Financial markets spent the week recovering strongly after managing to shake off the FOMC aftershocks which initially sent the dollar and US Treasury yields higher, and stocks and commodities lower. Most of these initial moves have now reversed led by US equities reaching new all-time highs and long bond yields trading steady, while dollar traders are still trying to decide whether the Greenback’s post-FOMC rally will reassert or fully reverse.

In commodities, the rotation out of metals and agriculture into energy showed signs of easing. With the grain sector being the exception, all other sectors rose this past week as the post-FOMC blow continued to fade. Crude oil and natural gas rose in response to rising demand and US shale producers focusing on financial discipline instead of hiking production. These developments lifted both fuels to levels last seen in 2018, with the oil market particularly focusing on OPEC and Russia’s next move when they meet on July 1 to agree on production levels for August and beyond.

Industrial metals led by copper staged a comeback after Chinese authorities only released small parcels of metals from state reserves as part of their efforts to curb prices. Adding to this news of a Russian has proposal to introduce of at 15% export tax on almuminum, copper, nickel and steel in order to combat domestic metal price inflation and boost tax revenue. Being a significant exporter the implementation could further tighten up markets and provide price support in 2H21.

Copper prices also found a bid, albeit a muted one, after President Biden’s $579 billion infrastructure plan received bipartisan support. However, the deal, which would support copper demand through energy transition measures with the establishment of an electrical vehicle charging network, still needs to find a way past a very divided Congress.

Gold struggled to find a fresh bid despite renewed dollar weakness and US real yields reversing lower towards pre-FOMC levels. The market remains torn on the outlook for inflation and for now the consensus has moved towards supporting the transitory view being talked up by central banks, especially the US Federal Reserve. With other gold-linked metals like silver and platinum both outperforming, the yellow metal may slowly set itself up for a renewed upside challenge. Potential buyers, however, are likely to remain sidelined, either waiting for another leg lower or a break above $1820/oz.

US natural gas prices surged to their highest in more than two years at $3.44/MMBtu as extreme heat in the U.S. West increased demand from utilities, thereby exacerbating already tight supplies. Inventories are currently 6% below normal for this time of year with rising domestic and LNG export demand at time when shale producers, just like those drilling for oil, have curbed output in response to investor calls for financial discipline. Front month prices this high in June was last seen in 2014 when it traded at $4.55/MMBtu.

Over in Europe, the Dutch TTF gas contract surged to a 2008-high above €32/MWh, equivalent to $11.25/MMBtu. Gas in storage has reached its lowest level for this time of year since 2009 on a combination of LNG terminal maintenance, strong hot weather-related demand and reduced flows from Russia, potentially geopolitically motivated in order to force an agreement on the soon-to-open Nord Stream 2 pipeline. Low deliveries of gas and lower wind-energy output has forced an increased use of coal which in turn helps underpin carbon prices that remain on an upward trajectory, currently above €55 per tons.

In the short-term the price direction will depend on the June 29 Ukraine auction of capacity on its pipeline, a critical transit route to Europe, and whether Russia and Gazprom will chose to send more supplies via Ukraine. Not least considering an upcoming 10 day maintenance on the Nord Stream 1 pipeline that links Russia directly to Germany. Dutch TTF one-month forward gas contract and US Henry Hub first month contract have both reached new highs on surging demand and tight supply. 

Crude: Following a small post-FOMC correction, crude oil quickly resumed its move higher with WTI and Brent both reaching levels last seen in 2018. This is in the belief that OPEC+ will, in the near-term, manage production increases in a manner that ensures continued price support as global demand continues to recover, and later on due to increased concerns that a lack of CAPEX spent on new production could leave the market undersupplied from late 2022 onwards. Recently, the rally has been led by WTI which has seen its discount to Brent narrow on speculation that storage levels at Cushing, the WTI futures delivery hub, could shrink further amid strong Midwest refinery demand.

Price rotations, that in recent weeks have favored energy over metals and agriculture, have also triggered a rotation by speculators. While they reduced exposure to metals, both precious and industrial, along with agriculture, the combined net-long in oil and fuel products (ex. natural gas) has become the biggest bet on rising energy prices since October 2018, but at 977,000 futures lots it is still 33% below the January 2018 record. While highlighting the risk of market bets becoming one-sided, it also shows the strong belief in higher prices currently being exhibited by investors.

Increasingly, however, the oil market’s focus will turn to the July 1 OPEC+ meeting, and through the actions or inactions of the group the market will be sent a clear signal whether it is price stability by raising production or higher prices that the group will be seeking. With Russia’s current government budget based on oil in the low 40’s, they may be more inclined to support a production increase in order to ensure a higher market share while limiting the risk of rising non-OPEC production.

Saudi Arabia, however, holds the key, not least after the goodwill they collected by their actions back in January when they made a unilateral production cut to support prices during a period of renewed lockdowns. The world is waiting to see whether they will try to support even higher prices by arguing against a bigger production increase. Continued tightness will ensure a steeply backward-dated curve which will benefit OPEC+ producers selling at prices based on high spot prices. Meanwhile, debt financed producers, an example being US shale producers, are often forced to hedge some of their future production 12 to 18 months out and, given the shape of the forward curve, at significantly lower prices than current spot prices.

Ole Hansen, Head of Commodity Strategy, Saxo Group