Crude oil's rally stalls amid warning signs of weaker demand

The recent rally in commodity markets was stopped in its tracks as investors took time to assess the economic backdrop amid further lockdown measures around the world. The ANZ China Commodity Index ended the first session of the week unchanged. Bulk commodities led the losses, with iron ore falling sharply. Precious metals were also lower, led by a fall in gold, while platinum and silver were also down. Copper fell, although this was offset by gains in nickel and zinc in the industrial metals sector. Energy ended slightly higher, with crude oil recovering from earlier losses. Agriculture also gained, driven by hogs and palm oil. Rice and wheat fell.

Crude oil’s strong start to the week faltered amid warnings of weaker demand. While the market has been buoyed by the rollout of COVID-19 vaccines, a path towards normalisation of demand remains a difficult one. Despite the first person receiving the vaccine, NYC Mayor Bill de Blasio warned residents to prepare for the possibility of another full lockdown. Germany will enter into a hard lockdown on Wednesdays, while London is to be placed under the toughest rules on the same days. This came after OPEC reduced its forecast for global fuel consumption. It warned that with the uncertainty around the development of COVID-19 and the vaccine rollout, it reduced its projections by 1mb/d. It now expects demand to rise by only 500kb/d from that quarter; interestingly the same amount it agreed to raise output by at the last OPEC+ meeting. The producer group will also have to contend with higher output from Iran. The OPEC producer is preparing to double output to 4.3mb/d, and raise exports to 2.3mb/d if US sanctions are eased, IRNA reported.

The rally in North Asia LNG prices gained pace amid signs of stronger demand and older weather. This comes amid ongoing supply side issues in Qatar and Australia. This saw the February contract for JKM futures surge 3.2% to USD10.625/mmbtu. The January contract was also stronger, rising 1.1% to USD8.165/mmbtu. However, bids from Trafigura and Vitol at over USD12/mmbtu suggest the rally is far from over. Strong prices in Asia would normally induce additional cargoes from Europe and the US. However, a lack of available vessels is restricting the trade. Overall, strong demand coupled with congestion at the Panama Canal has seen charter rates hit a one-year high.

Iron ore futures fell after Chinese steel mills called for authorities to step in and investigate the recent rally in prices. China Iron & Steel Association called on the China Securities Regulatory Commission to crack down on illegal activities in the market. This saw futures tumble as much as 4.5% to USD150/t on the Singapore Exchange, while futures on the Dalian Exchange closed 2.4% lower. Nevertheless, the falls were contained by expectations of strong demand. The release of industrial production, fixed asset and property investment today is expected to show further strength in the economic recovery.

Base metals were mixed amid the uncertain economic backdrop. Copper, the bellwether of the sector struggled to keep its head above water. However, nickel rose to a 14 month high as demand from steelmakers surge. The metal is being boosted by a pickup in demand from stainless steel producers in China, who have been buoyed by improving industrial activity. Expansion of the electric vehicle line-ups is also boosting sentiment. Solid Power, a battery start-up backed by Ford said it’s on track to begin testing of a solid state battery for automotive production in 2022. Nickel is a key component of such batteries.

The wave of vaccine news continues to weigh on sentiment in the precious metals market. Spot gold subsequently fell as much as 1% to trade just above USD1,800/oz.