Crude oil gains on signs of strong demand

A weaker USD helped boost investor appetite across the commodity spectrum. Falling inventories across markets supported gains.

Crude oil gained amid signs of stronger demand for refined petroleum products. EIA’s weekly report showed that inventories of gasoline fell 1,478kbbl last week, while distillate stocks remained at record lows. US exports of crude oil were strong, highlighting global demand is improving. This helped the market brush off a smaller than expected 2.59mbbl increase in crude oil inventories. While domestic demand in China remains curtailed by weak economic activity, demand for crude oil is expected to rise as its refiners eye tightness in global markets. China is encouraging refiners to ship more fuel by year end by providing additional export quotas for diesel, gasoline and jet fuel. This should see import demand rise further.

European natural gas pushed back above EUR100/MWh as some key measures to contain the energy crisis were scaled back. The European Commission will propose an upper limit on gas prices using a dynamic price mechanism, according to EU energy minister Kadri Simson. However, there is some doubt as to whether it will be in place in time for the heating season. Energy ministers set a deadline of 24 November to clinch a deal on the measures. The current wave of warm weather may have created a level of complacency. Storage facilities have been able to fill quicker than expected due to weaker than normal demand for the heating fuel. However, a cold snap could change all that quickly. Gas inventories still only cover two months of peak demand in winter. North Asia LNG edged lower as high storage levels in Europe raised the prospect of fewer LNG shipments heading to Europe. The fall in European prices has seen traders redirect shipments to Asia for delivery in November due to more attractive prices. This week Asia LNG spot prices jumped above the European benchmark for the first time since June. This may help ease shortages in the region, particularly with forecasts of colder weather in countries such as Japan.

Base metals rallied across the board as a weaker USD helped spur investor interest in the sector. The greenback dropped to a three-week low, while Treasury yields also declined, increasing the attractiveness of commodities. The currency moves also provide an opportunity to assess market fundamentals of metals such as copper. Inventories of all base metals have been declining sharply in recent months. While demand has held up better than expected against the weak economic backdrop, supply side issues have also played their part. Aluminium led the gains, rising more than 5% amid fears of disruptions to Russian supplies. This is being reflected in the options market, where the spread between the implied volatility of front month puts and calls has surged. This suggests traders are paying more to get hold of calls that will benefit more if the LME decides to ban delivery of Russian supply.

Iron ore futures were mixed as traders remain cautious about the global outlook for steel. Contracts on Singapore Exchange edged higher, while they fell on the Dalian Exchange. Weakness in the Chinese property market remains a headwind for steel and iron ore. New housing starts continue to fall. Weakness in steel demand is also emerging outside China.

Gold rose as the weaker USD and lower Treasury yields enticed more investors into the market. This comes ahead of next week’s Federal Reserve meeting, where the market will be watching for any clues on whether its aggressive rate hike cycle is nearing an end