The commodity rally continues with the Bloomberg Commodity Spot Index hitting a fresh ten-year high this past week. It is however worth noting a sharp divide has started to emerge between the different sectors with performance becoming a lot less synchronized than what we saw during the first half of 2021. The worst performing sector currently and throughout most of 2021 remains the precious metal sector, which has struggled to justify itself amid roaring stock markets and inflation worries being offset by the prospect of central banks reducing stimulus leading to higher Treasury yields and potentially a stronger dollar.

The dollar is another key factor determining the direction of commodities. It continues to trade strongly, thereby creating headwinds for the most dollar-sensitive commodities such as investment metals and key agriculture products. Stronger than expected US retail sales also gave the greenback another boost together with safe-haven demand as an emerging crisis at Evergrande, China’s and the world’s most-indebted developer, continues to unfold. If not contained by the government, it risks causing contagion to similar companies and the Chinese economy in general.

European gas and power market

Just like the previous two weeks, we cannot avoid mentioning the phenomenal surge in European gas and power prices, which increasingly is being felt by industries with heavy energy consumption from chemicals and fertilizers to cement and even sugar producers. A perfect storm of price supportive developments have emerged this year to send prices of gas to a record high, with the Dutch TTF first month benchmark at one point hitting €76.5/MWh or $26.8/MMBtu, a record $150/barrel oil equivalent. German baseload power prices for next year delivery reached €108/MWh, and close to 2.5 times the five-year average for this time of year. Also spare a thought for British consumers who have been some of the hardest hit, with the UK grid seeing a sharp fall in energy from wind turbines. The UK equivalent to the mentioned Dutch TTF contract hit an eyepopping €260/MWh before retracing lower.

Below are the main reasons driving the current surge. While some may eventually change and send prices lower, the prospect for another cold winter will send shivers down the spine of everyone from consumers to the industry and even politicians. The latter may have to worry about blackouts, partly due to green transformation initiatives making it harder to maintain the needed level of baseload in the electricity grid.

· Uncertainty over start of Nord Stream 2, a potential extra source of gas supply once up and running.

· LNG supply issues in the US due to Hurricane Ida disruptions.

· Low wind output across Europe with Denmark’s renewables leader Orsted reporting an ‘extraordinarily poor wind quarter’.

· Reduced production from Norwegian Hydro plants.

· Lowest stocks of gas ahead of the peak winter demand season in more than ten years.

Crude oil headed for a fourth weekly gain, with the Covid-led August slump long forgotten with both crude oil and natural gas still dealing with the disruptive and price supportive aftermath of Hurricane Ida. Producers of both continue to struggle reinstating production on platforms in the Gulf of Mexico with the IEA in its latest monthly Oil Market Report, seeing a potential loss of more than 30 million barrels. With refineries also struggling to get back up and running, the result has been a sharp and price supportive reduction in fuel stocks of gasoline and diesel. Adding to this is the mentioned surge in global gas prices spilling over to the US market, and the IEA forecasting a surging demand into yearend as the Covid impacts fade once again, and we are left with a market where bulls are once again in control.

However, concerns about Chinese demand, a continued recovery in US production and the prospect for more crude oil being released from strategic reserves in China and the US may curb further short-term gains above the multi-year trendline going back to the 2008 record peak, currently just below $77.

Gold and silver continue to exhibit troubling behaviour; stabilizing on falling yields, only to slump when they rise a bit. This week was no exception, with gold and especially silver getting dumped following a stronger-than-expected jump in US retail sales number. Higher yields drove a stronger dollar on speculation that stimulus could be reduced soon. Gold dropped below support-turned-resistance at $1780 while silver slumped to $22.60, its August low. A fund manager at BlackRock told Bloomberg that he had almost cut his exposure in gold to zero, a move that has been replicated by other money managers in recent months, as they bet on an economic recovery and normalizing real yields.

Until data proves otherwise the precious metals market will not be at the top of fund managers’ buy list, so despite continued strong demand in the physical centers in India and China, and from central banks, the metal is currently stuck within its wide 200-dollar range between $1700 and $1900. Next week, the focus turns to the FOMC meeting on September 22 where the market will be looking for confirmation when the bank will begin tapering its massive bond buying scheme. The size and the speed of the reduction are likely to determine the short-term direction, and in order for the outlook to improve, gold needs a solid break back above $1835. Until that happens, which we still believe it will, there are no major reason to chase or add to any existing positions.

Iron ore, a key input to the production of steel and Australia’s biggest export, is experiencing its longest run of daily losses since 2018. Chinese steel production, which dropped to a 17-month low in August, remains under pressure due to the governments clamp down on highly polluting industries but also signs of weakening activity in the property sector, a development currently receiving increased attention given the mentioned problems at Evergrande. The futures price in Singapore has suffered accordingly and from a record high of $230 a tonne in May the price on Friday slumped to near double digits at $101.50 a tonne.

Industrial metals traded softer on the week but still up on the month led by the recent surge in aluminum and nickel, which are seeing tightening supply and booming demand, not least due to the clean energy transition and China’s crackdown on emissions in energy-intensive industries. Dr. Copper, used in everything from wiring and electronics to electric vehicles, continues to trade range bound with a strong long-term demand outlook currently being challenged by growth worries in China’s property sector, a key source of demand.

The helicopter perspective shows copper, one of the kings of the so-called “green” transformation, still lingering in a downtrend but which at the same time has managed to put in a double bottom around $3.95/lb. While we wait for a higher high, initially above $4.63/lb, to attract fresh momentum buying, the risk of a deeper correction cannot be ruled out, but in our opinion, copper remains a buy on fresh strength and any potential additional weakness.

Surging container freight rates: Another development impacting the cost of, and ability to ship raw materials around the world is the ongoing surge in global container freight rates. This past week Denmark’s Maersk, one of the world’s largest owners of container vessels, upgraded its 2021 earnings for a third time citing an exceptional market situation. Freight rates are driven higher by persistent congestions and bottlenecks in global supply chains struggling to keep pace with the demand for goods and overcome labour disruptions caused by Covid outbreaks. These inflationary forces are not expected to reverse anytime soon with high rates currently expected to last towards 2023.

Ole Hansen, Saxo Group