Commodities rise as supply issues plague energy and metal markets

Commodity markets started the week in a buoyant mood, amid a broader rise in risk appetite across markets. Better than expected economic data and further stimulus in China helped.

Base metals rebounded strongly from last week’s selloff, as Beijing boosted short-term liquidity into the banking system. China’s government remains confident it can reach economic targets for the year. The official Xinhua News Agency reported that weaker growth in Q3 was due to short term factors, which were already fading. However, supply side issues also came back into focus. Nickel rallied after Eramet disclosed a 19% drop in ferronickel production from its operations in New Caledonia. The market is also showing signs of tightness, with cash contracts closing at their biggest premium to futures in two years. LME inventories are down nearly 50% since April.

Thermal coal futures in China pushed higher as the region faces another cold winter and power shortages. Authorities are keeping the pressure on the industry to boost supply at all costs. The efforts have seen inventories at major power plants rise to 95.37m tonnes as of 24 October, up 17mt since 30 September. However, that has increased air pollution to its highest level since May, with the PM2.5 particulate count at 151, according to US Embassy data.

Supply issues hit European gas markets. Flows of Russian gas into the continent dropped 26% over the weekend to its lowest level since 7 July. Despite the shortages, Gazprom maintained its outlook for 2021 deliveries to Europe and Turkey at 183bn m3. That’s in line with the forecast it gave in April before energy shortages took hold. Outages in Norway are also curbing supply. Maintenance at the Oseberg field has been extended to Tuesday while capacity at the Troll field has been reduce to 7m m3. In the North Asia LNG market, spot prices gained as production outages in the US further tightened supplies. Freeport is experiencing a build-up in pipelines that has caused it to reduce shipments from its Texas export terminal in October and November. Forecasts of La Nina weather system developing is also raising concerns. This usually brings hasher winters, which could put pressure on energy systems in the region.

Crude oil prices started the session strongly on signs of tight supply. Falling inventories and rising premiums of cash prices over futures suggests demand remains strong. However, prices gave up gains following reports that the European Union will hold discussions with Iran later this week. This is a prelude to broader talks in Vienna on how to revive the 2015 nuclear deal. Aside from this, OPEC also appears to be concerned about the impact on demand of rising COVID-19 cases. This led Saudi Arabia to suggest that producers shouldn’t take the rise in prices for granted as the recovery in demand is still fragile. This comes ahead of its monthly meeting with fellow OPEC+ producers to discuss the impact of the supply agreement. The cautiousness is likely to see it stick to its schedule increase of 400kb/d, rather than add any more supply to quell energy shortages.

Gains in energy markets saw European carbon prices edge higher on Monday amid low liquidity. However, negotiators are edging towards a deal that might create a global carbon market. Brazil signalled its willing to compromise, easing its stance that saw talks in 2019 fail. The nation has a lot of leverage, as the Amazon would generate a large amount of credits in any global offsets market.

Inflation concerns helped push gold prices above USD1,800/oz. Treasury Secretary, Janet Yellen, said she expects price increases to remain high through the first half of 2022.