Commodities Corner: The most vicious of circles

Commodity prices are still being held hostage by the Fed and interest rates, with matters not helped at all by the sharp rise in US consumer prices in May.

It might be repetitious but rising oil and energy prices remain the biggest danger to economies large and small, employment, growth and demand, especially from consumers.

US petrol prices above $US5 a gallon for the first time ever have given America a timely reminder of the potential damage to be caused by the combination of high prices, supply shortages, rising costs and the impact from the Russian invasion of Ukraine.

Figures from the American Automobile Association (AAA) showed prices topping the $US5 a gallon mark on the weekend with no sign of any easing in the offing (around $A1.90 a litre)

These prices now look set to continue at current levels of higher if global oil prices remain around $US120 a barrel.

The new high means US petrol prices have risen by more than two-thirds in the past year and have more than doubled since Joe Biden entered office.

The May consumer price index, released on Friday, showed prices up 1%, or 8.6% compared to the same time last year. The market had been expecting just over 8%, so the news came as shock and saw markets slide.

Economists expect demand to start easing if petrol prices remain above $US5 a gallon. That’s called demand destruction and Goldman Sachs in particular reckons that will help drive prices lower – eventually.

Friday’s CPI release hit commodities, especially oil as traders worried about the rising chance of demand destruction in the wake of the Fed’s expected rate rise this week.

Since March, the US central bank has lifted its benchmark policy rate by 0.75 percentage points and is expected to add another 0.50% this week, although some economists wonder if the surge in may’s CPI might see the bank drop a 0.75% jump on markets to frighten demand and prices lower (and trigger a recession?)

Brent crude fell $US1.06 to settle at $US122.01 a barrel. US West Texas Intermediate crude fell 84 cents to settle at $US120.67 a barrel.

Both benchmarks still posted weekly gains, 1.9% for Brent and 1.5% for WTI.

Oil companies are not adding to gas or oil production, despite requests and demands from the Biden administration.

But the US sectors did boost rig numbers last week – the first rise for three weeks.

Total rig numbers rose six to 733 in the week to June 10, its highest since March 2020, according to energy services firm Baker Hughes Co.

Baker Hughes said that puts the total rig count up 272 rigs, or 59%, over this time last year.

U.S. oil rigs rose six to 580, their highest since March 2020, while gas rigs were unchanged at 151 for a third week in a row.

Even though the combined rig count has climbed for a record 22 months in a row to May, US oil production is still below pre-pandemic record levels of 12.3 million barrels a day (bpd) in 2019.

US crude production is forecast to only rise about 700,000 this year to 11.9 million bpd and surpassing the record only in 2023 at 13.0 million bpd, according to data from the US Energy Information Administration.

An ongoing imponderable is events in China, where lockdowns are continuing to be imposed on parts of Beijing and Shanghai.

Shanghai, which emerged from a two-month lockdown earlier this month, said that seven of its 16 districts would conduct mass testing, according to state media. Those areas included financial and downtown districts.

Since Thursday, at least three districts in Beijing have ordered bars and some other entertainment venues to close until further notice.

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The mixed Chinese trade data (imports up sharply and imports edging higher on weak volumes) will be followed this week by the last data for the month – investment, retail sales and production – and commodity markets will be watching closely.

Comex copper rose nearly 4% last week after the trade data showed imports of the metal were the only commodity to see a rise in the first five months of this year.

Gold – up 1.81% and Silver, up 0.11% also rose last week but weakened on Friday after the CPI data release.

Rising bond yields and the higher US dollar are straining commodity and precious metals markets.

The re-emergence of risk aversion, which has been apparent in recent sessions, is not benefiting gold and precious metals.

Industrial metals, on the other hand, have gained some ground, boosted by the easing of restrictions related to the coronavirus in China.

Lead is trading at $US2,200 a tonne, copper is holding steady at $US9,600 a tonne (over $US10,000 in late May) while aluminium is gaining some ground at $US2,750 a tonne.

In grain markets there’s rising pessimism about a potential return of Ukrainian supplies to international markets. US timber (lumber) prices are still falling to $US562 a thousand board feet (of wood).

That’s down sharply from the 10-month peak of $US1,480 touched in March, as rising interest rates and inflation have dampened demand despite the looming summertime construction season.

New home sales in the United States sank 16.6% month on month to a seasonally adjusted annual rate of 591,000 in April, the fourth month of falls and the lowest level in two years. On top of that, transportation bottlenecks eased, and output volumes at sawmills have recovered from Covid constraints and better weather and timber is now more plentiful.

Oil though continues to overshadow other commodities and will continue to do so for quite a while yet.