Commodities rally on hopes of further stimulus measures

Commodity markets bounced back strongly, as governments looked at ways to support growth in a coordinated fashion. The ANZ China Commodity Index ended the first session of the week up 1.8%, following last week’s 4.3% decline. The energy sector led the complex higher, with crude oil prices rallying strongly. Iron ore and steel were also up, pushing the bulk commodities sector higher. In the agriculture sector, strong gains were seen in hogs, wheat and cotton. Industrial metals rallied on the back of good gains in nickel and copper. Precious metals also found support, with gold ending higher.

The crude oil market rebound strongly from last week’s sell-off, with Brent crude surging as nearly 6%. Expectations of a coordinated response from central banks around the world sparked the initial rally. However, growing expectations that OPEC was ready to support the market with further production cuts extended the gains late in the session. Russia has been so far reluctant to discuss further output cuts, saying it wants to wait and see the impact of COVID-19 on demand. However, with prices now below the Russian central bank’s budgeted level of USD55/bbl, there are hopes they will be more willing to support the market to protect President Putin’s aggressive spending program. A Bloomberg survey shows that all the market is largely expecting OPEC and its allies to cut output substantially when it meets in Vienna. The average forecast level was 750kb/d, against a 600kb/d cut that the OPEC+ monitoring committee recommended in February.

The Asian LNG market also found some support as buyers continued to probe the market amid the low levels. However, the rebound remains fragile. Japan LNG demand is expected to take a hit from the announcement that schools will be shut for a month. This is likely to impact the country’s electricity consumption; which LNG contributes significantly too. In the futures market, LNG Japan Korea Marker futures for April rose USD0.09 to USD3.05/mmbtu. May futures were also stronger, rising USD0.015 to USD3.165/mmbtu.

Investors took a glass half-full approach in the bulk commodity markets. After China’s manufacturing PMI fell to its lowest ever level, expectations that the Chinese government would step in with an aggressive stimulus package rose strongly. Iron ore futures on the Dalian Exchange rose nearly 6%, after suffering a loss of around 8% last week. Steel futures were a little more subdued, but still up by around 3%. Iron ore was supported by another fall in port stockpiles. According to Steelhome data, they fell for a third consecutive week to 126.95mt.

Base metals rose amid the risk-on tone in markets. Sentiment was supported by expectations of a pick-up in industrial activity in China. The number of new cases of COVID-19 in mainland China continues to fall, with only 202 cases reported on 1 March. This is down from over 800 ten days ago. Authorities also continue to push for factories to reopen across China, with aggressive targets pushed onto provinces. Base metal prices were also supported by an across the board fall in inventories. Copper rose more than 1%, with most of the gains coming in Asia trading. Nickel was the best performer in the market, gaining more than 3.6%.

Gold’s sell-off was relatively brief, with prices rebounding strongly during Monday’s session. The prospect of a coordinated approach by central banks boosted sentiment in precious metals sector. Federal Reserve Chair Powell raised the possibility of a rate cut when he pledged to act as appropriate to support the economy. This saw the USD fall, boosting investor appetite for the precious metal.