Easing virus restrictions boosts sentiment across commodities

Rising expectations of a shift in China’s zero-COVID strategy saw commodity markets rally across the board. The rally was aided by broader market sentiment reacting positively to signals the Federal Reserve may slow the pace of interest rate hikes.

Crude oil rallied sharply last week as easing COVID-19 restrictions raised hopes of stronger demand. Oil demand has suffered under the strict measures to contain the virus, with China’s National Petroleum Corp estimating demand will be down 2% in 2022. On Friday, Shanghai eased COVID-19 testing rules, joining Beijing, Shenzhen, Guangzhou and other cities in shifting to reopening after recent protests. Most places will not require PCR results for access to public transport or shared spaces. However, the market remains on edge as European sanctions on Russian oil kick in this week. The European Union also agreed to a USD60/bbl price cap on its oil, paving the way for a wider deal with the Group of Seven. The price is still higher than where Russian Urals crude is currently trading. The agreement includes a mechanism that would allow revisions every two months, and a provision to make sure any resetting of the cap should leave it at least 5% below average market rates. Russia said it wouldn’t accept the plan and is preparing a workaround in any case. Deputy Prime Minister Alexander Novak warned his country could “reduce output” in response. On Sunday, OPEC also agreed to keep production unchanged, implementing the 2mb/d reduction it agreed to at its last meeting. The decision reflects the unpredictability of supply and demand in coming months. The group is not scheduled to meet until February.

European gas recorded its third weekly gain as falling weather boosts heating demand. Colder-than-normal temperatures are set to spread through the northern part of the continent this week, according to forecaster Naxar. This will be the first real test of its ability to withstand the energy crisis and replace Russian gas flows. To-date, a mild autumn and strong LNG inflows have enabled it to fill gas storage levels much higher than expected. However, the reopening of China could see the continent struggle to access additional shipments of LNG. The likely increase in competition for LNG saw North Asian LNG prices push higher last week. Supplies could be even more limited as Freeport struggles to restart its plant. The US exporter said it won’t be until year end, two weeks later than announced last month. China’s ban on the re-export of LNG cargo could keep the spot market even tighter.

China’s apparent easing of COVID1-9 restrictions boosted sentiment in the base metals market. Copper led the sector higher amid hopes the eased restrictions would lead to stronger demand. This comes amid signs of weakness in the physical market. The most actively traded futures contract in Shanghai swung to a small discount versus the next month, signalling ample supply. The premium paid at the port of Yangshan has also fallen to its lowest level since July as inventories rise and import needs fall. Aluminium prices have stabilised in recent weeks amid an abundance of other supply side issues that should keep the market tight. This includes a moderation in China’s output. Curtailments are expected to rise, with cash costs at 60% of its smelters above current prices.

A weaker USD helped pushed gold above USD1,800/oz last week for the first time since August. However, data on Friday showing the US jobs market was hotter than expected pushed it back below that level.

Iron ore settled above USD105/t, buoyed by China’s moves to support the property sector. These measures should have a better chance of developing into stronger demand for steel and iron ore