AFKInsider Commodities Report: Supply & China Woes Hurt Commodities

AFKInsider Commodities Report: Supply & China Woes Hurt Commodities

Crude oil futures posted their biggest weekly losses since mid-April this week as ample supply coupled with concerns over China’s economic growth fueled worries that demand for oil would be hit, triggering a sell-off.

Adding to the pressure was uncertainty about the direction the U.S. Federal Reserve would take on quantitative easing.

The U.S. Energy Administration (EIA) on Wednesday reported an unexpected increase in U.S. gasoline stockpiles, sparking concerns that summer demand in the world’s top oil-consuming country might be weaker than expected. The agency said gasoline inventories  increased by 3 million barrels in the week ending May 17.

U.S. crude oil inventories are at their highest in 30 years. While the EIA data showed U.S. crude oil stockpiles fell by 300,000 barrels from the previous week to 394.6 million barrels, the decline was below analysts’ expectations. Furthermore, in its own crude stocks report, the American Petroleum Institute (API) showed U.S. crude inventories increased last week 532,000 barrels to 390,740 barrels.

Concerns about oil-demand growth in the world’s second-biggest consuming country, China, were fueled following the release of a preliminary manufacturing survey on Thursday, May 23, which showed that China’s factory activity shrank for the first time in seven months in May as new orders fell, deepening fears that the country’s economic recovery had stalled.

The flash HSBC Purchasing Managers’ Index (PMI) for May fell to 49.6, slipping under the 50-point level, demarcating expansion from contraction for the first time since October. The final HSBC PMI stood at 50.4 in April.

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On London’s Intercontinental Exchange, Brent North Sea crude for delivery in July touched a three-week low of $100.64 a barrel on Thursday, May 23, before regaining some ground to settle the day at $102.60. This was more than $2 down on the $104.64 of May 17. Brent crude prices remain sharply below the 2013 peak-to-date of $119.17, reached on Feb. 8 and $3.69 off the $98.75 low touched on April 18.

The New York Mercantile Exchange West Texas Intermediate (WTI) – or U.S. light sweet crude – for July slipped to $94.28 a barrel on Thursday May 23, down from $96.95 on Monday’s close.

The negative China figures also weighed hard on copper and other industrial metals prices this week. The country is the biggest importer of copper and an economic slowdown there would have a significant impact on metals markets. Three-month copper on the London Metal Exchange (LME) on Thursday, May 23, fell to $7,215 a tonne – its lowest for a week – at one point before settling at $7,319.50 by the day’s close.

On Wednesday, three-month copper touched $7,533.75 a tonne, its highest since April 12, amid concerns of tighter supplies due to various supply outages.

Gold prices too saw further falls this week, pressured by the higher U.S. dollar and mixed quantitative easing signals from U.S. Federal Reserve Chairman Ben Bernanke’s testimony before the Joint Economic Committee (JEC) of Congress on Wednesday, May 22. Spot gold briefly broke above $1,400 an ounce to a one-week high of $1,414.25 after Bernanke said monetary stimulus was helping the U.S. economy recover and it was too soon to remove existing measures. But the yellow metal failed to hold on to those gains after Bernanke hinted at the possibility of gradually reducing the Federal Reserve’s bond purchases in the next few meetings if employment data improved. Spot gold finished the day at $1,408.50 an ounce and slipped to $1,380.50 on Thursday, May 23.

Among other precious metals, continuing supply concerns in top producer South Africa provided some support this week for platinum, which rose to $1,474 an ounce mid-week. Sister metal palladium reached $750 an ounce. But both metals were trading lower on Thursday, May 23, at $1,455 and $739 respectively.

Cotton futures hit a three-month low amid concerns that a slowing economy will curb demand in China and forecasts of rain in Texas that could ease supply concerns in the biggest U.S. producing state. The most active July cotton contract on ICE Futures U.S. touched 82.25 cents a pound at one point on Thursday, May 23, the lowest for a most-active contract since Feb. 27. July cotton closed the day at 83.42 cents a pound, $3.50 off last week’s high of 86.92 cents.

Sugar continues to be a negative performer as fears of a supply glut weigh on the market. The London-based International Sugar Organisation (ISO) this week warned there was little hope for higher sugar prices as it lifted its estimate for the world output surplus for 2012-13 (Oct. 1-Sept. 30) to 9.98 million tonnes, a record high. Raw sugar for July delivery on the ICE Futures U.S. sank to a near three-year low of 16.60 cents a pound mid-week as a stronger U.S. dollar and producer selling added to the supply woes. Thursday, May 23,  brought few gains, with the contract finishing only 0.05 cents up at 16.65. Last week, raw sugar was trading near 34-month lows of 16.95 cents a pound.

Ample supplies also continue to weigh on coffee futures, with ICE arabica futures falling to the lowest level in more than three years. The most-active July arabica contract on ICE Futures U.S. touched $1.2825 a pound on Wednesday, May 22, the lowest for the front-month contract since March, 2010. This week, London cocoa gained some support from a weakening U.K. pound, with the July contract on NYSE Liffe closing Thursday at £1,537 a tonne.

While care has been taken to ensure that the information contained in this report is accurate, it is supplied without guarantee. The author, Lynda Davies, can accept no responsibility for any errors or any consequence arising from them.