Commodity Markets Strongly Influenced by Macroeconomic News – Energy Prices in the Red, Other Commodities Volatile

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The first week of May began on a rather bearish tone for all commodities, especially for energy due to negative macroeconomic news and related recession expectations. However, the end of the week brought a turnaround for metals and agricultural commodities, allowing them to finish the week slightly positive, unlike energy prices which, despite a recovery at the end of the week, still ended the week in the red.

 

At the start of the new week, the Dollar Index (DXY) is above 101 points. S&P 500 index is in an upward trend on a weekly basis, above the level of 4,100 points, while the fear index VIX is in the opposite weekly trend, currently below 17. The Goldman Sachs Commodity Index (GSCI) starts the week above the level of 550 points, although it fell to 530 points at one point last week. The Bloomberg Commodity Index (BCI) also starts the week above 103 points, although it fell close to the level of 101 points in the middle of last week.

 

Currently, we have two important external factors affecting the market, namely American banks and inflation. The collapse of banks is inevitable until interest rates are drastically reduced. This is a strong bearish factor in the market, as we saw in the declines in early March and now in the second half of April. The rise in interest rates forces banks and funds to liquidate assets to obtain liquidity, which is why commodity prices and financial markets in general are falling. The second factor is inflation, which remains high and could rise again in 2024 with the introduction of new digital currencies.

 

The American FED raised interest rates by 25 basis points last week, marking the tenth consecutive rate hike. However, what may be more important is the message sent along with it, which is that a pause in the tightening of monetary policy may follow until the effects of the increase in the cost of money are seen. The key word is ‘may’, which the market did not want to hear, and investors were disappointed by the messages that the cycle of monetary policy tightening is not yet over and that a reduction in interest rates cannot be expected anytime soon.

 

Inflation (targeted at two percent) remains a priority. The FED confirmed that the growth of the American economy is slowing, but it currently seems more likely that it will ‘soft land’ rather than plunge into recession. The FED thought two years ago that inflation would only be transitory, and here we are today.

 

On the other side of the Atlantic, according to Eurostat data, inflation in twenty eurozone member states rose in April to seven percent (up from 6.9 percent in March), but core inflation in the same period fell to 7.3 percent (down from 7.5 percent) for the first time in the last ten months. Although these data show a significant slowdown in inflation compared to double-digit figures at the end of last year, inflation remains too high, which is why the ECB raised interest rates again last week, this time by 25 basis points.

 

U.S. Bankruptcy?

 

Is it possible that the U.S. will default as early as June because Democrats, Republicans, and the White House cannot reach an agreement on the debt ceiling? An eventual default would lead to turmoil in all markets with a global financial crisis as a consequence. It seems that the U.S. is entering a zone of fiscal chaos, a place that is not exited without severe consequences.

 

At the same time, China is expanding its influence around the world, with a particular focus on South America, Africa, and the Middle East. Recently, China purchased its first stake in a Qatari gas field, while one Chinese company stated that it is interested in investing $10 billion to exploit vast lithium reserves in Afghanistan. The largest Chinese steel producer signed a contract to build a steel mill in Saudi Arabia. Moreover, last month China mediated an agreement between Iran and Saudi Arabia to end the war in Yemen. An agreement was also reached with Brazil to use local currencies instead of the dollar in trade exchanges.

 

All of this is recognized in the U.S., so it is not surprising that Janet Yellen stated that separating the U.S. from China would be catastrophic for the U.S. Bloomberg estimates that BRICS is soon expected to surpass G7 countries in economic growth expectations. According to their analysis, while G7 and BRICS countries contributed equally to global economic growth in 2020, the performance of the Western-led bloc has recently declined. By 2028, G7 is expected to account for only 27.8 percent of the global economy, while BRICS will account for 35 percent. The Middle East produces about a third of the world’s crude oil. Russia, Iran, and Qatar account for just under 60 percent of the world’s gas reserves. Nineteen nations have expressed interest in joining the BRICS group, and they are countries that are primarily commodity-based.

 

On Wednesday, we expect inflation data from the U.S., which will be the most important macroeconomic indicator of this month. Investors and consumers want to see a trend of lower inflation, especially due to concerns about the balance sheets of regional U.S. banks, rising recession prospects, and the upcoming U.S. debt ceiling on June 1. Lower inflation will lead to looser monetary policy, which will result in a decline of the dollar, which in turn will lead to a cycle of rising commodity prices.

 

In the current circumstances, gold is regaining significance. Sudan is the tenth largest gold producer in the world and the third largest on the African continent, after Ghana and South Africa. Estimates suggest that Sudan could produce more than 18 tons of gold this year. Therefore, the current military-political upheavals in Sudan should be viewed in this context, as well as in the context of Sudan’s pivot towards Russia. Russia is expected to build a naval base in the Red Sea. Gold is already a strong motivator for war, and a Russian naval base in the Red Sea could create significant problems for traffic to the Suez Canal, as the Suez is one of the most important trade routes on the planet.

 

Recession traders are closely monitoring energy demand as it remains an excellent indicator of recessionary trends, as well as growth trends. Brent oil futures jumped on Monday to over $76/bbl, recovering from the lowest level in the last 45 days of $71.28/bu reached last Thursday. Market sentiment was boosted by a larger-than-expected increase in U.S. jobs, which alleviated concerns about a potential economic downturn. These positive economic prospects, combined with a weaker U.S. dollar and expectations of reduced supply at the next OPEC meeting, provided some support for crude oil prices.

 

Looking ahead, investors will closely monitor the short-term report from the U.S. Energy Information Administration on Tuesday and OPEC’s monthly outlook report on Thursday to gain insight into the market trajectory for the rest of the year. Additionally, this week a report on Saudi Aramco’s earnings will be released, as the world’s largest oil producer provides further insight into industry performance. Natural gas futures prices in Europe fell to €36/MWh, extending a decline of 5.1 percent in the first week of the month and reaching levels not seen since July 2021 when Russia first restricted energy supplies to Europe.

 

Gas prices have been falling since mid-December 2022, after peaking at €339/MWh in August, due to ample LNG supplies, reduced consumption, and mild weather. Industries and households in the European Union reduced their natural gas consumption by 13.2 percent in 2022. Meanwhile, record LNG deliveries from the U.S. and increased supplies from Norway, Algeria, and Qatar have largely replaced Russian pipeline gas. Although the worst energy crisis has passed for now, risks remain for the next winter, such as a hot summer that could reduce water levels, a cold winter, and a recovery in Asian LNG demand.

 

Wheat at Lowest Level in 21 Months

 

The FAO food price index reached 127.2 points in April, compared to 126.5 points in March. This is the first increase in 12 months, but we are still 20 percent below the record of March 2022. The increase was driven by sugar and meat prices, but the grain index fell by 2.4 points, 1.7 percent compared to March, with wheat down 2.3 percent and corn down 3.2 percent. Funds continue to reduce their assets and currently have the lowest investment in agricultural markets in the last 32 months.

 

Last week, both CBOT and MATIF fell sharply, with wheat on MATIF reaching the lowest level in the last 21 months, and on CBOT since April 2021. Corn, on the other hand, fell to its lowest level since July 2022. Only at the end of the week did prices on the exchanges begin to recover. Currently, on CBOT, old crop corn is below $6/bu, new crop wheat is around $6.5/bu, and old crop soybeans are below $14.4/bu. On MATIF, new crop wheat is above €240/t, while old crop corn is below €230/t.

 

Brussels announced that Bulgaria, Poland, Romania, Hungary, and Slovakia have agreed to allow the transit of Ukrainian agricultural products across their territories, while the import ban will last until June 5. The suspension of EU import tariffs on Ukrainian exports has also been extended for another year to support the country’s economy during the war with Russia.

 

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Ukrainian grain exports in April reached 3.62 million tons (vs 0.92 million tons in April last year). Regarding the new season, Ukrainian corn exports are estimated at 15 million tons (vs 24.4 million tons for the current season), while wheat exports are estimated at 11.5 million tons (vs 14.4 million tons this season). The main question remains whether we will see an extension of the export corridor or its interruption. The latter seems more likely. This will be a bullish signal in the markets, but I fear it will have little impact on the physical price of commodities.

 

The supply of physical products continues to exceed demand, and the pressure to empty warehouses is increasing, given the upcoming harvest. It has been shown that stocks in Italy and on the Danube/Balkans are higher than expected. For soybeans, from now until the end of the year, uncertainty regarding the harvest in the U.S. and chronic instability in Argentina could lead to price volatility; however, next year, especially from March/April, all indicators point downward.

 

 

Copper futures prices rose above $3.9/lbs, recovering from the lowest level in the last four months of $3.83/lbs reached in the middle of last week as evidence of lower supply outweighed concerns about weak demand. Copper stocks on the Shanghai Futures Exchange fell below 135,000 tons, their lowest since early January, which is equivalent to just over three days of consumption according to data from the World Bureau of Metal Statistics. Meanwhile, stocks on the London Metal Exchange were below 60,000 tons, the lowest since 2005. However, weak demand has kept further increases in copper prices at bay.

 

Lithium carbonate prices rose above 180,000 CNY/t for the first time since they fell to a 19-month low of 165,500 CNY/t on April 24, as renewed optimism regarding long-term demand currently outweighed the pressure of high short-term supply. Government incentives for the transition to electric vehicles have led analysts to predict that lithium demand will be 16 times higher by 2040 than current levels. However, China’s decision to eliminate cash subsidies for households purchasing NEV vehicles has halted the sharp growth momentum of the sector, pressuring car sales and halting raw material purchasing activity from battery manufacturers.

 

NEV registrations rose by 22 percent in the first quarter of 2023, significantly slowing compared to a 93 percent increase in 2022. The drop in demand coincided with a noticeable oversupply of batteries during that period, as manufacturers took advantage of the final influx of state subsidies and ramped up production by the end of 2022, creating unsustainably high inventory levels. Futures for rebar rose above 3,620 CNY/t, recovering from the lowest six-month price of 3,550 CNY/t achieved last week, as lower supply currently outweighed growing demand concerns. The Chinese Iron and Steel Association has called on producers to reduce output in the near future to ensure stable cash flow, reducing the prospects for inventory recovery.

 

The recovery of construction and infrastructure building in China has not materialized despite a series of government incentives and liquidity injections amid the country’s economic reopening, jeopardizing metallurgical balances. Accordingly, both major Chinese PMI surveys reflect an unexpected decline in manufacturing activity in April, dampening hopes for growth in the quarter. Additionally, new construction started fell by nearly 20 percent year-on-year in the first three months of 2023, as government efforts to support the services sector resulted in a 5.8 percent reduction in real estate investment despite an 11.8 percent increase in credit during the same period.