Commodity prices fell again last week, dollar reached its highest level in eight weeks

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The movement of prices in the past week confirmed that the price increase in the previous week was mainly technical in nature. Led by oil, commodity prices fell again last week. Looking at the broader picture over the month, energy sector prices recorded modest growth in January, while non-energy commodity prices fell. Energy prices rose by 1.6 percent, led by natural gas in the US (+25.9 percent) and oil (+2.6 percent). Agricultural product prices fell by 0.7 percent.

Food prices fell by 1.6 percent as grains and oils and meals decreased by 1.3 percent and 2 percent, respectively. Beverages rose by 1.7 percent, while raw materials increased by 0.9 percent. Fertilizer prices fell by 2.9 percent. Metal prices slightly decreased by 0.3 percent in January, led by nickel (-2.2 percent) and iron ore (-0.9 percent); lead prices rose by 2 percent. Precious metals decreased by 0.3 percent, led by silver (-4 percent) and platinum (-1 percent).

This week, we are expecting an important WASDE report on Thursday in the US, which will impact the movement of agricultural commodity prices, and there is already some attention on next week when we await inflation data in the US. The other eye will obviously be on geopolitical games in the world as the situation in the Middle East becomes increasingly crowded, and the initial conflict is spreading like a tidal wave among the countries of the peninsula.

Who knows what else we can expect to happen in those areas, but we know it will impact the movement of commodity prices. Over the weekend, the US responded to Iran with attacks in Iraq and Syria, and the energy complex remains quite calm regarding this at the beginning of the week. Rebels have since stated that new attacks are expected as retaliation.

On Friday, new data showed that in the US, the number of employed in January rose significantly more than expected, and unexpectedly strong wage growth was also recorded. This means that consumption, and thus inflationary pressures, will continue to be heightened. As a result, market hopes that the FED would start lowering interest rates as early as March have completely faded. Especially since FED Chairman Jerome Powell announced that the FED would be cautious in lowering interest rates and that it would likely be at a significantly slower pace than the market expects. ECB officials also indicate that they will not rush to lower interest rates as inflation in the eurozone remains above target levels.

Natural gas prices remain below 30 euros

All of this has prompted the US dollar to rise, but also a wave of selling in commodity markets. In the currency markets, the value of the dollar against a basket of currencies reached its highest level in eight weeks, and the DXY index starts the new week at a level above 104 points while the euro-dollar exchange rate fell to 1.075.

Consequently, last week on global markets, oil prices sharply fell as further slowing of global economic growth is expected. The price of Brent crude fell by 7.4 percent last week, while the price of WTI crude fell by 7.3 percent. Thus, oil has returned within its movement limits over the last two to three months, namely below 80 dollars per barrel for Brent and below 75 dollars per barrel for WTI. At the beginning of the new week, Brent oil is at a level slightly above 77 dollars per barrel, while WTI is slightly above 72 dollars per barrel. Thus, in the past week, oil lost all the value it had created a week ago, and this is a textbook example of how a piece of macroeconomic news (the delay in the start of interest rate cuts) can significantly impact commodity price movements.

Due to expectations of further slowing growth in the US and eurozone economies, it is hard to expect a strengthening of oil demand. Especially since the growth of the Chinese economy, the world’s largest oil importer, is also slowing down. Conflicts in the Middle East last week did not significantly affect oil prices as there were no additional disruptions in the supply of ‘black gold’. Therefore, OPEC+ member countries are implementing supply cuts to avoid further declines in crude oil prices.

Futures prices for European natural gas TTF remain below 30 euros per megawatt hour. In the last two weeks, prices first rose by about ten percent, only to fall by five percent at the end of last week. This is a result of growing concerns about gas supply. After the attacks in the Red Sea, LNG tankers carrying Qatari gas are now taking longer routes around Africa, bypassing the Suez Canal. Production issues at Freeport, a large US plant, could also affect gas supply. However, due to the mild winter, gas storage levels in the EU were at a comfortable 71.1 percent. Additionally, the increase in wind energy production will lead to a decrease in gas demand in the electricity sector, while moderate temperatures will reduce the need for heating.

There is still optimism about China

We have already mentioned the impact of the dollar, which weakens dollar-linked agricultural commodities and strengthens those from the eurozone. Hedge funds now have the largest short position in the last four years (-17.2 billion dollars); this means they have been selling agricultural futures over the past 11 of 12 weeks. Clearly, funds are currently betting on lower prices for grains and oilseeds. Weekly prices on exchanges have fallen. Thus, on the CBOT, the price of wheat (March contract) fell by 0.1 percent and continues to trade below six dollars per bushel. The price of corn (March contract) has fallen by 0.8 percent on a weekly basis and remains below 4.5 dollars per bushel. Finally, the price of soybeans (March contract) has fallen by 1.7 percent on a weekly basis and is trading below 11.9 dollars per bushel. MATIF wheat is still slightly above 210 euros per ton, and corn is above 180 euros per ton. We will see if this week it falls below those levels.

The weather is favorable in South America ahead of important weeks for the harvest in Brazil and production in Argentina. The increase in supply from the Black Sea to the Mediterranean, caused by fewer exits through Suez to Asia, is depressing grain prices. The price of physical commodities is falling. In the last three weeks, the fundamental scenario has been well defined. Only a significant external event can change this situation. However, from mid-February, estimates for spring planting will begin. A factor that should not be overlooked, given that some products, such as corn, have negative margins for producers.

Futures prices for copper have further fallen to around 3.8 dollars per pound, marking a weekly loss driven by concerns about demand from China and rising US interest rates. The Chinese manufacturing sector contracted for the fourth consecutive month in January, contributing to negative sentiment. As a result, a slowdown in industrial activity is expected in the first quarter, which will likely affect demand. However, Glencore’s projected production decline of 5 percent for 2023, along with expected further reductions in 2024, could potentially balance this effect. Despite these challenges, there is still optimism that China will take measures to stabilize its economy, which should then be reflected on the demand side, in the form of price increases.

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