Easing supply-side issues triggered selling across the energy complex. Sentiment also soured following weak economic data in China.
By Daniel Hynes
Market Commentary
Crude oil prices collapsed after a deal to restore Libyan supply brought the focus back to the tepid demand backdrop. Libya’s Sadiq Al-Kabir central banker governor said there are strong indications that political factions are nearing an agreement to overcome the current deadlock. This would pave the way for more than 0.5mb/d of oil supply to return to the market. This would come just as the OPEC+ alliance is preparing to bring back part of its own curtailed supplies. This triggered a wave of selling, as traders considered what that would mean for the global oil market. Concerns over the economic backdrop, which have been suppressed by these supply-side issues, were released, resulting in Brent crude and WTI falling nearly 5%. Those demand concerns were heightened this week by further weak economic data. China’s factory activity contracted for a fourth straight month in August while weakness in its property sector persists.
European gas futures extended losses as high inventories and weak demand weigh on sentiment. The market has shrugged off recent risks to supply. Despite mounting tensions in Ukraine, gas flows between Russia and Europe have remained at previous levels. Extended maintenance in Norway is also expected to end soon. That has given comfort to traders that the market will remain well supplied, underpinned by underground storage facilities that are over 92% full. Demand also remains weak, with the industrial sector showing no signs of improvement. North Asian LNG prices were also lower as spot buying dried up. Major importers are showing little interest to acquire additional cargoes over the next few months. Traders warned that Chinese LNG buyers, particularly second-tier companies, are not interested at current price levels. The congestion at the Bintulu export facility in Malaysia also appears to be easing. The number of vessels waiting outside the facility has fallen to eight, suggesting production issues are being rectified.
A risk-off tone across markets weighed on sentiment across the base metals sector. Copper led the losses, falling nearly 2.5% as a stronger USD also crimped investor appetite. The demand backdrop remains weak, with a further slowdown in Chinese factory activity raising concerns that it will fail to reach its economic growth target. Zinc bucked the trend to end the session higher as tightness in the concentrate market increases. Treatment charges at China’s zinc smelters have plunged even deeper below zero, putting pressure on them to cut output even further. They had already reduced production this year to stem the losses. With the crisis in China’s steel industry showing no signs of turning around, the demand for zinc shows no sign of improving.
Gold prices came under pressure as a stronger USD saw investor demand wane. The precious metal fell below the key USD2,500/oz level as a fifth straight month of contraction in the US manufacturing sector added to the dour mood across markets. Despite the weakness, speculators continue to increase their exposure. Net bullish bets on gold have reached a four year high, according to CFTC data. Exchange traded funds added 61,221oz of gold to their holdings yesterday, bringing this year’s net sales to 2.71m oz.
Data source: Commodities Wrap