Commodities: Sentiment-driven price slide

Commodities: Sentiment-driven price slide

(Commerzbank Commodity Research)


  • Oil prices decline despite falling global stocks, robust Chinese demand and lower Saudi production
  • Continued outflows out of gold ETFs
  • Rising electricity costs weigh additionally on South African mines
  • Weak economic data and rising inventories weigh on copper
  • Robust US export sales provide tailwind for agricultural prices 

Energy: Oil prices are continuing on their downward trajectory. Brent is trading this morning at $111 per barrel, its lowest price since mid-January, while WTI hit an eight-week low of under $92 per barrel overnight. There is no fundamental justification for the price slide on the oil market, which appears to be sentiment-driven. True, the Chinese Purchasing Managers’ Index fell in February to 50.1 points and thus only just remains in expansive territory. This does not necessarily point to weaker oil demand from China, however. Indeed, Chinese oil imports have been extremely robust in recent months despite slower economic dynamism. This tallies with the assessment of consultant firm Oil Movements, which anticipates a 0.5% increase in OPEC shipments by mid-March due to growing demand from Asia. According to the US Energy Information Administration (EIA), global oil stocks declined by 1.3 million barrels per day on average in the past 60 days. This suggests a tightening of supply and should have more of a price-driving effect on the oil market. According to a Bloomberg survey, OPEC crude oil production increased slightly in February for the first time in six months; at 30.6 million barrels per day, however, it remains at a low level. Production has normalized in Libya and Nigeria, whereas Saudi Arabia has actually reduced its production once again.

Precious metals: Gold ETFs recorded outflows yesterday for the ninth consecutive day. Since mid-February, investors have withdrawn 107 tons of gold from the ETFs, meaning that ETFs will probably contribute negatively to investment demand for the first time in eight quarters. It is nonetheless too early to proclaim the end of the twelve-year bull market for gold. The ultra-loose monetary policy of major central banks, negative real interest rates and gold purchases by the central banks of emerging economies continue to suggest that gold prices will rise.
South Africa’s state energy provider Eskom, which accounts for 95% of the country’s electricity production, has been given the green light to raise electricity prices by an average 8% per year over the next five years – this was approved yesterday by the South African National Regulatory Authority. According to the authority, electricity prices will rise from April from 65.51 cents per kwh to 89.13 cents per kwh in 2018. Although the approved price hike is only half that originally requested by Eskom, it will nonetheless have a considerable impact on the country’s mining industry. According to the president of the Mining Industry Association, it will cost the already severely embattled platinum and gold mines an additional ZAR 860 million this year alone. Last year, half of the country’s platinum mines and 37% of its gold mines were already unprofitable, and the latest price hikes could lead to further production cuts. The latest fall in the price of platinum may therefore prove to be only temporary in nature.

Base metals: Metal prices remain under pressure. Aluminium has slipped below $2,000 per ton to hit a three-month low, while a ton of copper costs less than $7,800 and as such is nearly 7% cheaper than at the beginning of February. Besides the disappointingly low upward revision of fourth-quarter GDP in the US, still rising copper stocks are weighing on prices. Copper stocks registered on the Shanghai Futures Exchange climbed by 18.5 thousand tons to a good 226 thousand tons this week, bringing them to almost the same level as the record high they achieved a year ago. Within four months, LME copper stocks have more than doubled, and at just shy of 460 thousand tons are at their highest level since October 2011. What is more, disappointment came this morning in the form of the Purchasing Managers’ Index for the manufacturing sector in China: contrary to expectations, it did not climb marginally in February but dropped back from 50.4 to 50.1. This figure is likely to be distorted by a number of factors, however: the dates of the Chinese New Year’s celebrations, the closure of several factories in the north of China due to severe environmental pollution and changes to the sample. Furthermore, it should be noted that the index nonetheless remains in expansive territory for the fifth consecutive month. We believe that the Chinese economy remains on the road to recovery and will lend buoyancy to metal prices again in the medium term. In the short term, the pressure on metal prices could abate if the ISM index in the US does not fall as sharply as expected this afternoon. After all, a number of regional indices have proved to be surprisingly positive of late.

Agriculturals: Agriculturals are bucking the general trend and continuing their recovery, receiving tailwind from the weekly export figures published yesterday by the US Department of Agriculture, which suggest robust demand. Evidently, buyers are being lured in by the lower prices for grains and soybeans. US corn exports totalled 302.6 thousand tons last week, which is a full 28% above the average of the preceding four weeks. Mexico and Japan were the biggest buyers. Although wheat saw sales of the old crop decline to 372.6 thousand tons, sales of the new crop more than doubled week-on-week to 152.3 thousand tons. Soybean export sales totalled 689 thousand tons, after cancelled orders had resulted in negative export figures in the two previous weeks. Including the new crop, 1.171 million tons of soybeans were sold, a good 800 thousand tons of which is destined for China. It is also interesting to note that export sales of cotton, at 152.9 thousand tons, exceeded the average figure from the previous four weeks by 5%, despite the already sharp increase in prices. Buyers are clearly not being deterred by the higher prices. As a result, the most-active cotton futures contract was able to climb to a nine-month high of nearly 86 US cents per pound.