Monday 3-Oct-2022
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Potential trade wars sour otherwise strong fundamentals

OpinionsPotential trade wars sour otherwise strong fundamentals

Commodities gave back the gains from the prior month. Industrial metals led the losses, falling by 5.3%. With the Trump Administration imposing tariffs on steel and aluminium imports, the threat of a tit-for-tat trade war has sent jitters into the base metals markets. However, judging by global purchasing managers indices, economic growth appears to be on a strong footing in both manufacturing and service sectors. That bodes well for commodity demand. Although an upgrade in the Federal Reserve’s assessment of the US economy is likely to be US Dollar positive, which could constrain commodity prices in US Dollar terms.

At its May meeting, the Organization for Petroleum Exporting Countries (OPEC), will have to think carefully about its messaging for lifting the curbs on its production, which we expect will happen sometime in 2019. They will be keen to emphasise that avoiding a build-up of oil inventory will continue to be their goal. We suspect many members are itching to raise production at current prices before the US eats their market share, but they will likely keep their restraint until the end of the year, as the programme to reduce inventory is currently working successfully. The delay of Saudi Aramco’s initial public offering (IPO) may ease Saudi Arabia’s urgency in propping up oil prices. Last year, Saudi Arabia had indicated that the company is worth US$2 trillion – a valuation that would be difficult to attain without oil prices north of US$85/bbl. Delaying and scaling back the IPO is likely to buy the country time to revise its message and condition the market for a lower valuation. Saudi Arabia is also being evasive about whether the company will float on an international exchange at all (they confirmed it will float on the local exchange next year). That will significantly change the scale of the IPO and the ambition of the country to diversify its economy. Meanwhile, Saudi Arabia-Iran tensions appear to be intensifying. While this provides a geopolitical premium in oil for now, it could develop cracks in OPEC’s unity, which could end the pact prematurely.

  • Positive sentiment towards agricultural commodities supportive of recentprice gains. Investor positioning across cocoa, cotton, wheat, soybean and corn have improved a significantly. Weather related disruptions have helped to improve sentiment towards agricultural commodities that have lagged in performance last year. We remain supportive of further price gains among cocoa but maintain a cautious outlook on sugar.
  • Temporary headwinds derail industrial metal prices but fundamentals remain intact with the exception of zinc. The uncertainty over trade wars in conjunction with weak manufacturing data and higher production of metals in China weighed on industrial metal prices. While rising supply is likely to reduce the existing deficits of most metals, we abelieve the fundamentals remain intact and concerted global growth to underpin performance.
  • Oil prices rise on bullish forecasts. The International Energy Agency’s bullish assessment of oil demand coupled with their view of a muted supply response from most of the world has provided a boost to oil prices. Meanwhile OPEC raised its estimate of US oil production, recognising just how responsive the country is to price.
  • Precious metal prices falter after a good start to the year. Precious metal prices slipped as the Federal Reserve nears its first rate hike of the year. With the US central bank likely to increase rates at a faster pace this year, compared to other major central banks, the US Dollar has appreciated by almost 1% over the past month, leading to a decline in gold and silver prices.

Please find the full Commodity Monthly Monitor for attached on the left.