Pain Mode – Commodities drop as FOMC deflates the reflation trade

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The commodity sector was heading for one of its biggest weekly losses since the early pandemic panic last March as the reflation trade deflated at a rapid pace after the FOMC signaled it would speed up its expected pace of policy tightening, thereby potentially lowering the risk of runaway inflation. Adding to these was continued efforts by the Chinese authorities to reduce inflation through curbing speculation and the hoarding of commodities. Finally, a stronger dollar also created headwinds after reaching a two-month high against a basket of currencies.

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Under Pressure

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After a momentous rally this year, it looks like oil prices are finally coming under pressure – with the threat of inflation dampening oil market optimism. The months-long oil price rally hit the pause button this week, following a shift in outlook from the U.S. Federal Reserve. “Inflation is your friend until it isn’t,” Louise Dickson of Rystad Energy said in a statement. “The oil market is re-learning this lesson in the past two trading days after the US central bank hinted at potential interest rate hikes in 2023, which would make oil more expensive in non-dollar denominated economies and could damper demand.”

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Carbon and gas driving strong week for energy

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Commodities traded higher for a third week with broad gains in energy and metals off-setting pockets of weakness across the agriculture sector. As a result, the Bloomberg Commodity Spot Index, which tracks the front-month performance of major commodity futures, continued to trade near a ten-year high.

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IEA: Open The Taps

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Oil prices climbed on Friday as the International Energy Agency boosted optimism about global oil demand recovery, Oilprice said. Oil rises for third week on positive economic news in the U.S. and accelerating global vaccination campaigns. The road traffic in the U.S. and much of Europe is largely back to levels seen before the pandemic. 

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IEA: It’s time to make clean energy investment

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The world’s energy and climate future increasingly hinges on whether emerging and developing economies are able to successfully transition to cleaner energy systems, calling for a step change in global efforts to mobilise and channel the massive surge in investment that is required, according to a new report by the International Energy Agency. It’s time to make clean energy investment in emerging and developing economies a top global priority.

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Strong Oil Demand Growth Is Here To Stay

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Oil prices held their gains at the start of the week, with Brent at $71 and WTI just below $70. “For many, the $70 per barrel oil signal may be enough for investors to cash out of the bull cycle early – likely what happened today – which would stifle the upward price trajectory forecasted by our bullish crude balances,” said Louise Dickson, an analyst at Rystad Energy. Investors are scoping up options bets on crude that pay off if oil prices soar to $100 per barrel. 

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OPEC+ reaffirms trajectory

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OPEC+ officials met for a virtual meeting on Tuesday and reaffirmed its current plans to gradually increase production in July. Its outlook for global oil demand growth at around 6 million barrels per day this year.  “The market is now facing the exact opposite dilemma of April 2020,” said Louise Dickson, an analyst at consultancy Rystad Energy. “Producers now have just as delicate of a task to bring back enough supply to match the swiftly rising oil demand. If markets over-tighten, a flare-up in prices could jeopardize the global economic recovery.”

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Global Energy Investments

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As spending rebounds towards pre-crisis levels, not enough is going into clean energy, especially in emerging market and developing economies, new IEA report finds.

Global energy investments set to recover in 2021 but remain far from a net zero pathway. With energy investment returning to pre-crisis levels, its composition is continuing to shift towards electricity: 2021 is on course to be the sixth year in a row that investment in the power sector exceeds that in traditional oil and gas supply, according to the World Energy Investment 2021 report.

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