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Commodity Markets - September 2017

Source: OPEC_RP170904 9/12/2017, Location: Europe

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In the group of energy commodities, crude oil prices increased as a result of both the continuing decline in US inventories and signs of continuing market rebalancing. Meanwhile, coal prices jumped due to higher demand for power generation in China. With regard to non-energy commodities, agricultural price declines were led by drops in grain prices based largely on receding fears of drought in the US plains and the expectation of plentiful global supplies. However, at the end of the month and beginning of September, cotton and orange prices increased in response to the potential damage caused by Hurricanes Harvey and Irma to the US southern statesí crops. Base metals were supported by improving prospects for global manufacturing activity and the continuing expansion of Chinese infrastructure and real estate investment, while some supply disruption also played a part. Gold prices rose on reduced expectations of a rate hike in December by the US Federal Reserve.

Trends in selected commodity markets
During the month, further improvement in global manufacturing activity led a rally in metal prices to their highest level since 2014. The JPMorgan global manufacturing purchasers managers index (PMI), which achieved a 75 month high of 53.1 compared to 52.6 from the previous month, signals the resilient pace of global industrial production, while at the same time, supply disruptions from strikes, regulatory led mine closures and weather related events has also tightened the market. Further support has arrived from expectations of fewer interest rate increases by the US Federal Reserve in the short run, which is associated with a weaker US dollar and stronger gold prices. Meanwhile the effects of Hurricanes Harvey and Irma have supported the prices of various commodities. In the agricultural commoditiesí group, cotton prices have jumped by more than 12% since mid-August on concerns about the cotton crop in the State of Texas, which according to the US Department of Agriculture (USDA) accounted for around 43% of the US cotton output in 2016. Furthermore, the expected path of Hurricane Irma will impact on the South East region, which accounts for an additional 26% of US cotton production. The impact of Irma has also been reflected in a 15% jump in the price of concentrated orange juice futures, as the State of Florida produces more than half of US orange output.

Beyond the aforementioned storm related issues, monthly average agricultural prices declined with the downward trajectory of food prices. Grains led the drop in food prices, largely reversing the gains achieved in 2Q17, as the impact of drought in the US plains, and flooding in South Asia during that quarter appear to have been overestimated and global stocks of wheat, soybeans and rice are expected to increase due to higher global supplies. USDA projections for global stocks of wheat at the end of the marketing year 2017/18 increased to 264.4 million metric tonnes (MMT) from 258.6 MMT in the previous month estimation, mainly due to higher expected output from Russia and Ukraine. Average winter wheat prices declined by around 15% m-o-m. In the case of soybeans, the USDA revised up the 2017/18 global stocks forecast from 93.5 to 97.8 MMT due to higher expected US production which represents an increase from the 97.0 MMT of the previous year. In the case of rice, global stocks estimations for 2017/2018 were slightly revised upwards to 122.9 MMT versus 119.4 MMT the previous year by the USDA in spite of lower expected output from Bangladesh and Sri Lanka.

Metal prices were supported by improving prospects for global manufacturing and investment in infrastructure in China. In spite of some recent slowdown, strong growth in fixed asset and real estate investment has translated into higher steel demand. As a result, Chinese steel output has increased by 10.3% y-o-y in July and by 5.1% y-o-y from January to July. Iron ore prices rose by 12.3% during the month, also supported by flat y-o-y mine output in July, in China. Amid rising Chinese steel and aluminium output, with aluminium up 9% y-o-y, regulatory actions from the US Government will require close monitoring. During the month, the US Department of Commerce preliminarily ruled that Chinese aluminium foil production benefits from subsidies ranging from 16.7% to 81%, which could trigger tariffs in that same range. This could be a harbinger of similar actions to other aluminium and steel products as well. Commodities used for steel product making such as zinc and nickel have also risen due to higher steel product demand. Nickel prices have also been supported by the Philippine Governmentís continuation of the restrictions to open pit mining. Copper prices have jumped to top strong manufacturing prospects globally while the effects of the supply disruption in Chile and Peru at the beginning of the year supported prices. Average copper inventories at the London metal exchange warehouse system dropped by 23% to 228k tonnes during the month, suggesting a temporary tightening market as well.

In the group of energy commodities, oil prices advanced on sustained withdrawals from inventories and the continuing conformity with the Declaration of Cooperation. Natural gas prices declined in the US in the first weeks of the month on lower temperatures in eastern and southern regions which limited demand, but prices recovered toward the end of the month, partly in anticipation of the impact of Hurricane Harvey. In the aftermath of the storm, prices have remained stable in the band between $2.90/mmbtu and $3.1/mmbtu, were they have stayed since mid-March. Natural gas prices in Europe advanced due to higher demand resulting from low temperatures and lower natural gas deliveries from Norway. Natural gas inventories for the EU Member States increased to 76.7% of capacity at the end of August from 63.4% in the previous month, though last yearís end of August inventories were at 83.7%. Thermal coal prices jumped by 9.6% as a result of strong demand for power generation in China and supply delays in Indonesia and Australia due to severe weather. Thermal power generation in China increased by 10.5% in July, and by 7.8% y-o-y from January - July, as a result of a summer heat wave, higher industrial production and reduced hydro electrical output which was down by 3.4% y-o-y in the January - July period according to the National Bureau of Statistics. The Government of China recently banned coal, iron ore and lead imports from North Korea to comply with the UN resolutions. In 2016, shipment of Anthracite (high quality coal) from North Korea to China reached 22.4 MMT, while due to a preliminary suspension as of February 2017, only 2.67 MMT have been shipped in 2017, according to Chinese customs official data.

Average energy prices in August increased by 4.4% m-o-m and by around 27% in the Jan-Aug period compared to the previous year. This has supported headline consumer price inflation readings, though the effect would tend to fade towards the end of the year should energy prices stay around current levels. The largest monthly average increase in the energy group was in Australian benchmark thermal coal prices which increased by 9.6% m-o-m and are 53% higher y-o-y in the January-August period.

Agricultural prices decreased by 1.7% in August, with average food prices decreasing by 3.4%. Agricultural commodity prices have been relatively flat on average in a year to date comparison therefore their contribution to inflation has been relatively muted compared to energy commodities. Prices of winter wheat, rice, maize and soybeans decreased m-o-m by 15.4%, 5.8%, 5.7% and 4.4%, respectively.

Average base metal prices increased by 7.6% in August, with advances among all group components. Metal prices are around 23% higher year to date and have experienced the best performance among commodity groups since the beginning of the year. Copper, aluminium and nickel advanced by 8.4%, 6.7% and 14.7% during the month, respectively.

In the group of precious metals, gold prices increased by 3.7% on average, a trend that has continued at the beginning of September on the expectation of a lower path of interest rates in the US.

In August, the Henry Hub natural gas index declined. The average price was down by 9, or 2.7%, to $2.88/mmbtu after trading at an average of $2.96/mmbtu in the previous month.

The EIA said utilities added 65 bcf of working gas in underground storage during the week ending 1 September 2017. This was slightly above the median analystsí expectations of a 63 bcf injection. Total working gas in underground storage stood at 3,220 bcf, 6.2% lower than at the same time the previous year, but 0.5% higher than the previous five-year average.

Investment flows into commodities
Open interest (OI) increased in August for selected US commodity futures markets such as copper, crude oil and livestock while it was relatively stable for natural gas, agriculture and precious metals. Meanwhile, in monthly terms, speculative net length positions increased for precious metals, copper and crude oil, while they declined for agriculture, natural gas, and livestock.

Agricultureís OI increased by 4.4% in August. Meanwhile, money managersí aggregate net position turned bearish again with a net short of 89 thousand lots, following a short lived push in July. The switch to a combined net short position was mainly concentrated in net short positions in soft red winter wheat.

Henry Hubís natural gas OI decreased slightly by 1.1% m-o-m in August. Money managers decreased their net length by 22.8% to 66 thousand contracts, though speculators have held a net long position for the last 12 months.

Copperís OI increased by 18% m-o-m in August. Money managers increased their net long positions by 58% to 118 thousand contracts in August. Speculator positions have increased 2.7 times since May, amid a price rally of around 16% during the period.

Precious metalsí OI was relatively stable in August, however Money managers turned bullish, as shown by a jump in their net long positions by 5.3 times to 206 thousand contracts. This put the Money managersí net length as a share of open interest at 30%, their highest level since April.

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