We have just experienced a very volatile week, during which prices fluctuated, sometimes rising and sometimes falling, ultimately ending with a decline in energy prices (primarily oil and gas) and agricultural commodities, while metal prices increased. There is never a break in the markets; something is always happening, an event that will capture the market’s focus, which is estimated to have a significant impact on commodity and capital markets.
In this context, this week is no exception. On Wednesday, there is a FED meeting, and on Friday, we await the report on new jobs in the U.S., and in this context, it is essential to monitor the movement of the dollar, while tensions in the Middle East remain the “topic of the day,” and we must not forget Ukraine.
For now, it seems that caution in anticipation of the FED meeting and data on Chinese production in the coming days balances fears of escalation in the Middle East. Among other things, traders are focused on the weather (un)favorable conditions in Brazil, Argentina, and Paraguay and the pace of planting in South America.
Data on the U.S. economy remains quite favorable, with GDP growing by 4.9 percent in the third quarter (compared to a growth of 2.1 percent in the second quarter and far above the estimate for the third quarter of 4.2 percent), and PMI has risen to a quarterly high, which continues to push towards a hawkish FED, and the opinion remains on the continuation of the monetary policy of “higher for longer” (higher interest rates for a longer period), which is bullish for the U.S. dollar. Currently, the EUR/USD exchange rate is around 1.06.
On the other hand, the EU may need to worry about stagflation – an economic slowdown amid inflationary pressures. Meanwhile, the ECB has predictably kept rates unchanged, ending the longest tightening cycle in its history faced with signs of economic slowdown, but adding that it is currently premature to talk about cuts.
Debt, when it exceeds a certain level, becomes chaos, madness, and then destroys nations. Just look at the end of the Spanish, British, or Dutch empires. Or Germany between the two wars, Yugoslavia in the 90s, ancient Rome, or today’s Argentina. More or less, the same story. As in Hemingway’s description of poverty, the process initially starts slowly, and then suddenly collapses. Part of this process includes the devaluation of purchasing power, a process emphasized by rising, not “transitory” inflation. Then comes an increase in social unrest, and consequently, greater centralization of the political left or right in the name of “what is best for the population.”
The CEO of HSBC, one of the largest banks in the world, believes that the world is at a critical point regarding public debt and that there is a significant risk of a global financial earthquake. The IMF has warned that U.S. government debt is the result of “unsustainable” fiscal policy and is the “most concerning” among the largest economies in the world.
The stock prices of the four major U.S. banks on Wall Street have suffered a significant decline, reaching levels similar to those during the banking crisis in March. Year-on-year losses are substantial, with declines ranging from 15 percent to as much as 24 percent, raising concerns among investors and affecting the market in general.
On the other side of the Pacific, China has signed mining agreements with more than 10 countries in Asia, Africa, and South America at the recent “Belt and Road” Forum. China’s strategy is clear: to ensure the availability of key strategic raw materials – oil, metals, minerals, grains, and oilseeds.
Gold has reached a price of $2,006.5/t.oz, which is equivalent to €61.06/g, a historical record for the precious metal against the European currency. The loss of value of the euro, but generally FIAT currency vs gold is a fact. With the arrival of CBDCs, another way of devaluing the purchasing power of money, to devalue debt, the situation can only worsen.
Oil prices fluctuate depending on geopolitical tensions
After two weeks of growth, oil prices on global markets fell last week, and their movement largely depended on news from the Middle East. The price of Brent crude fell by 1.8 percent last week, while WTI fell by 3.6 percent. Throughout the week, prices oscillated within a relatively narrow range, primarily depending on news from the Middle East.
When news indicated an escalation of the conflict between Israel and Hamas, oil prices rose, and when it seemed that tensions were easing, prices fell. Their weekly decline would have been even greater had prices not risen by about three percent on Friday due to traders being unsettled by the attack of U.S. fighter jets on weapons and ammunition depots in Syria. In a broader context, the conflict between Israel and Hamas and armed incidents in the region have not yet directly affected oil supply, but possible disruptions in deliveries from Iran and other major producers in the Persian Gulf are possible.
Global energy and fossil fuel consumption is expected to defy wars and high prices, reaching record levels in 2024, driven by strong Asian demand, according to a new report released by the Economist Intelligence Unit on Wednesday. According to that report, despite still high prices and unresolved supply chain disruptions, demand for fossil fuels will reach record levels, but demand for renewable energy will increase by 11 percent.
It is expected that demand for oil alone will increase by 1.7 percent next year, and demand for natural gas is expected to rise by 2.2 percent, led by Asia and the Middle East, while Europe will continue to see reduced demand as it seeks to conserve gas and energy.
Futures prices for European natural gas jumped nearly seven percent, to a level above €54/MWh before retreating and falling to below €50/MWh after the Egyptian government announced that natural gas imports had fallen to zero from 800 million cubic feet per day. This raises further concerns about supply disruptions due to the conflict in the Gaza Strip. Flows from Egypt to Europe make up a small share, but the war has already caused the closure of the Tamar field in the Mediterranean Sea, and there are concerns for the safety of Qatari LNG ships passing through the Hormuz Strait.
Natural gas prices in Europe have jumped about 40 percent since the start of the war between Israel and Hamas. Additionally, news of a compressor failure at the Norwegian gas processing plant Nyhamna has raised further concerns for supply. However, gas storage in Europe remains about 99% full, thanks to unusually warm weather and strong LNG imports.
Most activity and volatility around soybeans
If it weren’t for the war in the Middle East, the agricultural commodity market would be easy to read when it comes to the three main products: weak corn, neutral wheat, and soybeans linked to weather in South America (with slightly more bullish than bearish potential). Geopolitics and inflation are external factors that can change that picture.
Currently, the most activity and volatility in the markets is around soybeans, whose price increase on the CBOT is supported by unfavorable weather in Brazil, where there is a transition from drought to excess rainfall, depending on the state. Meal is under price pressure due to the Argentine product deficit and congestion during loading in Brazil.
Wheat from the U.S./EU is weak due to fierce competition from the Black Sea, where, despite the slowdown, goods from Ukraine are still being delivered. Trade in Ukrainian ports on the Danube is significantly slowed down by state inspections being conducted to ensure tax payments, especially for cash trade.
Despite falling transportation prices, the flow of goods for ships departing from Danube ports has worsened, also due to weather conditions that limit navigation. We are witnessing huge lines of ships waiting to exit or enter the Thessaloniki Canal: at least 75 ships are currently waiting. Otherwise, agricultural commodity exports from Ukraine in October amounted to 2.15 million tons, compared to 4.22 million tons in October 2022.
If we look at the EU, wheat exports are at 9.3 million tons, 22 percent less than last year. Total exports for this season are estimated at 31 million mt (one million mt less than in the last estimate). The weakness of the dollar punishes wheat exports from the eurozone. The 2023 harvest is estimated at 125.5 million tons, in line with 2022.
Corn imports are at 5.45 million tons, 40 percent less than last year. The 2023 harvest is estimated at 59.9 million tons, 13 percent more than last year. Mars estimates yields for the 2023 harvest at 7.13 t/ha, compared to 7.26 t/ha in September. This is a 5 percent decline compared to the average of the last 5 years, but an increase of 21 percent compared to the drought of 2022.
Futures prices for copper rose above the threshold of $3.65/lbs at the end of October, amid expectations of strong demand and new hits on supplies. Beijing has stated that it will expand its budget for this year to borrow an additional one trillion CNY for investments in production, increasing purchasing activity for industrial inputs and limiting concerns about low demand due to worries about debt in the housing construction sector.
Meanwhile, new data showed that stocks on the Shanghai Futures Exchange and the London Metal Exchange fell by nearly 40 percent in the past week. The decline is aligned with a new jump in the copper premium in Yangshan, signaling greater demand for physical deliveries in Asia.
