Commodities Corner: Oil by itself

The rout across most commodity markets continues – only oil has proven to be resistant to the growing belief that recessions stalk the global and major economies, especially China and America.

Commodity markets and investors appear to believe that the rapid pace of interest rate increases from central banks will overshoot and push economies across the globe closer to, if not into a slowdown and then stagflation.

The weak GDP numbers for China for the June quarter on Friday did nothing to improve confidence – annual growth almost halting at 0.4% from 4.8% in the first quarter and quarter on quarter growth contracting by 2.6% from the three months to March.

That rattled commodity prices such as iron ore and copper a little more while prices for key rural commodities also softened.

Commodity prices have been falling for the past month on growth fears. And even though oil remains around $US100 a barrel, it’s down from $US120 a barrel in March in the wake of Putin’s invasion of Ukraine which has caused many of the current problems.

If the current weakness continues into August, we should see a significant easing in inflationary pressures in the US and some other economies, but Australia has a way to go with the peak yet to be found.

So by last Friday, many previously hot commodities had definitely cooled.

Iron ore led the way Friday with a 16% slump in the price of 62% Fe fines delivered to northern China from the Pilbara – SGX futures in Singapore ended at $US96.15 a tonne, down from $US114.60 a week earlier and the lowest price since last November’s sell off.

According to Fastmarkets MB, benchmark 62% Fe fines imported into Northern China ended around $US96.04 a tonne, down 4.24% from Thursday and the lowest since November 2021.

Thermal coal prices also sold off on Friday – the ICE Newcastle index saw the front month price shed more than 8% or close to $US30 a tonne lower at $US339.85.

Copper fell under $US7,000 a tonne for the first time in nearly two years on Friday in London and it lost more than 8% on Comex in New York for the week, ending Friday at $US3.23 a pound, leaving it down more than a third since hitting an all-time high above $US10,700 a tonne on the London Metal Exchange in March after the Ukraine invasion, and analysts think there is more weakness to come, despite all the talk of the need for more metal in the greener, renewable future.

Investors took fright at the weaker than forecast 0.4% annual growth in Chinese GDP in the June quarter, as well as less than convincing data on retail sales, production and investment.

In effect, the Chinese economy ground to a halt because of the impact of harsh restrictions as part of President Xi’s zero Covid policy which is still not working with more cases being reported every day.

As well a continuing protest by mortgagees in parts of China and botched government attempts to try and settle the growing dispute, also undermined confidence and refocused investor attention on the faltering property sector.

Comex gold fell under $US1,700 an ounce for the first time in months and though it bounced back to $US1,703 an ounce, it still shed almost 2% in value over the week and is a long way from the peak of $US2,078 an ounce in early March. Comex gold prices are now around 11-month lows.

Comex silver dropped 3.3% to settle at $US18.55 an ounce.

Oil prices rose Friday but lost ground for another week – Brent lost 5.5% over the week to settle at $US101.16 on Friday, after dipping under $US100 a barrel. US West Texas Intermediate dropped 6.9% to settle at $US97.59 a barrel.

US petrol prices are retreating from the record retail level of $US5 a gallon – the futures price is around $US3.20 a gallon and fell 7% last week and 16% in the past month.

The latest US inflation data is expected to prompt the Fed to raise rates by at least 0.75% at its meeting next week, a strong move that more economists think could push the US economy into recession, which would mean less demand for oil.

But in reality, oil markets remain extremely tight and the International Energy Agency and OPEC have both stressed this tightness in their latest forecasts now running into 2023.

This has not prevented oil prices from falling through the $US100 a barrel level last week for Brent and WTI.

Wheat prices continued dropping and are now at five-month lows – that is, back to levels well before Russia’s invasion of Ukraine in late February.

CBOT (Chicago Board of Trade) prices for wheat and corn prices declined to $US7.90 and $US6.00 cents a bushel respectively.

In its latest report, the US Department of Agriculture revised production estimates for the European Union and Ukraine downward by 2 million tonnes each to 134.1 million tons and 19.5 million tons, respectively.

However, the estimates were raised by similar amounts for Russia and Canada. The outlook for the US is improving.