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.
Rising inflation remains a key focus and one that to a certain extent has been driven by higher input costs from surging commodities. In China, factory-gate inflation, or PPI, reached its highest level since 2008 with authorities offering to release state reserves of industrial metals as part of their continued efforts to cool commodity prices and keep a lid on inflation. In the US, consumer prices rose 5% year-on-year, again the fastest pace since 2008, with core inflation running at the highest since 1992.
These developments however did not deter investors in the bond market where Treasury yields dropped to new lows for the cycle. This trend has been driven by a combination of a market currently accepting the Fed’s view that surging inflation will soon reverse lower and the flood of USD liquidity being pumped into the market as the US Treasury continues to reduce its account to under $500 billion by August 1 from a 2020-high of around $1,800 billion. The combination of lower yields and a softer dollar all helped boost risk appetite across markets, including commodities.
Dutch TTF gas and ECX Carbon, two Europe-centric commodity futures and non-members of the mentioned commodity index, showed the biggest rise on the week. The front-month TTF gas contract, the European benchmark, hit a five-month high on a combination of tight supply caused by above-average temperatures, a temporary drop in flows from Norway and Russia, and not least a renewed rise in EU carbon permits to prices above €53 per ton.
During the past year, and especially since November, the ICE EUA futures contract which represents one ton of carbon emissions has rallied strongly to trade 40 euros, or 300% above the average price from the previous five years. What happened in November was the first vaccine announcement signaling a clear path towards a global recovery and Joe Biden, with his more environmentally friendly policies, being elected President of the US.
Crude oil traded higher for a third consecutive week with Brent gaining a foothold above $70 while WTI managed its highest close since 2018. The pace did slow down somewhat with the market, despite a very bullish outlook for the second half of 2021, beginning to contemplate whether most of the Western Hemisphere recovery in demand has been priced in by now.
The potential short-term negative price impact of an Iran nuclear deal was seen on Thursday when algorithms that often control a large percentage of daily volumes in the futures market temporarily choked after misreading news regarding the US lifting sanctions on one Iranian person, and NOT the country as a whole. It briefly drove the price of Brent and WTI down by more than 2% before reverting back to the starting point. According to TankerTrackers.com, Iran’s own fleet of supertankers is currently storing 70 million barrels of gas condensate, and it has been rising lately due to insufficient demand from China, its biggest customer.
Monthly oil market reports from EIA, OPEC and IEA all painted a supportive outlook for crude oil demand with the IEA now expecting to see global oil demand return to pre-virus levels late next year. While a return of Iran to the global market within a few months potentially could supply the additional barrels required for the remainder of the year, there is no doubt that the OPEC+ group of producers currently have the ability and strength to dictate the direction of oil prices. However, by keeping the market artificially tight over the coming months, they risk leveling out the playing field in 2022 when the IEA expects non-OPEC growth, due to high prices, could rebound by 1.6 million barrels.
Estimating a price target on a politically-controlled commodity such as oil is very difficult, and while the risk of a short-term correction exists, the current trajectory points to higher prices with Brent potentially aiming for the 2019 high at $75.
Ole Hansen, Head of Commodity Strategy Saxo Group