Commodities extended their strong start to the year this week with the broad Bloomberg Commodity index trading up 4.1% so far this month while the energy-heavy SP GSCI has notched up gains in the region of 5%. The energy sector has been the main focus so far this year with tighter-than-expected supply driving crude oil higher by close to 10% while extreme roller-coaster rides best describe what is unfolding in the natural gas market, both in the US and especially in Europe. 

On the macroeconomic front the commodity sector received some additional tailwind from a weaker dollar and softer bond yields after data showed US consumer prices reached a forty-year high at 7% in December, in line with expectations. China, in contrast, saw its CPI cool, and together with weak lending data it raised the prospect for the Chinese government speeding up the pace of some of the 102 major projects outlined in its 2021-25 development plan. Many of the areas pinpointed will required industrial metals in some sort as they focus on energy security, affordable housing, infrastructure developments and logistics.

The industrial metals sector jumped to a three-month high on the prospect of rapidly declining inventories, supply disruptions and the mentioned prospect for Chinese stimulus raising the potential for a renewed upside push. Nickel led from the front after reaching a decade high on worries Indonesia, the world’s biggest shipper, will introduce export taxes on raw nickel exports to focus on expanding more profitable refining activities at home. The move by Indonesia, together with solid demand towards the production of electrical-vehicles batteries, may trigger a large supply deficit in 2022. Following months of sideways trading, copper showed signs of breaking higher with the move above the $4.47-50 area of resistance-turned-support being driven by the prospect for rising demand towards electrification, tight supplies and signs China is stepping up its policy response to support a slowing economy, thereby off-setting recent macro risks, especially those stemming from China’s beleaguered property sector. 

The agriculture sector has seen a mixed start to the year with tight supply markets such as coffee, cotton and soybeans trading higher while weakness in wheat has continued this month. Gathering pace after the USDA raised its forecast for world inventories, and after the International Grains Council forecast record world production in the upcoming 2022-23 season. Adverse weather developments in Brazil continues to negatively impact supplies of coffee and most recently also soybeans, although some beneficial rains are now expected in the growing areas.

Another roller-coaster week unfolded in global gas markets. The US natural gas first month futures contract jumped 14% on Wednesday to a six-week high, in response to frigid freezing weather before collapsing by 12% the following day on the prospect for weather turning milder and after the weekly stock draw was in line with expectations. Adding to this was the recent surge in LNG shipments to Europe and the once-insulated US market has become much more exposed to international developments, all of which supported the biggest weekly rise since November.

Meanwhile in Europe, the energy crisis rumbles on and despite an armada of LNG ships delivering increased supplies, prices remain at punitively and, for some, unaffordable prices. The mentioned arrival of LNG shipments and so far mild January weather has reduced the risk of blackouts and gas storage running empty, but uncertainties regarding the Nord Stream 2 pipeline and Russia’s intentions in Ukraine continue to trigger sudden spikes and high volatility. On Thursday, the Dutch TTF benchmark gas future briefly traded below €70/MWh in response to the mentioned mild weather and strong overseas LNG supplies, before suffering a sharp reversal higher back above €90/MWh after Russia-US talks failed to ease fears of military action in Ukraine, a crossing point for around one-third of Russian gas to Europe. 

Crude oil continues its month-long rally and while the early January jump was driven by temporary worries about supply disruptions in Libya and Kazakhstan, a bigger and more worrying development has become apparent during this time. Besides the surging Omicron variant having a much smaller negative impact on global consumption, it is the emerging sign that several countries within the OPEC+ group are struggling to raise production to the agreed levels that has supported prices this month. 

For several months now we have seen overcompliance from the group as the 400,000 barrels per day of monthly increases was not met, especially due to problems in Nigeria and Angola. However, in their latest production survey for December, SP Global Platts found that 14 out of the 18 members, including Russia, fell short of their targets. According to Platts, the 18 members in December produced 37.72 million barrels a day, some 1.1 million barrels below their combined quota. 

The rising gap between OPEC+ crude oil quotas and actual production has already been felt in the market with front month futures prices in both WTI and Brent having rallied stronger than later-expiring contracts. The spread or so-called backwardation between the first and the second Brent futures contract has risen from a low point at 20 cents a barrel in early December, when Omicron worries sparked a sharp correction, to 70 cents a barrel currently. 

Global oil demand is not expected to peak anytime soon and that will add further pressure to available spare capacity, which is already being reduced monthly, thereby raising the risk of even higher prices. This supports our long-term bullish view on the oil market as it will be facing years of under investment with oil majors diverging some of their already-reduced capital expenditures towards low carbon energy production. The timing of the next move up hinges on Brent’s short-term ability to close above $85.50/b, the 61.8% retracement of the 2012 to 2020 selloff, followed up by a break above the double top at $86.75. First though, the chart below increasingly points to the need for a period of consolidation or perhaps even a correction. But with firm fundamentals in play only a bigger than expected omicron development and stronger production can send the price sharply lower. 

Gold traded higher thereby almost reversing the losses seen during the first few days of the month, when surging US bond yields triggered some weakness. Gold’s ability to withstand the 0.3% jump in US ten-year real yields at the start of the year has surprised some, but not us, given our focus on gold’s relative cheapness to real yields that had been rising since last July. Having seen that misalignment disappear, gold then received additional support this week from a weaker dollar, not only against the JPY as risk sentiment rolled over, but also against the big EURUSD pair which managed to break free of sub-1.1400 resistance after US CPI jumped to the highest in decades. 

Several hawkish comments from Fed members, led by Fed Vice Chair nominee Lael Brainard who said she was open to a March rate move, had limited impact on gold, the most interest and dollar sensitive of all commodities. It highlights our view that the gold market has by now fully priced in a succession of US rate hikes starting this March, and with the bond market being torn between a Fed-driven increase in bond yields against the rising risk of a bond-friendly economic slowdown, we see a much more balanced risk-reward situation emerging in gold. 

Silver’s recent outperformance faded in response to some end-of-week profit taking among the industrial metals. For silver to shine and move higher towards the $23.90 resistance area, it first needs to break above $23.41, the 50% retracement of the November to December selloff. Gold meanwhile has once again established some support in the $1800 area ahead of key support at $1777. A break above the $1830-35 area could see it target $1850 ahead of the November peak at $1877.

Ole Hansen, Saxo Group