Crude oil tumbles as US inventories rise

Commodities Wrap, 12 Dec

A mixture of optimism and doubt saw a mixed performance in the commodity markets. The ANZ CCI ended the session down 0.4%, driven by heavy losses in crude oil. Agriculture was also weaker, with hogs and palm oil suffering large falls. The bulk commodity sector suffered from a fall in the coking coal price. The performance of the metals was much better, with strong gains in copper and nickel helping push the industrial metals sector higher. Precious metals also gained.

Crude oil prices tumbled after an unexpected rise in US inventories. Crude oil stockpiles rose 822kbbl last week, against expectations of a 2.5mbbl drawdown. However, it was the rise in oil product inventories that was the most worrying. Gasoline inventories rose 5.405mbbl, while distillate stockpiles rose 4.118mbbl. This is not unusual, with inventories for both traditionally rising in December. However, it comes at a sensitive time when the market is finely balanced and the focus is on demand. The warm glow from last week’s OPEC decision to deepen production cuts is fading quickly, with OPEC’s monthly report showing the hard work still required to balance the market. It expects Russia output to continue to rise, which will push the call on OPEC supply down to 29mbbl in H1 2020. This is still lower than current production levels.

A bearish tone continued to permeate the Asian LNG market, with buyers remaining on the sidelines. There was continued interest from Indian buyers for cargo out to February. Otherwise, interest was scarce. The LNG Japan Korea Marker futures for January rose 2 cents to USD5.630/mmbtu. However, February futures were weaker, declining 5 cents to USD5.365/mmbtu.

The mood in the base metals sector remains positive, with optimism over a recovery in Chinese demand helped by signs of progress from the US-China trade talks. This saw copper rise nearly 1% while nickel jumped 3.3%. Reports continue to surface suggesting the new US will delay tariffs due to hit Chinese goods on 15 December. The rhetoric has come from the Chinse side, with the US silent on the issue for the moment. Investors are also waiting to hear details from the Chinese leadership’s annual policy gathering in Beijing this week. Expectations are growing that the government will set a growth target of around 6%, according to a Bloomberg report.

Iron ore was mixed, with futures in Singapore gaining while ending lower in China. The unexpected rebound over the past month, which has pushed prices above USD90/t has created some confusion in the market. With steel demand remaining lacklustre amid rising exports from Brazil and Australia, iron ore was expected to remain under pressure. However, with margins improving for steel mills, they have been happy to chase iron ore higher as optimism grows of stronger demand in 2020. We remain doubtful. China’s proactive fiscal policy is having little impact on infrastructure spending, while the manufacturing sector remains weak.

High inventories continue to weigh on Asian coal markets. Stocks held by China’s six major power generators rose to 16.96mt last week, up from 15.8mt a month ago. This saw January thermal coal futures fall 0.6% to CNY543.2/t on the Zhengzhou Exchange. The seaborne market was also weaker, with Australian Newcastle January futures falling 0.5% to USD66.75/t.

The Gold price inched higher in the lead-up to the release of FOMC decision on rates. Earlier in the session, subdued US consumer prices raised expectations that the Fed will remain on hold. PGM continued their march higher, as supply issues gripped the market. Eskom, the state power utility scrambled to repair broken plants and stabilise the system. This has forced platinum producers to halt output.