De-escalation of the situation in the Middle East has reduced the risk of rising commodity prices, gold again at a peak

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The weekend behind us turned out to be much calmer and more stable than expected, after tensions flared between Israel and Iran. Surprisingly, politicians managed to de-escalate the situation, which is not a common occurrence in the Middle East, and this was reflected in the markets in the form of reduced risk premiums and falling commodity prices, primarily energy prices. Commodity markets are mixed at the start of the new week as traders balance between already known factors we have extensively written about this year – the economic strength of the US, halted disinflation signals, hawkish rhetoric from the FED, and energy market volatility due to tensions in the Middle East and between Russia and Ukraine. So, nothing new.

The flight to safety was again a theme, and gold has reached new heights again, while oil remains slightly below the highest levels seen two weeks ago, but current crude oil prices can still maintain that ‘sticky’ inflation. As mentioned, energy and grain markets follow geopolitical headlines, and it is still expected that crude oil and the US dollar will again have a significant impact on the direction of futures prices in the week ahead. Otherwise, this week we expect data on US GDP (a growth of 2.5 percent year-on-year is expected), the Bank of Japan’s decision on interest rates, and PCE inflation data, as well as financial reports from major commodity companies such as Halliburton, Kimberly-Clark, Bunge, Darling, Dow, Valero, and Exxon Mobil.

Markets Strengthen

Financial markets are strengthening after comments from FED Chairman Powell, who indicated that inflation data will complicate the central bank’s planning and may jeopardize expected interest rate cuts. Certainly not what traders expected to hear. Generally, Powell’s comments indicate a likely continuation of the FED’s aggressive policy, which will probably keep rates ‘higher for longer’, and the market is beginning to understand this more and more.

China’s GDP growth is estimated at 5.3 percent year-on-year, which is above market estimates. This is certainly good to see, but it is even more evident that official belief in China’s recovery is needed. The Chinese central bank has been buying gold for 17 consecutive months, and China has imported over 2,800 tons of gold in the last two years. Additionally, it should not be forgotten that China is also the largest producer of gold in the world.

Oil and Gas Prices Decline

On global markets, oil prices fell more than 3 percent last week as traders are concerned about slowing economic growth and thus demand, while tensions in the Middle East and increased US oil inventories provide price support. At the start of the new week, Brent crude futures are at $87/bbl, while WTI crude futures are at $82/bbl, which are the lowest price levels in the last four weeks. JP Morgan analysts reported last week that global oil consumption since the beginning of April is down by 200,000 barrels per day compared to expectations. The de-escalation of the conflict in the Middle East has reduced the geopolitical risk premium in oil prices. Additionally, the US House of Representatives has imposed new sanctions targeting the Iranian oil sector, which are expected to be included in a foreign aid package, specifically targeting shippers and refineries of Iranian crude oil. The latest data shows that US crude oil inventories have increased by 2.7 million barrels, which is almost double the increase of 1.4 million barrels that analysts expected.

European natural gas futures prices TTF have fallen to around €30/MWh, as concerns about possible LNG supply disruptions from the Middle East have eased. However, rising geopolitical tensions, such as Russian attacks on Ukrainian gas facilities and conflicts in the Middle East affecting shipping routes, have intensified the focus on natural gas supply. Additionally, Europe is facing reduced LNG imports amid increased demand in Asia, despite record-high seasonal gas inventories.

Rising Coffee Prices and Tea Production Costs

Funds now hold the largest short position in the entire agri complex in the last 4.5 years (617,000 contracts worth $14.4 billion), suggesting that they are betting that weak demand, abundant global supplies, and a strong dollar will keep prices low as we enter risky planting weeks. However, current price movements on the exchanges suggest that the lowest values, those from mid-March, are very unlikely to be tested in the weeks ahead. Market drivers are still not fundamentals. The world is holding its breath, waiting to see where military escalation will take us. The rise in commodity prices in recent weeks has also been contributed to by the rise of the dollar. This large ‘short’ position of funds is simultaneously a bullish risk present in the markets.

Prices of coffee have risen more than 20 percent since January, after extreme weather conditions hit crops in major producing countries, including Vietnam and Brazil. At the same time, tea production costs have risen by 34 percent just last month due to rising industry costs and the crisis in the Red Sea that has affected container ship movements. After we have somewhat accepted the fact that we will have to eat less chocolate, the least we needed was to be deprived of coffee and tea.

Copper Prices Also on the Rise

Copper futures prices have risen to $4.5/lbs, the highest in nearly two years, as concerns about low supply are faced with signs of increasing demand. Satellite data showed that copper smelters in China, the world’s largest producer of refined copper, have reduced activity levels to comply with promises that their production could fall by up to 10 percent this year. These moves mark a response to low copper ore supply for Chinese smelters, increasing the sector’s excess capacity to bring smelting fees to the lowest level in several years. Amid a wave of reduced ore supply, Zambia has suspended activities in key mines due to power shortages, while the Cobre mine in Panama has closed, and South American mines have failed to meet their guidelines for 2023. Meanwhile, increased demand from China has spurred imports of unrefined copper ore, aligning with strong manufacturing PMI readings, suggesting that factories may gain some strength after prolonged pessimism.