Mixed economic data saw commodity markets drift lower. Supply side issues remain in focus amid rising geopolitical tensions.
By Daniel Hynes
Crude oil drifted lower after it ventured into overbought territory amid rising geopolitical tensions. Although the market was poised for a correction, data showing OPEC output remain steady also weighed on prices. Overall crude oil shipments by OPEC members were broadly unchanged in January, according to data from Kpler, despite further production cuts of 2mb/d announced last year coming into force. Nevertheless, traders remain on edge as tensions rise in the Middle East. The attack on a Trafigura oil tanker in the Red Sea has raised the risks around supply disruptions. The risk of the US getting dragged into the conflict is also rising. The US is weighing up potential action following Iranian-backed militants killing three US soldiers in a drone assault. Traders have started covering short positions; but long positions have increased marginally, highlighting a lack of conviction for the moment.
Global gas prices extended gains on supply side disruptions. Last week Freeport announced one of its trains at its LNG export facility had been damaged by recent cold weather and will be closed for maintenance for about a month. Tensions in the Middle East added to the supply risks. Crossings of the Suez Canal by LNG tankers have stopped completely over the past week, adding weeks to journeys. However, no supply has been lost. North Asian LNG also pushed higher following the Freeport disruption. The gains were ultimately limited amid ample supplies in the region.
The base metals sector struggled to hold last week’s gains, which were sparked by China’s efforts to shore up economic growth. This is despite looming supply cuts across several markets. Chinese copper smelters are threatening to cut output amid plunging profits. A surge in capacity has come at a time of tightness in the concentrate market, pushing processing fees lower. Aluminium also retreated from a three-month high as inventories in China rose. Aluminium ingot stockpiles expanded almost 7% to 467.1kt, according to Shanghai Metals Market. Traders remain mindful of potential disruptions to supply in Europe following reports that the EU is considering sanctions on Russian supply.
Iron ore futures extended last week’s gains after Beijing announced further measures to support its equity markets. The ban on short selling came after the PBoC unveiled broad plans to guide money into sectors of national importance to boost its faltering economy. Data showing steel production at major Chinese mills rose 3.7% to 2.1mt in mid-January also added support. Sentiment wasn’t impacted by news that China’s largest property developer, Evergrande, received a liquidation order from a Hong Kong court.
Gold rose as mixed economic data saw investors increase speculation that the Fed could still lower borrowing costs in March.
Data source: Commodities Wrap