Oil gains as OPEC cuts tighten the market

Supply side issues provided support to commodity markets amid ongoing uncertainty about the demand outlook.

Signs of tightness in the physical market continue to push crude oil higher. Output cuts by the OPEC+ alliance continue to reduce supply as the market worries about the renewed tensions in the Middle East. An outbreak of violence in Gaza and the lack of a peace deal between Israel and Hamas have kept the risk of supply disruptions elevated. This has seen the premium of spot prices over one-month futures grow. In recent months, rising non-OPEC supply and concerns about Chinese demand restrained the rally. However, these issues may also be easing. The number of drill rigs operating in the US has fallen to a point where they are insufficient to maintain current production. Consequently, US shale oil output could top out near current levels before plateauing. This should see growth in non-OPEC supply fall from 2.1mb/d last year to 1mb/d in 2024.

North Asian LNG prices gained last week as China ramped up purchases. February imports rose to 5.5mt, up 15% y/y according to ship tracking data. It’s also the country’s highest ever level for that month. Earlier in the week, China’s largest energy producer, CNPC, said it expects gas imports to climb 8.2% to 179.1bn cubic metres this year. The comes as new LNG import terminal comes online, estimated to hit a record 50mt/y in 2024. European gas also rallied strongly last week as buyers take advantage of the low prices. This is despite storage facilities being over 62% full, a record for this time of the year.

Base metals were under pressure in early trading on Friday after data showed the China’s factory output shrank for a fifth straight month, suggesting demand remains weak. This wasn’t helped by aluminium inventories rising to their highest level since May 2023. Nickel prices fell amid further warnings of a chronically oversupplied market. An Indonesian government official said that prices are unlikely to rise above USD18,000/t because the country will ensure the market remains well supplied to keep costs low for electric vehicle (EV) manufacturers. Indonesia is implementing plans to assuage concerns about compliance with ESG issues in an effort to seek deals with the US EV sector that is off limits to the Chinese.

Gold rose to a nine-week high as weak economic data raised the prospect of interest rate cuts later this year. US factory activity came in lower than expected while consumer spending fell. Treasury yields subsequently tumbled, adding impetus to rise in investor demand for the precious metal.

The weak factory data in China also weighed on sentiment in the iron ore market. Futures had rallied last week on expectations that the National People’s Congress annual “two sessions” meetings being held this week will provide further support measures for the beleaguered property sector. However, the focus is likely to be on climate targets, which could ultimately weaken demand for iron ore.