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What to watch in commodities: Powell, China, crude, Texas, mines

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What to watch in commodities: Powell, China, crude, Texas, mines

LONDON/NEW YORK/SANTIAGO (June 13): Commodities are having a stormy start to the week, courtesy of Friday’s American inflation thunderbolt and China’s fresh Covid troubles. The Fed’s rates decision tops the agenda for coming days, and there’s also two key oil reports, a major global mining event and a stress test for Texas electricity.

Investors are now on alert for a more hawkish turn when Federal Reserve Chair Jerome Powell meets the press after the bank’s two-day conclave ending Wednesday. Monday’s opening slump shows investors are worried — oil dropped below US$120 a barrel and metals slumped.

OPEC and the International Energy Agency issue monthly outlooks on Tuesday and Wednesday as China re-imposes some anti-virus measures that could hit demand. World food markets are still tracking the fate of Ukraine’s grain exports. And in Texas, power usage just hit an all-time high amid worries over grid capacity. 

Testing time

Crude just clinched a seventh weekly gain as US holiday driving demand drains fuel inventories and European Union sanctions on Russian barrels threaten supply. But attention is already turning to what happens after the summer, especially if monetary tightening intensifies to the point of threatening growth or triggering a recession. China’s contribution to demand also looks shakier than it did a week ago.

This all presents a complex backdrop for key industry reports this week. The first will come on Tuesday, when the Organization of Petroleum Exporting Countries releases its latest estimates of supply and demand for this year. But an even more anticipated analysis is due the next day, when the adviser to consuming nations, the International Energy Agency, unveils its first detailed forecasts for 2023.

China setbacks

Just days ago, it looked like China was decisively heading for the exit from Covid curbs that have battered commodities demand. Recent flare-ups in Beijing and Shanghai highlight the risk of backsliding, and the prospect of on-off measures that will keep consumer confidence in check. Officials in the capital admitted the latest outbreak was proving hard to contain.

Investors will be looking carefully at how authorities tackle this rise, and also at a snapshot of a struggling economy due Wednesday. May data includes everything from steel and energy output to retail sales, and the latest on property activity. The numbers should “pick up a little from the depressed levels in April but may not be enough to give a significant lift to commodities prices”, according to Capital Economics.

Heat wave

Demands on the Texas electricity grid just hit a record high as a heat wave drives consumers to crank up air conditioners — and this on a weekend when many offices and factories are closed. The main grid operator, Electric Reliability Council of Texas, has warned that more reserve power may be needed, potentially taxing the state’s ageing coal and natural gas power plants. More extreme heat could be the biggest test since the deadly blackouts triggered by 2021’s winter storm. 

The stoppage of a major liquefied natural gas terminal in Texas also helped damp power demand, but it’s causing ructions in gas markets. The fire at Freeport LNG sent US prices for the fuel sharply lower and stoked a rally in the European market.

Volatility should continue as traders try to gauge the damage, and when the facility will restart. Freeport estimated the terminal will be up and running in three weeks, though some analysts expect a worst-case outage of up to 90 days.

Food crisis 

Harvest time is drawing nearer across Europe, putting prospects for Ukraine’s grain exports increasingly in focus.

Russia’s invasion has shut its main ports on the Black Sea, and Ukraine has resorted to rerouting grain exports by rail, truck and barge via the European Union instead. That’s helped buoy shipments, while sales remain well short of usual levels.

All eyes will be on how the pace progresses as farmers begin to reap key staples like wheat this summer. Ukraine is still backlogged with millions of tons of grain from last year’s harvests and could run short of silo space without a pickup soon. Its export limitations from the war have stoked increasing worries about global hunger, with rising food prices expected to boost the world’s import bill to a record this year.

Digging down

The PDAC mining convention — held by the Prospectors & Developers Association of Canada — resumes in-person programming this week, with the industry in the unusual position of enjoying high metals prices and healthy profits while facing tight funding and lacklustre valuations. Thousands of executives, investors, government officials and bankers from around the world will converge on Toronto.

Inflationary and supply-chain woes make for a risk-off macro backdrop, with many in the industry predicting further consolidation as companies compete for investor attention and scarce capital via liquidity and scale. The dealmaking buzz may focus on the next mid-sized producers looking to join the big league, and which single-asset developers may be gobbled up.

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