The Commodities Feed: China’s GDP falls short The complex has come under pressure this morning following China’s second quarter GDP data, which came in below market expectations. The data will do little to ease concerns over the Chinese economy.   Energy – China data weighs on oil Oil’s venture above US$80/bbl was relatively short-lived, with Brent settling below this level at the end of last week. Downward pressure has continued during early morning trading today following weaker than expected Chinese GDP data. A slight recovery in the USD has also put some pressure on oil whilst supply concerns have also eased, with both the Sharara and El Feel oil fields in Libya reportedly resuming after a brief shutdown last week due to protests. However, it appears as though loadings at Shell’s Forcados oil terminal in Nigeria remain halted after a possible leak was discovered last week. The terminal was set to ship 220Mbbls/d in July. This follows a number of other recent supply disruptions in the oil market, including Kazakh output being affected by power issues and Mexican output bieing hit by a platform explosion, whilst the market is still awaiting the resumption of Kurdish oil flows via the Ceyhan terminal in Turkey. Speculators increased their net long in ICE Brent over the last reporting week, buying 48,123 lots to leave them with a net long of 233,029 lots as of last Tuesday. This is the largest net long speculators have held since April. However, the current speculative long is likely to be somewhat larger, given that this data will not include the post-US CPI rally. The Commitment of Traders report also shows that producers appear to have taken advantage of the more recent strength by selling into the rally, with the producer gross short increasing by 34,930 lots over the last reporting week. The latest rig count data from Baker Hughes shows that the number of active US oil rigs continues to trend lower. The oil rig count fell by 3 over the last week to 537, which is the fifth consecutive week of declines. The number of active rigs has fallen from a year-to-date peak of 623 in mid-January. Whilst up over the last week, Primary Vision’s frac spread count does suggest that completion activity in the US has plateaued over the last few months. China released its second quarter GDP numbers this morning, which showed that GDP grew 6.3% year-on-year, falling short of market estimates of 7.1%. Even so, quarter-on-quarter GDP numbers came in line with consensus at 0.8%. June industrial production came in above expectations at 4.4% YoY, whilst retail sales in June slowed to 3.1% YoY from 12.7% previously, which was also below expectations of 3.3%. The weaker than expected GDP numbers are likely to continue to cause concern for markets. Digging a little deeper into industrial output numbers shows that apparent domestic oil demand was strong over June, coming in at 14.86MMbbls/d, up 13.6% YoY and 1.4% MoM. However, the oil market clearly seems focused on weak headline numbers.

Agriculture: Bearish WASDE report The USDA’s latest WASDE report was a largely bearish affair, particularly for corn and soybeans. The USDA revised up its US corn production estimate by 55m bushels to 15.32bn bushels, on the back of a larger than expected planted area as reported in its recent acreage report. A reduction in yield estimates (due to recent dry weather) was not enough to offset the higher acreage. The market was expecting a larger fall in yields, therefore the USDA’s production estimate was above the 15.15b bushels the market was expecting. Higher output sees US ending stock estimates for 2023/24 at 2,262m bushels, up slightly from the previous forecast and above the 2,166m bushels the market was expecting. For the global balance, corn production for 2023/24 is forecast to increase by 1.7mt to 1,224.5mt, as output increases from Canada (+0.7mt) and Ukraine (+0.5mt) partially offset by reductions from the EU (-0.9mt). 2023/24 global ending stocks for corn were left largely unchanged at 314.1mt, although this was above the little more than 312mt the market was expecting. The USDA lowered 2023/24 US soybean output estimates by 210m bushels to 4,300m bushels due to lower acreage. The market was expecting further downside to soybean output, however, the agency left yields unchanged from last month. US 2023/24 ending stock estimates were reduced from 350m bushels to 300m bushels, which was still well above the roughly 206m bushels the market was expecting. For the global market, 2023/24 soybean production estimates were lowered by 5.4mt to 405.3mt, which leaves ending stocks for 2023/24 at just under 121mt.   Lastly, the USDA projects US wheat supplies to increase by 74m bushels to 1,739m bushels. This pushes US ending stock estimates up by 30m bushels to 592m bushels, which is above the roughly 565m bushels the market was expecting. For the global wheat market, the USDA expects 2023/24 wheat production to fall to 796.7mt this season, down from an earlier estimate of 800.2mt. As a result, ending stocks for 2023/24 were lowered by 4.2mt to 266.5mt, which is less than the market was expecting.

The gold price has made a retreat to the vicinity of $1,900 per ounce. What's next for gold prices - will the King of Metals find support there from which to bounce? Please comment on the US CPI reading. What does it mean in terms of further Fed monetary policy?   Today’s US CPI numbers for June were never likely to change the calculus behind another 25bps rate hike when the Fed meets in two weeks’ time. Having hit a peak of 9.1% this time last year, today’s numbers have seen US CPI slow further to 3%, while core CPI slowed to 4.8%, a much softer number than expected. The nature of today’s figures suggest that whatever other Fed officials would have us believe further rate hikes beyond July will be a big ask, and probably won’t happen, hence today’s US dollar weakness. This may also help to explain why the US dollar has slipped so much against the Japanese yen in recent days, although some are suggesting it is because we might see a policy shift from the Bank of Japan when it meets at the end of this month. Whichever way you come at it from the net effect is likely to be the same in that US and Japanese rates are likely to converge, rather than diverge.This should be good news for gold as a weaker US dollar should help lift the yellow metal back towards $2,000 an ounce

Tighter oil market over the second half of 2023 Fundamentals are not dictating oil prices at the moment. Instead, macro uncertainty and concerns over the China recovery are proving an obstacle to oil prices moving higher. In addition, expectations for a more hawkish US Fed will certainly not be helping risk appetite. Speculators have reduced their positioning in the market considerably in recent months. ICE Brent has seen the managed money net long fall from a year-to-date high of around 300k lots in February to around 160k lots in the last reporting week. This has predominantly been driven by longs liquidating, although there has also been a fair number of fresh shorts entering the market. We still expect global oil demand to grow by around 1.9MMbbls/d in 2023, and while this may appear aggressive in the current environment, it is more modest than some other forecasts – for example, the International Energy Agency forecasts demand to grow by 2.4MMbbls/d this year. Whilst we believe that our demand estimates are relatively modest, there are still clear risks to this view. The bulk of demand growth this year (more than 50%) is expected to be driven by China. So far this year, indicators for Chinese oil demand have been positive, as the economy has reopened. However, the concern is whether China will be able to keep this momentum going through the year. The risk is that the growth we have seen in domestic travel starts to wane as the effects of 'revenge' spending ease. Supply-side dynamics continue to provide a floor to the market. OPEC+ continues to cut and we have seen Saudi Arabia announce further voluntary supply cuts through the summer. Recently-announced cuts from Saudi Arabia, Russia and Algeria amount to a reduction of a little over 1.5MMbbls/d in supply over August 2023. Although, there are doubts over whether the 500Mbbls/d of cuts recently announced by Russia will be followed. It doesn’t appear as though Russia has stuck to a previous cut of 500Mbbls/d when you consider that Russian seaborne crude oil exports have been strong for most of the year. Drilling activity in the US has also slowed this year with the number of active oil rigs in the US falling from a year-to-date peak of 623 in mid-January to 545 recently, which is the lowest level since April 2022. While supply growth is still expected from the US, and output is set to hit record levels, the growth will be much more modest than in previous years. For 2023, US oil output is expected to grow in the region of 600-700Mbbls/d, while for 2024 growth is expected to be less than 200Mbbls/d. Higher costs, a tight labour market and an uncertain outlook all contribute to this more tepid growth. While the broader theme we have seen from US producers in recent years is to also be more disciplined when it comes to capital spending. We have revised lower our oil forecasts for the latter part of the year. A more hawkish Federal Reserve, limited speculative appetite (given the uncertain outlook), robust Russian supply and rising Iranian supply all suggest that the market will not trade as high as initially expected. We still forecast that the market will be in deficit over the second half of the year and so still expect the market to trade higher from current levels. We forecast ICE Brent to average US$89/bbl over 2H23.  

Agriculture – US corn and soybean concerns The United States Department of Agriculture's (USDA’s) latest crop progress report continues to highlight concerns for the US corn and soybean crop, given current dry weather conditions. The USDA rated 50% of the corn crop in good-to-excellent condition over the last reporting week, lower than 55% a week ago and 67% seen at the same stage last year. In fact, the rating for the corn crop is the lowest seen for this time of year since 1988, whilst it is a similar story for soybeans, with 51% of the soybean crop rated good-to-excellent condition, down from 54% a week ago and 65% seen at the same stage last year. These poor crop conditions will leave speculative shorts nervous as we move through the growing season, and this is the reason why we have already seen some large amounts of short covering. Meanwhile, for winter wheat, an improvement was seen in crop conditions with 40% of the crop in good-to-excellent condition, up from 38% seen a week ago. Ukraine’s Agriculture Ministry reported that Ukrainian grain exports remained almost unchanged from the previous year and stood at 48.4mt for 2022/23 as of 26 June with the current season nearing its end. These shipments include 16.6mt of wheat (down 11% year-on-year) and 28.8mt of corn (up 23% YoY). In a separate data release, the EU’s Monitoring Agricultural Resources unit projects Russia’s wheat harvest to fall 17% YoY to 86.7mt for 2023, as mixed weather conditions continue to hurt the wheat crop.

Metals – Copper spreads strengthen While LME copper prices remain under pressure given concerns over Chinese demand and a more hawkish Fed, LME copper spreads continue to strengthen, reflecting some tightness in the prompt market. The cash/3m spread rallied by more than $12/t yesterday to a backwardation of $31/t – the strongest we have seen this spread since November last year. Available inventories in LME warehouses continue to fall with on-warrant stocks yesterday falling by 4,400 tonnes to just 25,725 tonnes, the lowest since October 2021. Recent data from the China Iron and Steel Association (CISA) show that steel inventories at major Chinese steel mills climbed for a second consecutive week to 16.2mt in mid-June, up 2.64% compared to early June. Meanwhile, crude steel production at major mills rose by 1.4% from the abovementioned period to 2.26mt/d in mid-June.

Recession risks drive safe-haven flows gold’s way Oil has worst weekly decline since May Bitcoin tests highest level in a year   Oil Oil prices are declining on fears that a European recession and delayed stimulus from China will spell trouble for the global growth outlook.  Next week, the heads of the major central banks will gather in Portugal and likely signal a commitment to tackle inflation with aggressive rate hikes. Energy traders are worried that the Fed and friends might cripple economic growth in the second half of the year. The upcoming week contains Energy Institute global energy outlook that could become a lot more pessimistic and the World Economic Forum’s New Champions meeting, which will focus on energy transition.     NatGas There was a brief relief with European natural gas prices this week.  The current pullback could easily be disrupted as the supply situation remains very tight.  The risk of outages and increased demand could be triggered by a hot summer, which could send supplies much lower ahead of next heating season.be triggered by a hot summer, which could send supplies much lower ahead of next heating season.     Gold Gold has had a couple of rough months as Wall Street started to price in much more aggressive central bank tightening across Europe. The dollar has been rallying on strong demand for Treasuries as investors worry about the global growth outlook.  After tumbling to the $1920 level, gold is starting to attract safe-haven flows as the stock market selloff intensifies. Gold got an added boost after the Fed’s Bostic said he favors no more rate hikes for the rest of the year. The rebound however lost some steam after the latest PMI data isn’t showing enough weakness in the service sector to warrant a pause. Next week, will be key for Fed rate hike expectations as we get the PCE readings and hear from Fed Chair Powell again.  If swap futures start to believe the Fed will likely deliver two more rate increases, gold could remain vulnerable. However, if risk aversion runs wild, gold could see some flight to safety flows. Gold has key support at the $1900 level and resistance at the $1960 region.  

Metals – weather disruptions at Codelco mines Codelco has halted some copper mining operations in central Chile due to heavy rains experienced last week. Mining activities at the Andina mine are currently suspended, while some operations were also stopped at El Teniente mine. The Los Bronces mine (located near the Andina mine) is also operating at a reduced rate. The copper LME cash/3m spread has moved deeper into backwardation, reaching US$18.74/t on Friday, reflecting concerns over a tighter prompt market. The latest CFTC data shows that speculators increased their bullish bets in COMEX copper by 16,334 lots over the last reporting week, leaving them with a net long position of 23,258 lots (the highest since the last week of January) as of last Tuesday. The move was predominantly driven by short covering with gross shorts falling by 12,214 lots to 30,914 lots.