contango

The Commodities Feed: Supply risks vs demand concerns Commodity markets largely shrugged off developments in Russia over the weekend, with the focus now back on China demand concerns and the US Federal Reserve.   Energy – Rangebound crude Energy markets largely shrugged off events over the weekend in Russia. Oil opened strongly yesterday, but gave back a lot of these gains as the day progressed. As a result, ICE Brent settled just 0.45% higher on the day. The more hawkish tone from the US Fed appears to be capping oil prices and the broader commodities complex, while there remain broader concerns over China’s economic recovery. Up until now, oil demand indicators for China have been good, with stronger crude oil imports and higher apparent domestic demand. The concern is whether this can continue as there are clearly still some weak spots within the Chinese economy – specifically with industrial production and the property sector. For the oil market, there is little on the calendar for today. ICE Brent August options expire today, which will be followed by the August futures expiring on Friday. The latest open interest data (which is up until Friday) shows that there is still open interest of more than 17k lots at the $75 strike for August call options. Meanwhile, we will also get US inventory numbers from the American Petroleum Institute (API) later in the day. The European natural gas market had a volatile trading session yesterday with TTF trading in a range of EUR5.40/MWh over the day. Obviously, there would have been concerns over the remaining Russian pipeline flows to Europe following developments in Russia over the weekend. However, fundamentals for the European gas market are still bearish in the short term. EU gas storage continues to fill up and is now more than 76% full, well above the 57% seen at the same stage last year and also higher than the five-year average of 60%. In the absence of any significant supply shocks, EU gas storage will hit the European Commission’s target of 90% full well before 1 November. This suggests that later in the summer we could see further pressure on prices and a deeper contango along the forward curve – there is already an almost €20/MWh contango between the August 2023 and December 2023 TTF contract.  

Metals: Headwinds for gold The metals complex came under pressure yesterday following the weak set of Chinese data (retail sales and industrial production), whilst Chinese new home price data released this morning will also do very little to help sentiment with prices in July falling 0.23% month-on-month, compared to a MoM decline of 0.06% in June. On top of weak Chinese macro data, LME inventories for a number of metals continue to climb higher. LME copper stocks increased by 4,775 tonnes yesterday to a little over 90k tonnes. In fact, LME copper inventories have increased by almost 36k tonnes since mid-July. Higher inventories have weighed on the LME copper cash/3m spread with it trading in a contango of US$56/tonne, compared to a contango of just US$7/tonne back in mid-July. Zinc inventories in LME warehouses also saw big increases yesterday with inflows of 14,725 tonnes, which leaves inventories at 106,900 tonnes- the highest levels since April 2022. Spot gold is managing to hold above US$1,900/oz, although it briefly broke below this level following stronger-than-expected US retail sales numbers. This data might start to raise some doubts over whether the Fed is really done with its tightening cycle. Any further data suggesting the Fed still has more work to do will likely put pressure on gold prices. And with the increase seen in real yields lately, it is difficult to see any meaningful upside to gold prices in the short term.

Metals – LME copper spreads widens LME copper cash/3m spread widened to a record contango of a little more than US$70/t this week (although this narrowed to a little less than US$57/t yesterday) as copper demand in the physical market remains under pressure due to slower industrial activity in China and elsewhere. Tepid demand has led to a significant increase in exchange inventories. LME copper inventories increased to a fresh one-year high of 164kt with inflows of around 110kt since mid-July. Meanwhile, LME data shows that speculative net longs in LME copper dropped by 12,501 lots over the last week with their net long position falling to a 3-month low of 43,441 lots as of 22 September. The latest data show that China’s gold imports from Hong Kong increased to 45.2 tonnes over August compared to around 30.2 tonnes in July as demand for precious metals remains strong in the domestic market. Cumulatively, China’s gold imports from Hong Kong increased by 36% YoY to 359 tonnes over the first eight months of 2023. Looking ahead, gold demand in China is likely to have improved further this month as reflected by the high premium for gold in the local market. Shanghai gold currently trades at a premium of around US$100/oz over international prices.