Commodities weaker as investor appetite dented by stronger USD

Commodities Wrap, 26 Sep

Easing trade tensions were offset by a surging USD, which ultimately saw the commodity markets come under pressure. The ANZ China Commodity Index ended the session down 0.5%. Energy was the biggest loser, with oil prices falling sharply. Bulk commodities and agriculture also ended the session in the red. The moves saw gold prices drop, which weighed on the precious metals sector. The only sector to end the day higher was industrial metals, with copper and nickel stronger.

Crude oil prices fell as supply issues came back into focus. Saudi Aramco has boosted total capacity to more than 11mb/d, according to a Bloomberg report which quoted unnamed sources. This is a week earlier than they have been suggesting since the attack on the Abqaiq oil facility took out 5.7mb/d of capacity. Output is essentially at the level it was before the attacks on 14 September. Not surprisingly, Brent prices fell on the news, with very little geopolitical premium built into the prices. Sentiment wasn’t helped by a strong gain in inventories. Crude oil stockpiles in the US rose 2.412kbbl, which was significantly higher than market consensus.

Asian LNG markets remained on the back foot, with futures falling further amid a flurry of cargo hitting the market. The LNG Japan Korea Marker futures for November fell 6 cents to USD5.69/mmbtu. December futures were also weaker, falling 5 cents to USD6.525/mmbtu.

Sentiment in the base metals market lifted on signs that the US-China trade talks were progressing well. President Trump told reports at the UN that a deal with China could happen sooner than it thinks. News wires also reported that Chinese companies were preparing to purchase more US pork. However, the market remained cautious with copper prices trading in a tight range. This was despite further positive economic data. US new home sales rebounded at a faster rate than forecast in the US.

The stronger USD and easing geopolitical risk saw the precious metals sector come under pressure. Gold prices fell sharply on Trump’s UN comments, with prices threatening to break below USD1,500/oz for the remainder of the session. The threat of Trump being impeached also failed to garner much haven buying. The release of transcripts of a call with the Ukraine President, Volodymyr Zelenskiy, did little to dispel concerns that Trump misused his powers. The rising political uncertainty saw the USD become the market’s asset of choice, with gold suffering as a consequence. Sentiment wasn’t helped by reports of the US and China getting closer to signing a trade deal.

Bulk commodity markets were mixed, with iron ore futures holding near recent levels amid concerns over tougher curbs on steel output in China and easing trade tensions. The market has struggled to find a consensus on what the output curbs will mean for the steel and iron ore markets in China. The issue was back in focus earlier this week after the province of Hebei said it was planning to shut down output to improve air quality. This gained some credence after China’s Ministry of Ecology and Environment said that air pollution is expected to be medium to heavy in key cities such as Beijing, Tianjn and Hebei.

Tightening supply helped push coal prices in China higher. Coal production in China is expected to be impacted by stricter mine safe inspections underway ahead of the National Day on 1 October. Thermal coal for January rose 0.7% to CNY576.2/t on the Zhengzhou Exchange. However, this didn’t transfer to the seaborne market. The Australian Newcastle futures fell 0.2% to USD67.35/t.