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- Commodity prices have risen due to the increase in oil prices
- All the most indebted poor countries in the world have received large loans from China
- The market has revived on a wave of optimism that oil demand will increase next year
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After several weeks of weekly price declines, we can say that commodity prices have risen for the past week. This is primarily due to the rise in oil prices. Prices have also increased for a larger portion of metals, as well as some agri commodities. At the same time, gas and soft commodity prices have fallen. In contrast to commodities, the value of the US dollar fell last week, and the EUR/USD ratio is now above 1.09, which is always a bullish signal for dollar-denominated commodities and bearish for non-dollar commodities.
Regarding some general indicators, the dollar index DXY is above 102 points, and the fear index VIX is very low, below 13 points. The Goldman Sachs Commodity Index (GSCI) starts the week at 535 points, while the Bloomberg Commodity Index (BCI) is below 99 points.
The pre-Christmas week is usually synonymous with a quieter week on the exchanges, with lower trading volumes ahead of the upcoming Christmas and New Year holidays. Currently, one of the significant factors affecting the commodity markets is the optimistic macro environment, thanks to last week’s decisions by major central banks that did not raise interest rates (as expected) but further boosted market optimism about interest rate cuts by mid-next year.
In addition, the situation remains unchanged, with no signs of improvement in the Middle East or Ukraine. The Russian state news agency RIA reported on Sunday that the Minister of Agriculture stated that Russia has no interest in extending the grain deal. There was no obvious reason why such a statement needed to be made at this time. Some traders certainly raised an eyebrow at the news of a partial disruption of shipping in the Red Sea following Houthi attacks on commercial vessels last Friday.
One thing to watch is certainly the hedge funds that have the largest short position in agri commodities in the last three years. This means that funds are betting on lower prices in the future, especially for grains and oilseeds. Only time will tell whether they are right or if there will be a panic closing of positions at some point next year.
Overall, commodities are struggling to maintain value, suggesting that economic growth is struggling. Some believe this will continuously push inflation lower, but the other side of that argument is that if commodities seem too cheap, all this fresh ‘risk’ money will want to buy commodities!
According to the IMF, all the most indebted poor countries in the world have received large loans from China. Critics call this “debt trap diplomacy,” in which China deliberately lends to countries it knows cannot repay, hoping to gain political influence. Most of the financing for large deep-water ports, long railways, and power plants will come from the wallets of Chinese companies. Some will be grants, but many are taken in the form of loans, and when countries fail to meet their obligations, consequences may arise. In Pakistan, for example, the deep-water port in Gwadar was financed by loans from Chinese banks amounting to $16 billion. The only problem? The interest rate is above 13%, and if Pakistan defaults, China could ultimately take all kinds of collateral as compensation, from coal mines to oil pipelines.
Stabilization of Oil Demand
And we have reached this point. After seven consecutive weeks of falling oil prices, last week oil prices slightly increased, although they fluctuated significantly during the week, depending on news about supply and demand. The price of Brent crude oil rose by 0.9% last week, to above $76/bbl. The price of WTI crude oil rose by 0.3%, to above $71/bbl. The market has revived on a wave of optimism that oil demand will increase next year, as it seems that the cycle of interest rate hikes in Western countries has ended.
This most likely means that, despite the sharp increase in interest rates over the past year and a half, the world’s largest economy will avoid recession. And that, in turn, means stabilization of oil demand. Due to lower prices and potential strengthening of demand in the US, global oil consumption is expected to increase by 1.1 million barrels per day in 2024, about 130,000 more than previously expected, according to the International Energy Agency (IEA).
European natural gas futures prices TTF fell below €33/MWh, the lowest in almost three months, amid signs of decline and ample supply. Winter temperatures on the continent have returned to moderately above seasonal norms after a sharp cooling in early December, keeping demand for gas-intensive heating far below extremes.
Consequently, market players have bet that current levels of large stocks will provide strong protection against the risk of supply shortages on the continent if temperatures unexpectedly drop. The latest data showed that European gas stocks will remain close to all-time highs until early January. Meanwhile, weak gas purchases in China have lowered LNG export prices for key Eurasian import terminals, including the European Dutch hub.
Grain Prices ‘Stuck’
Wheat futures prices on the CBOT ended the week slightly lower, while prices on MATIF fell significantly. Argentina has devalued the official peso exchange rate to 800 and proposed an increase in the export tax on wheat and corn from 12% to 15%, but this still needs to be approved by Congress. Crop estimates in Argentina continue to range between 14.5 and 15 million tons. Despite some regions being too wet and others too dry, plus farmers’ reluctance to sell on Matif, March was at its lowest weekly close since January 2022.
Deliveries to the EU are still officially lagging behind last year’s by 14%, and goods from the Black Sea have likely taken most of the million tons of sold grain to North Africa. The price of corn on the CBOT ended the week slightly lower despite export sales still significantly ahead of USDA projections, the recovery of crude oil, and Brazilian prices pushing export demand in the US.
Brazilian futures prices for March rose for the sixth consecutive week to an eight-month high amid ongoing and increasing drought, and private crop estimates continue to fall. The crop estimate in Argentina remains at 55 million tons. Despite imports to the EU still being 44% lower than last year, Matif ended the week lower (at €197-198/t) and spreads weakened again amid ongoing cheap competition from the Black Sea and discussions about a possible 30% increase in French acreage next year.
Overall, it is confirmed that December is a volatile month, but for now, there is no clear direction of movement. Looking ahead, the price of soybean meal will be crucially influenced by the moves of the new president of Argentina. For soy, everything depends on the (un)favorable weather conditions in January in South America, especially in Brazil. For grains, the current fundamentals leave little room for significant changes; prices are ‘stuck’. This means that significant price changes can only occur if external factors change.
Copper futures prices have risen to $3.9/lbs, approaching the highest four-month level, following the rise of other base metals. The trend of decreasing inflation in the West and the potential reduction of central bank interest rates next year strengthens hopes that lower borrowing costs can support manufacturing activity.
Additionally, a lower dollar increases foreign demand for base metals. Concerns about supply have also supported the trend, as Panama plans to close the Cobre mine of First Quantum, halting production from a key source of supply in the world. However, limited demand expectations from China have restricted price growth.
