuck in Germany with no Russia permit. Russian President Vladimir Putin warned volumes could be cut to 20% of capacity by the end of this month, when another part is due for maintenance. Dutch front month futures rose 0.4% to close the session at EUR155.50/MWh.
North Asian LNG prices were steady as buyers continue to accelerate efforts to secure cargoes ahead of further supply tightness. Following South Korea’s successful purchase of 14 spot LNG cargoes for delivery this winter, Taiwan returned to the spot market after several quiet months. Japan has also been active. Asia’s LNG price discount to Europe has shrunk sharply over the past week, as Asian buyers try to lock in supply amid the prospect of further competition from Europe. This comes amid the spectre of China returning to the market once outbreaks of COVID-19 are contained.
Copper led the base metals lower as investors continue to grapple with threats to global demand. The ECB raised rates by 50bps, bringing back into focus the impact of tighter monetary policies. The Fed is due to meet next week, with another aggressive rate hike likely. However, the bleak outlook in China remains a drag on global demand. The issues in the property sector continue to linger, with another developer looking to amend bond payments. Ongoing outbreaks of COVID-19 are likely to remain a drag as well. However, the fall in copper prices is raising concerns of weaker growth in supply. Freeport-McMoRan warned that prices are too low to support new mining developments. Europe’s power crisis is also taking its tolls on supply of other metals. Romanian’s Alro Group which cut aluminium output by 60% earlier this year, said Thursday that it will suspend alumina production in August amid rising energy prices.
Gold managed to erase earlier losses to end higher after the ECB raised rates by 50bps. The subsequent rally in the EUR against the USD helped boost investor appetite. Demand for safe haven assets was also stronger as the Italian political crisis worsened. Spot gold eventually ended the session up 1.1% to close at USD1715/oz.
Data source: Commodities Wrap