The commodity sector spooked by the recession ghost saw steep declines across all three sectors of energy, metals and agriculture this past week. At this point, the level of potential demand destruction remains unclear, but we doubt the eventual impact will be enough to unsettle the long-term reason commodities are in a cyclical bull run. In this update we take a closer look at crude oil, copper, gold and wheat, Saxo Bank reports.
The commodity sector is increasingly being spooked by the recession ghost. This past week’s selling saw steep declines across all three sectors of energy, metals and agriculture. At this point, the level of potential demand destruction remains unclear. However, there is no doubt that some of the recent froth is currently being taken out of the market. This is partly driven by macro-orientated funds who bought the rally but now are having second thoughts as the risk of an economic slowdown looms ever larger.
The current worries, however, will only manifest itself over the coming months and quarters. At this point, we doubt the eventual impact will be enough to unsettle the long-term reason commodities are in a cyclical bull run. Structural issues, such as doubts about the long-term investment appetite for new projects within energy exploration and mining, remain a key reason tightness will continue to be a price supportive issue over the coming years. Some of it led by the green transformation which is making the outlook for fossil-fuel based energy demand increasingly difficult to predict.
The unpredictability of future demand has recently been highlighted by several energy producers which are currently on the receiving end of critical comments from governments – especially the Biden administration which is struggling to gain traction, amid record high fuel prices at the pumps, ahead of the midterm elections this autumn. In defence of not raising capital expenditure towards increased oil production and refinery capacity, most energy producers say that rising sales of electric vehicles is set to cut gasoline market share over the next several years, thereby reducing the appeal of new long-term drilling and refining projects.
The month of June has indeed delivered a sharp turnaround across markets, starting with the higher-than-expected US inflation print on 10 June leading to the first 75 basis point rate hike in decades. With several additional rate hikes to follow, the market has increasingly started to worry that central banks around the world will continue to raise rates. This will be either until inflation is brought under control or something breaks – the latter being the risk of economies buckling under pressure with recession the consequence. For now, at least one element of inflation, i.e., rising input costs through elevated commodity prices, have started to retreat.
/Saxo Bank/