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The trend of rising energy prices continues, led by gas and oil, while metal and agricultural commodity prices have generally been under pressure, with some exceptions. Regarding some general indicators, they remain good, with the dollar index DXY close to 105 points, the S&P 500 index dancing around the level of 4,500 points, and the fear index VIX holding below 15. The Goldman Sachs Commodity Index (GSCI) is above 600 points for the second consecutive week, while the Bloomberg Commodity Index (BCI) remains above 106 points.
An important week lies ahead for agricultural markets and commodity exchanges. The USDA WASDE report is the most significant fundamental production report for September, which, if geopolitics allows, will dictate trends until the end of the year. Specific to this report is that for the first time, the U.S. government will provide yield data derived from objective field samples.
In addition, the anticipated inflation report is the main macroeconomic point of this month, with direct implications for the FED’s policy and the direction of the U.S. dollar. On this side of the Atlantic, the decision of the European Central Bank will also be awaited, adding further uncertainty to currency markets. Traders will generally monitor import movements in China, forecasts of drought conditions, progress of the autumn harvest in the northern hemisphere, generally strong seasonal trends in September, and upward momentum in crude oil.
Many mixed signals for the FED and the decision we can expect this week. While some advocate for the current policy, others call for further rate cuts. It is certain that we will not see a reduction in interest rates just yet. That will only come when market frustration reaches one hundred percent, and it currently seems we are still far from that.
What impact does monetary policy have on the life of the average citizen? A comparison of figures for the U.S. from 1930 with those from 2023 is telling. In 1930, the price of a house was three times the average salary. Today, it is eight times. Back then, the cost of a car was 46 percent of the average salary. Today, it is 85 percent. Rent was 16 percent of the average salary then. Today, it is 42 percent. The average annual salary in 1930 was $1,300, while in 2023 it is $56,000. For the lower and middle classes, the current crisis is tougher than the one in 1929, known as the Great Depression. If this is the case for the U.S., what would the data for Croatia show!?
Is crude oil being used as a weapon?
On global markets, oil prices rose last week for the second consecutive week, reaching their highest levels this year as the world’s largest producers decided to maintain reduced production. On the London market, the price of a barrel rose 2.4 percent last week, to above $90/bbl, the highest level since November last year. In the U.S. market, a barrel increased by 2.9 percent, to $87.5/bbl, the highest level since September last year.
At the end of June, prices showed a decline of 17 percent since the beginning of the year, and now a rise of four percent seems to be continuing. Goldman Sachs believes that the price of a barrel could rise to $107 in 2024. The price increase for the second week in a row is due to decisions by Saudi Arabia and Russia to cut production. Saudi Arabia announced last week that it would reduce production by one million barrels per day until the end of the year, surprising traders who expected the decision to extend the reduced supply only until the end of October.
Russia, on the other hand, decided to cut exports by 300,000 barrels per day until the end of the year. By reducing production, these countries aim to maintain elevated oil prices, given that demand is weakening due to slowing growth in the world’s largest economies. One might also ask whether this is the beginning of OPEC+/BRIC countries starting to use crude oil as a weapon?
We must also remember the impact that rising oil prices had on inflation (which was also driven by production limits) and what it may have on possible future inflation readings. On the demand side, the market hoped for a strengthening demand from China after restrictive COVID measures were lifted at the beginning of the year. However, the recovery of the world’s second-largest economy from the COVID crisis is significantly slower than expected.
The growth of Western economies is also slowing as central banks have been raising interest rates for a year and a half to curb inflation. When such a supply and demand relationship exists in the market, prices can only go in one direction – upwards.
TTF gas futures prices are at around €35/MWh; after an increase of about 15 percent at the beginning of the month. Market instability is expected to continue due to supply disruptions, despite the outlook for weak demand. In Australia, unions are pointing to an escalation of strikes, and although two Chevron plants primarily serve Asia, a drop in production could prompt buyers, especially Japan, South Korea, and China, to seek LNG from alternative suppliers. In fact, reports have shown that China wants to purchase more than a dozen deliveries for this winter, with deliveries extending to the end of 2024.
Additionally, the Norwegian Troll facility is in its third week of maintenance, with more significant capacity restrictions than initially expected. Despite these supply issues, demand for natural gas in Europe remains low, especially in Germany, where high borrowing costs affect both the household and industrial sectors. Furthermore, natural gas storage in the EU is filled to about 94 percent.
Grains Under Pressure from Black Sea Commodities
The FAO food price index averaged 121.4 points in August, a decrease of 2.1 percent compared to July and 11 percent year-on-year. The grain price index in August decreased slightly by 0.7 percent compared to July and by 14.1 percent year-on-year. The global vegetable oil price index in August was 125.8 points, recording a decline of 3.1 percent compared to July.
Overall, last week was marked by pressure on grains from Black Sea commodities, resulting in reduced export potential from the U.S. and EU. Although the strengthening dollar against the euro supported prices, corn, feed wheat, and bread wheat prices weakened on a weekly basis. This situation is also reflected in our most important market for physical commodities, that of Italy. There is a feeling that we are stuck without external geopolitical influences.
The story is different for soybeans, where production in the U.S., and then in a few months in South America, will make a difference. Argentina will make a significant difference compared to last year. A recovery of all crops is expected after last season’s shortfall due to drought.
Matif wheat is at €230-235, while corn is in the range of €210-215/t. On the CBOT, corn is around $4.8/bu, wheat $5.8/bu, while soybeans are around $13.5/bu. In the EU, wheat exports are relatively weak, around five million tons since the beginning of the season, which is 32 percent less than last season.
It is also worth mentioning that sugar on the London exchange reached its highest level in the last 12 years, while cocoa reached its highest level in the last 46 years.
Copper futures prices are at $3.7/lbs. In August, consumer prices in China returned to positive territory, recording a modest increase of 0.1 percent. Furthermore, factory price deflation has eased, showing signs of economic stabilization. Investors are now eagerly awaiting key data on industrial activity and retail sales to be released on Friday.
Beijing has recently implemented a series of measures aimed at strengthening the real estate market, including reducing existing mortgage rates for first-time homebuyers and adjusting down payment ratios in selected cities. However, the country is still in the process of awaiting further policy support, given the risk of not achieving its economic growth target for this year.
Aluminum futures prices have hovered around $2,200/t as supply pressures have intensified signs of greater demand. China, the world’s leading producer responsible for more than half of global production, has halted the expansion of production capacity beyond the current limit of 45 million tons as Beijing tries to prevent oversupply and higher energy consumption from old, inefficient infrastructure.
At the same time, Indonesia’s ban on bauxite exports, the main commercial ore for aluminum, has also jeopardized supply pressures. Meanwhile, market players have signaled that increased demand for solar panels and electric vehicles in China is likely to offset the decline in aluminum use in the construction sector, indicating a recovery in purchasing activity.
