Crude oil gains as Hurricane Ida shuts down industry

Commodity markets remained well bid following the strong end to last week. Without the threat of tighter monetary policy in the short term, investors are moving back into cyclical sectors such as commodities. The ANZ China Commodity Index gained 0.4% during the session, driven by gains across the metals and energy sectors. Crude oil rose as Hurricane Ida hit the Louisiana coast. LNG and thermal coal were steady. Further gains in coking coal lifted the bulk commodity sector, while iron ore edged lower. Agriculture ended slightly lower, as soybean and palm oil fell. Precious metals were weaker, as gold struggled to stay above water. Industrial metals were unchanged.

Crude oil gained as Hurricane Ida made landfall, causing the closure of oil platforms and refineries. Companies closed as much as 1.7mb/d of 95.7% of crude production, according to the Bureau of Safety and Environmental Enforcement. However, due to damage from torrential rain, flooding and cyclonic winds, approximately 12% of the US total refining capacity has been shut. Gasoline futures surged. The damage to oil platforms in the Gulf of Mexico looks limited, which should result in a relatively rapid return to full production. That may not be the same for the refining sector, with extensive damage expected to take weeks to recover from. This comes as the OPEC+ alliance is set to review the current production cut agreement. With rising coronavirus case number globally, the market will be on the lookout for any sign the group may be considering halting the scheduled increase in production in coming months.

The rally in North Asian LNG prices took a breather as traders assessed the outlook for demand amid ongoing supply outages. The JKM October contract rose 0.1% to USD17.720/MMBtu. Longer dated futures were also subdued, with the November contract unchanged at USD18.840/MMBtu. LNG export terminals were largely untouched by Hurricane Ida. However, surging European gas futures are likely to see the battle for cargo in Asia continue. Disruptions to gas production in Norway, as well as gains in carbon credits drove the rally.

The rally in gold lost momentum as strong equity markets and a slightly stronger USD dented investor demand. Its appeal was also dented by a rally in Treasuries, with the yield on the 10y bond falling three basis points to 1.28%. The precious metal jumped above USD1,800/oz last week following a dovish Fed. Investors were more interested the platinum group metals, with palladium surging more than 3%.

Iron ore futures were mixed, as the world’s top steel producer delivered a cautious outlook on prices. Baoshan Iron & Steel Co flagged the potential for renewed price declines following its annual earnings report. The company said it was sticking to its strategy of keeping stockpiles of raw materials at low levels. However, iron ore exporter Fortescue Metals painted a more positive picture. It said port inventories were still stable at low levels and exports to China are robust. This comes as signs of further pressure on steel output. The province of Guangxi ordered local steel mills to cut production to reduce energy consumption. The stoppages could result in nearly 1m tonnes of lost output in September.

With the London Metal Exchange closed for a UK holiday, base metals were unchanged. However, copper futures on the Comex gained as hopes of further growth in demand strengthened following the dovish tones from the Jackson Hole symposium. The market is also facing further supply side issues. Workers at BHP’s Cerro Colarado copper mine rejected the latest wage offer. This is likely to lead to a strike in coming days.