Crude oil rallies as OPEC cuts production

Commodity markets were mixed as investors digested solid economic data and more hawkish central bank comments. A stronger USD also weighed on sentiment. Oil rallied after OPEC cut output.

Crude oil gained after producers warned of further cuts to output. At its monthly meeting, the OPEC+ alliance agreed to cut current production quotas by 2mb/d. However, the group will use outdated production baselines to measure the curbs. That could see the actual fall in production limited to only half that amount. Even so, it sent a strong signal to the market that they are going to support the market going forward in a bid to keep prices elevated. In addition to the cuts, the supply agreement has been extended until the end of 2023. Saudi Arabian Energy Minister Prince Abdulaziz Bin Salman said that the supply curbs will remain in place until the end of agreement unless the market changes. The move was met with disapproval by many western countries. US President Joe Biden said that the US would release another 10mbbls from its strategic reserve in response to the cuts. At the same time, the European Union announced a new package of sanctions against Russia, including a price cap on oil sales to third countries. This drew the ire of Russia, with Deputy Prime Minister Alexander Novak warning that his country won’t sell to any countries that adopt it. The oil market also drew support from a bullish inventory report from EIA. US crude oil inventories fell by 1.36mbbl last week. Gasoline inventories also fell to their lowest levels since November.

European natural gas advanced after two days of losses as supply risks mounted. Dutch front month futures rose 7.3% to EUR173.69/MWh following the release of EU’s new sanction package on Russia. While it didn’t deal with natural gas directly, it raised the geopolitical tensions as the Ukraine war continues. EU Commission President Ursula von der Leyen called for boosting common funding for its strategy to shift away from Russian fossil fuels and signalled she’s open to discussing a temporary broad price cap on gas. North Asian LNG futures slumped as suppliers moved to sell more shipments on the spot market. This follows reports of milder weather and robust inventories, which could ultimately curtail demand for spot shipments in the next few months. Nevertheless, risks of disruptions to LNG supply rose. Gas flow to US LNG export terminals fell 14% this week due to planned maintenance. Malaysia’s Petroliam Nasional Bhd declared force majeure after a pipeline leak at its export terminal.

Copper struggled to keep its head above water as the USD moved higher following hawkish comments from central bankers. Mary Daly warned that she doesn’t see a chance of the Fed cutting rates in 2023. The FOMC will stay the course by lifting rates until inflation is firmly back below 2%. Sentiment was weighed down by further rises in inventories. Copper stockpiles at LME warehouses have recorded 20 consecutive days of gains. Lead bucked the trend to move higher after Nyrstar shut down its smelter at Port Pirie in South Australia. Glencore’s move to place its Nordenham zinc smelter on case and maintenance also provided some support to zinc prices.

Gold eased back towards USD1700/oz amid the renewed strength in the USD. This was triggered by fresh data showing the US economy remains resilient. That could provide impetus for the Fed to continue with its aggressive rate hike cycle.

Iron ore futures in Singapore also gained as investors eye China’s support of the property sector. Authorities have recently unveiled a slew of measures aimed at channelling more funding into the real estate sector.