By Daniel Hynes
Commodity markets pushed higher as ongoing supply shortages offset concerns of weaker demand. A weaker USD also helped boost investor appetite for the sector.
Crude oil extended recent gains as the market faced the prospect of OPEC supporting prices through production cuts. Saudi Arabia Oil Minister Prince Abdulaziz bin Salman warned that markets had become disconnected from fundamental supply/demand factors. This may force it to cut output when the OPEC+ alliance meets next month. Adding further support to prices, Kazakh oil exports may be disrupted for months due to damaged moorings. Dive teams uncovered cracks where subsea hoses attached to buoyancy tanks at two moorings at the Caspian Pipeline Consortium oil-loading terminal. Daily volumes had already been down 20% due to a string of other maintenance issues. Approximately 1.3mb/d was expected in August. This helped offset concerns of additional Iranian oil hitting the market as talks on the nuclear agreement gain traction.
The surge in European natural gas prices paused as traders took stock of the energy crisis. Dutch front month futures pulled back from its record high on Monday to settle at EUR269/MWh. Nevertheless, concerns of further cuts to Russia gas flows remain. Gazprom said the Nord Stream pipeline will be shut down for 3 days from 31 Aug for maintenance on key turbines. The market is reluctant to assume that gas flows will return to the previous level of 20% capacity once completed. There are an increasing number of industries that are reducing output amid the gas shortages. Poland’s largest chemicals company, Grupa Azoty SA, stopped making some of its key productions because of record high energy costs. In France, new orders for manufacturing declined, mirroring contractions seen across the continent. North Asian LNG prices were also lower, with JKM futures falling 2.6% to end the session at USD56.33/MMBtu. Nevertheless, concerns of supply shortages have kept interest in the spot market high. Buyers from Japan, South Korea and Taiwan are accelerating talks with suppliers for more shipments through the end of the year.
European carbon fell, extending losses as buyers retreat amid energy market weakness. EUAs extended their losses on Tuesday to 9.9% in two days as buyers retreated after Monday's sharp drop from record highs. There is also some expectation of increased auction volumes in September. The threat of weaker industrial activity also weighed on sentiment.
Copper gained as Beijing rolled out measures to ease the prolonged property crisis. The PBoC urged the country’s lenders to expand credit in the latest move to boost growth, from rate cuts to special loans. Sentiment was supported by a weaker USD, which helped support investor appetite. Aluminium also gained as concerns of further cuts to output in China rose. A searing heat wave and subsequent drought has seen hydro power in Sichuan fall sharply. This has already led to restrictions on power use on heavy industry. This could lead to aluminium production from China falling in August. This comes amid a backdrop of low inventories.
Iron ore futures gained following the additional support measures for China’s beleaguered property sector. The government is making moves to aid the sector, including offering CNY200bn in special loans to complete unfinished projects. This could be offset by lower steel output. Power shortages in Sichuan could led to steel mills being forced to suspend operations.
The weaker USD helped push gold prices higher. Haven demand was also prevalent following data showing US business activity contracted in August.
Data source: Commodities Wrap