A dovish Fed boosts sentiment

This is the last Commodities Wrap for 2023. It will return on 8 January. In the meantime, we wish you a safe and relaxing end-of-year break.

Sentiment lifted after the Federal Reserve gave its clearest signal yet that its aggressive hiking cycle is over. A weaker USD helped boost investor appetite.

Copper rallied along with the rest of the base metals sector after Wednesday’s FOMC meeting, where policymakers signalled the possibility of rate cuts in 2024. The move unleashed a bullish tone across the metals sector, which has been under pressure this year amid concerns the tighter monetary policy of central banks would weigh on economic growth and ultimately demand. This comes as copper is experiencing supply side issues that will tighten the market. The closure of the Cobre mine in Panama and cuts to output at Anglo American operations will remove 600kt of copper from the market next year.

Gold consolidated its gains following the dovish commentary emanating from Wednesday’s FOMC meeting. The precious metal surged back above USD2,000/oz as UST yields fell and the USD weakened. This apparent shift in tone from the Fed should see investors continue to build exposure to the precious metals sector. Palladium surged more than 15% after the UK announced new sanctions on Russian metals. UK citizens and companies will be prohibited from trading metals such as copper, nickel and aluminium from Russia. While the document didn’t explicitly list precious metals, it was widely thought the sanctions will encompass them. Russia is the world’s second biggest producer of palladium.

The iron ore market struggled as margins at Chinese steel mills continue to weaken. Rising coke prices are the latest input cost to put pressure on the industry. This could lead to steel mills easing back on steel output, hurting iron ore demand.

Crude oil was caught up in the wave of buying after the Fed’s apparent shift in tone around monetary policy. The ECB and BoE both kept rates steady, supporting a view that interest rate rises are a thing of the past. This was aided by a weaker USD, which made commodities such as oil priced in that currency more attractive. This offset concerns of weaker demand. The IEA said oil demand growth is slowing sharply as economic activity weakens in key countries. It reduced its forecast for demand in Q4 2023 by 400kb/d and expects growth rates will decelerate dramatically next year. It also said soaring production from US, Brazil and Guyana will offset cuts from Saudi Arabia and the OPEC+ alliance.

North Asia LNG prices hit a four-month low as winter buying dries up. High levels of inventories have been met with subdued demand early in the heating season. LNG cargoes are also pilling up at sea, with the volume on the water for more than 20 days jumping to its highest level since 2017, according to Bloomberg data. European gas prices were also lower amid weak demand from residential consumers.