The past week in commodity markets has been about mounting supplies and further improvement in Chinese economy.
Consequently, we have seen some big moves. Crude Oil and grain prices have dropped on an improved supply situation, while base metal prices were lifted on increasing demand from China.
Next week could prove just as interesting with Chinese foreign trade data and the IEA oil market report and USDA WASDE on the calendar.That may easily cut USD4-5/bbl off the current level of the oil price.
An eventful week in commodity markets is coming to an end. The main themes this week have been mounting commodity supplies and further optimism regarding the recovery of Chinese growth. In the oil market, news that rebels in eastern Libya have agreed to reopen two large oil ports managed to push concerns over the insurgence in Iraq to the background. With the prospect of Libyan oil gradually returning to the market, one of the key supply disruptions in the oil market could soon be out of the way. Consequently, the oil price dropped to around USD111/bbl this week – close to the level before the violence in Iraq escalated. Another key disruption, the sanctions on Iran, could also soon be removed. Iran and the so-called P5+1 resumed negotiations on Iran’s nuclear programme this week in Vienna ahead of the 20 July deadline for a new deal. A new deal would be likely to ease sanctions on Iran and increase the amount of oil available on the market. Both factors will weigh on the oil price and following a couple of weeks with upside worries, the risks are now probably tilted to the downside for the oil price (see Commodities Update: Near-term downside risks to oil price, 2 July 2014).
The lower oil price and more good news on the Chinese economy gave support to base metal demand this week. Chinese manufacturing PMI increased to 51.0 from 50.8 in May. The index is now firmly above 50, which indicates expansion and should be a clear sign that the Chinese economy has moved from a phase of fragile stabilisation to one of moderate recovery (see Flash Comment - China: Official manufacturing PMI in June improves for fourth month in a row, 1 July 2014). We expect the recovery in China to strengthen further during the second half of the year, which will further support base metal demand. The copper price rose more than 3% this week and is now at the highest level since February, above USD7.150/MT. Finally, the grain market sold off significantly this week – corn is down almost 6% over the week, soybean more than 3% and wheat around 2.5%. The trigger was a new report from the USDA which showed increasing US stocks. Production is set to increase further this market year, so supplies on the grain market will be plentiful. Although the upcoming El Niño could spoil this, the current benign supply situation will limit the upside potential for grain prices.
Although this week’s line of market movers will be tough to follow, next week’s calendar includes a number of events that should attract attention. On Thursday, Chinese foreign trade data for June is scheduled for release and on Friday the IEA Oil Market Report and the USDA WASDE are set to be published.
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