Oil gains as geopolitical tensions rise
Daniel Hynes
Senior Commodity Strategist | helping investors and companies navigate macro, political, economic & environmental issues
Highlights
Rising geopolitical tensions lifted energy prices. A broader improvement in risk appetite saw gains across other sectors.
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
Crude oil surged as simmering geopolitical tensions resurfaced. Brent crude gained nearly 3% after the US approved Ukraine’s use of long-range missiles against Russia, ramping up tensions between the two warring nations. Supply risks were also emerging in Kazakhstan, where the Chevron-led Tengiz venture cut daily production by as much as 30% due to ongoing maintenance issues. This coincides with a broad rally among risk assets. Oil followed equity markets higher, while a weaker USD eased headwinds facing investors. But these gains are occurring in an increasingly uncertain economic environment. Apparent oil consumption in China fell 5.4% to 14.07mb/d in October, according to Bloomberg data. This leaves growth for the year down 4.03% to 14mb/d. The spectre of trade war hangs over the global economy as US president-elect Trump pushes ahead with tariff plans.
Rising geopolitical tensions also lifted global gas prices. European gas rallied to its highest level in a year over uncertainty around Russian gas flows. Over the weekend, Austrian utility OMV said Russia had cut fuel deliveries in response to the company’s warning that it will stop paying for imports from Gazprom to recoup damages it won in arbitration. For the moment, Gazprom continues to send gas to other parts of Europe, but rising tensions puts this at risk. Russia launched missiles and drones against energy infrastructure and other targets across Ukraine. The approval of US long-range missiles is unlikely to ease tension. Supply disruptions in Europe could see competition for LNG shipments rise sharply in coming months. This saw North Asian LNG rise. Data showed that China’s demand for LNG remains strong. Imports over January–October surged to a pre-COVID levels, supported by a 28% jump in volumes in October.
The weaker USD helped trigger a rebound across the base metals sector. Copper rose by nearly 1% as investor appetite improved. Nevertheless, uncertainty over the outlook of the global economy and the spectre of another global trade war are keeping bullish sentiment contained. China’s move to overhaul its export rebate regime is roiling the base metals sector. Aluminium gave back some of last week’s gains, as traders digest the move by Beijing to cancel a tax rebate on aluminium products. China’s exports make up 7% of the global trade in aluminium.
Gold rallied, as the weaker USD enticed investors back into the market. Trump’s victory sparked a USD rally, with subsequent bullish bets by speculators falling to a three-month low. Central bank speakers also alleviated concerns of a halt to monetary easing. Austan Goolsbee said that as long as inflation continued fall, rates would be a lot lower over 12–18 months.
Iron ore rebounded strongly, pushing back above USD100/t amid signs of stronger demand. Production in October hit 81.88mt, up 6.2% on September and 2.9% higher than last year. This pick-up could continue as the industry front runs anticipated tariffs on Chinese steel next year.?
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Chart of the Day
China's net exports of aluminium have surged in recent years. That could be under threat after Beijing announced it would cancel export tax rebates.
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