Oil gained amid rising geopolitical risks. Renewed supply side issues helped support metals. Iron ore gained, as demand in China improved.
By Daniel Hynes
Market Commentary
Crude oil prices gained amid rising tensions in the Middle East. Israeli defence forces conducted a strike in Doha, targeting the senior leadership of Hamas, which the US and Europe have declared a terrorist organisation. This is the first strike in the region since the beginning of the nearly two-year conflict. It also stands to jeopardise US efforts to broker a peace deal between Israel and Hamas. However, the gains in oil prices are unlikely to be sustained without any escalation that directly targets oil infrastructure or trade flows. This is more likely from the Russia-Ukraine conflict, where Kyiv has targeted Russia’s energy infrastructure. Overnight, Ukrainian drones struck part of the Kuibyshev-Lysychansk oil pipeline. Russia’s crude processing rate fell to 4.98mb/d in the first three days of September amid the recent attacks, according to a Bloomberg report. This is more than 70kb/d below levels in late August. The rising risks to supply have shifted the focus away from OPEC’s recent decision to increase output by 137kb/d in October. This marks the reversal of cuts that were set to remain in place until the end of 2026, following the rapid return of the previous tranche of idled barrels over recent months.
The heightened geopolitical tensions saw the European gas market pare earlier losses to end the session relatively unchanged. While Qatar ships a significant volume of its LNG to Asia, it’s also an important supplier to Europe. Any disruption could affect global prices, especially with the region just weeks away from the start of its heating season. This comes following reports that the EU is exploring new sanctions on about half a dozen Russian banks and energy companies as part of its latest round of measures. North Asia LNG prices were also steady as the market awaits clarity on whether the US will tighten sanctions on Russian LNG.
Base metals edged lower as traders took stock following recent gains. However, aluminium bucked the trend to end the session higher on rising expectations of further tightness in the physical market. Requests to withdraw almost 100kt of aluminium from LME warehouses in Malaysia in just two days has reduced the volumes of stockpiles available to other buyers from a 14-month high. Copper was steady despite reports that Indonesia’s giant Grasberg copper mine was closed after workers become trapped underground. The workers are believed to be safe and rescue efforts are underway. A prolonged disruption at the second largest copper mine in the world could tighten the market which is already facing a shortage of feedstock. This follows disruptions at El Teniente mine in Chile, which highlighted the fragility of supplies the industry is facing.
Iron ore futures gained for a sixth consecutive day amid expectations of stronger Chinese demand. The steel making raw material pushed above USD107/t for the first time since February as steel mills recommence operations following forced closures during a recent military parade. This will be magnified by the need to restock inventory following the peak demand period. Earlier this week data showed China’s imports of iron ore remain strong, with August volumes hitting 105mt, the second highest for the year. Sentiment was also supported by reports that Rio Tinto is facing pressure from the Guinean government to make investments in steelmaking near its major iron ore mine, Simandou. This suggests the government is pushing back on companies that are focused on exporting raw materials.
Chart of the Day
The fall in China’s imports of LNG have gone a long way to enabling Europe to restock storage facilities relatively easily. Year-to-date LNG imports are down 6%. However, that doesn’t reflect China’s natural gas demand. Imports of natural gas via pipelines have continued to rise, suggesting underlying demand remains strong. This is likely to be an ongoing issues, following the deal with Russia to construct the Pipeline of Siberia 2.
Data source: Commodities Wrap