Metals rebound as focus returns to tight supplies and stimulus measures

Commodities gained as investors shrugged off concerns of weaker economic growth to focus on the broad tightness across most markets amid supply side issues. A weaker USD also helped support investor appetite.

Crude oil prices were under pressure early in the session as concerns of weaker economic growth amid tighter monetary policies by central banks remained the focus. However, prices rebounded sharply as investors viewed the selling as overdone. An explosion at a major refinery in Ulsan, South Korea, helped refocus the market on the tightness in refined fuel products. Gasoline inventories in the US fell sharply this week as tightness in global markets saw more exports. That stockpile now sits below the five-year seasonal average. This comes ahead of the key driving season in the northern hemisphere, where demand hits its seasonal high. A new report from Russia’s Economy Ministry indicated Russian crude oil production will drop 10% this year and remain below 2021 levels at least until 2025. This could be even greater if Europe manages to approve a plant to ban Russian oil. For the moment, Hungary remains steadfast in its demand to phase-in the sanctions over an extended period.

European natural gas edged lower to settle at its lowest level since the start of the war in Ukraine. Dutch front month futures fell 3.7% to end the session at EUR91.02/MWh as increased imports of LNG eased concerns of lower Russian gas. At least 10 LNG tankers are expected to reach European ports by the end of the month, according to ship tracking data. Amid warmer weather which has weighed on demand, inventories at European storage facilities have been rising to near their normal seasonal level. As of Tuesday, they were almost 41% full, close to the five-year high of 44%. This is up from 33% at the beginning of the month. European lawmakers reached a deal to set a minimum inventory level of 80% before 1 November. This is then to increase to 90% for subsequent winters. However, the market remains wary of supply shortages, with payments deadlines for Russian gas fast approaching. North Asia LNG futures gained as buyers continue to boost inventories amid the outlook for tight supplies. The Japan-Korea Marker futures gained 2.95% to settle at USD21.79/mmBtu. Chinese utilities were active amid speculation that easing virus-related restrictions will boost economic activity and demand for gas.

European carbon extended losses as a weak auction compounded wider bearish sentiment caused by EU proposals to raise billions of euros by selling EUR20bn of permits allowances. Prices did manage to recover somewhat over the afternoon to notch a 1.7% day-on-day slump.

Base metals gained as a weaker USD helped offset concerns about weaker economic growth. A slowdown in demand in China amid ongoing COVID-related restrictions has driven those concerns. Nevertheless, fiscal stimulus measures and ongoing supply side issues should see metals markets tighten in the second half of 2022. China is loosening fiscal and monetary policies with a CNY4trn infrastructure campaign. The government has also relaxed regulations on the housing market and lowered interest rates for first home buyers. However, labour shortages and high energy costs will continue to weigh on growth in copper, aluminium and nickel supply. This is aside from the disruption that the Russia-Ukraine war will eventually have on Russian metals supplies. The prospect of a rebound in demand in China, amid falling inventories, is unlikely to keep downward pressure on metals prices for long.

The weaker USD following an expected gain in US jobless claims saw gold prices rise sharply. This was supported by lower yields on US Treasuries.