Uncertain economic backdrop weighs on commodity markets

Concerns of softening demand driven by tighter monetary policies and instability in the US banking sector weighed on sentiment across the commodity sector. This was exacerbated by low trading volumes, with most Asian markets closed.

Crude oil fell sharply last week amid increasing concerns of weakening demand. Brent crude threatened to break below USD70/bbl as weak economic data in China combined with ongoing tightening of financial conditions weighed on sentiment. Prices rallied on Friday on expectations the selloff was overdone. Shell’s CEO, Wael Sawan, said the market was pretty tight. That tightness is being driven by the recovery of demand in China. A pick-up in domestic travel is now likely to spread to the jet fuel market as international travel becomes easier following changes to visas and COVID-19 testing measures. Overall, domestic travel in China should provide nearly a third of world growth in jet fuel demand in 2023. This comes as supply side constraints mount. OPEC’s 1.6mb/d is yet to be fully implemented, while Iraq is yet to strike a deal with Turkey that would allow for the resumption of 0.5mb/d of exports through the country.

European gas was also under pressure last week due to plentiful supply as warmer weather reduces heating demand. Western Europe’s LNG imports jumped to a record 10.6mt in April. Nevertheless, longer dated futures have held up relatively well as the risk of shortages remains elevated. Price sensitive buyers returned to the North Asian LNG market. Thailand and India were active in the spot market.

The weakening economic backdrop saw safe haven buying pick up in the gold market. Expectations the Fed will pause interest rate hikes also supported investor demand. That assumption was tested on Friday after US jobs data came in stronger than expected. Treasury yields jumped following the print, causing gold to drop nearly 2%. The World Gold Council said bullion demand from central banks slowed purchases sharply in the first quarter. China stood out as an active buyer, adding to its gold reserves for a sixth straight month in April.

Base Metals were mixed as the uncertain economic backdrop offset ongoing supply side issues. The market has become increasingly frustrated with the slow rebound in economic activity in China. This has seen investors reduce their net bullish positions on LME copper to a six-week low. However, Chile’s copper commission, Chilco, warned that prices are likely to lift due to weaker output from the country.

Lithium carbonate prices in China continued to recover amid signs of improvement in the electric vehicle (EV) market. Chinese EV sales recovered 51% to 1.05m units in March from January. International demand is also rising, with exports of lithium batteries from China up 94.3% y/y as they gain increasing favour among overseas buyers.

Iron ore futures in Singapore fell below USD100/t amid weak construction activity in China.