Oil extends gains amid signs of stronger demand
Daniel Hynes
Senior Commodity Strategist | helping investors and companies navigate macro, political, economic & environmental issues
Highlights
The prospect of easing monetary policy boosted sentiment across the commodity complex. Signs of strong demand helped push oil prices higher.
Prices and commentary accurate as of 07:00 Sydney/05:00 Singapore/17:00(-1d) New York/22:00(-1d) London.
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Market Commentary
Gold gained after the latest US economic data pointed to improving conditions for a US rate cut. US initial jobless claims pulled back from a 10-month high last week. Meanwhile, new home construction slumped in May to its slowest pace in four years. Nevertheless, Fed governor Neel Kashkari reiterated his view that it could take two years for the US central bank to return to its 2% inflation target. Investors were not deterred with higher Treasury yields and a stronger USD. They also had to digest data showing a 16% monthly drop in Swiss gold exports in May, driven by sharp declines to India and Hong Kong.
Copper extended recent gains on the prospect of rate cuts. Supply side issues also provided some support. Chilean copper miner Antofagasta and Chinese smelters are negotiating dramatically lower processing and refining fees for H2 2024. It underscores the tightness in the copper concentrate market, as well as overcapacity in China’s smelting industry. However, a sustained rally in copper prices may be elusive in the short term. Historically, a fall in real interest rates has corresponded with a strong rally in commodity prices. However, with Fed officials maintaining a cautious approach amid persistently high inflation, its impact could be muted until the Fed kicks off its own rate cutting cycle. Currencies moves may also remain a headwind. Our cyclical growth and cross asset volatility signals still point to a neutral economic environment, which is conducive to a flat but firm USD. On a more fundamental basis, demand for commodities in China remains under a cloud amid ongoing structural issues. This comes amid a policy backdrop for commodity markets that remains in a state of flux, centred around the energy transition. As such, any supply-driven price rallies could be crimped amid the highly uncertain outlook for demand.
Crude oil gained after US stockpiles fell. EIA’s weekly oil inventory report showed that US commercial inventories fell 2.55mbbls last week. This was despite a private industry report on Tuesday projecting a 2.26m barrel increase. More importantly there were signs of strong demand for fuel products. Gasoline demand on a four-week average rose for the seventh straight week. It has not caught up with last summer’s levels. Jet fuel is up for a fourth week and is approaching 2019 levels. Improved fuel demand helped shrink inventories, along with lower-than-expected refinery utilisation. Signs of stronger demand in Asia also boosted sentiment. Oil refineries across the region are bringing back some idled capacity after maintenance. According to Wood Mackenzie, 400kb/d of capacity will return in June.
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European gas prices fell as concerns of disruption to Russia pipeline gas supply eased. A recently successful damages claim against Gazprom raised the spectre of the Russia gas giant halting flows if payments were inhibited. However, it booked over 40bcm of gas to transit through Ukraine this week. That indicates it has received money for supplies by its deadline. The European Union approved a new package of sanctions over Russia’s invasion of Ukraine to target LNG tankers and transhipments of LNG to third countries.?
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Commodity markets perform well amidst rate cut cycles
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