Robust economic data in the US boosted sentiment. Supply side issues across energy markets remained supportive.
By Daniel Hynes
Market Commentary
Crude oil prices rallied as robust US economic data eased concerns about weaker demand. GDP grew at a 3% annualised rate in Q2, up from the previous estimate of 2.8%. Consumer spending was the main driver. This came as disruptions to Libya’s supply increased. Oil exports from five eastern ports were suspended while the country’s output dipped further amid a battle to gain control of the central bank. The terminals have a combined capacity of around 800kb/d. Even so, crude oil prices are on track for another monthly decline despite the best efforts of OPEC. The recent weakness highlights the market’s sensitivity to bearish news. The market is concerned about the medium-term outlook, with oil balances for 2025 looking weak. We see downside in growth in 2025, driven by economic headwinds in China and the US. OPEC surprised the market when a small sub-group, led by Saudi Arabia, announced it will gradually phase out 2.2mb/d of cuts from the start of Q4 2024. However, the group must now face-off against the new environment of deepening macro concerns and loosening fundamentals ahead. We believe OPEC will have no choice but to delay the phase out of voluntary production cuts if it wants higher prices. Otherwise, it could spark concerns that it is shifting to a market-share strategy.
European gas futures edged higher as supply side issues continue to hang over the market. Norwegian gas exports this week hit their lowest level since June due to seasonal maintenance. Traders are also monitoring any potential disruptions to Russian gas transiting Ukraine into Europe. Ukraine’s recent incursion into Russia has triggered a fierce response from Moscow, with the country coming under the biggest drone and missile assault since the start of the war. This raises the risk that energy infrastructure will be damaged. North Asian LNG prices gained following reports that Freeport’s LNG export terminal was shut due to issues with its fire-system. However, the gains were reversed after it quickly resumed production.
Iron ore traders shrugged off concerns over weaker demand to push prices back above USD100/t. The steel marking raw material fell close to USD90/t earlier this month after China’s Baowu Steel Group warned that conditions in the industry were worse than downturns in 2008 and 2015. The recent rally has sparked a fierce response from China’s metal industry. State-affiliated China Metallurgical News published an article saying the current rise in iron ore prices lacks fundamental support. Plentiful supply, weak demand, high inventories and low mining costs should continue to weigh on the commodity in the rest of 2024, it said.
The stronger USD triggered by the better-than-expected economic data weighed on investor appetite across the base metals sector. Aluminium led the metals lower as concerns about the strength of China’s demand recovery lingered. Ample supply added to the gloom. Rusal shipped record volumes to aluminium to China in the first half of the year. This has seen inventories in China rise to their highest levels for this time of year since 2019.
Gold held gains as traders await key inflation data that may shed light on the path of the US Federal Reserve’s interest rate policy.
