What to Watch in Commodities: Trade Truce, OPEC, Crops, Palm

LAGOS (Capital Markets in Africa) – It’s the end of a turbulent six months for commoditymarkets that have been buffeted by powerful and conflicting forces since the start of the year. While supply disruptions have fed a bullish narrative that’s driven oil, iron ore and corn to multi-year highs, concern over the impact of the U.S.-China trade war on economic growth has supported a bear case for raw materials, especially industrial metals.

The Bloomberg Commodity Spot Index eked out a 6.6% gain in the first half. Markets got another boost after an eventful G-20 meeting in Osaka that saw the U.S. and Chinese presidents agree to resume trade talks, with Donald Trump pledging to hold off on new tariffs on Beijing. Agricultural markets in particular may benefit after Trump said Xi Jinping had promised to buy “tremendous” amounts of U.S. farm products. It’s bad news for gold bulls, though, as haven assets that were bolstered in recent months by the long-running tensions lose their appeal.

It’ll be a big week for oil. The Russian and Saudi leaders also met in Osaka and agreed to extend OPEC+ production cuts for potentially as long as 9 months, just days before the group is due to gather to decide on the curbs. Prices are ticking higher on Monday as investors expect ministers to rubber stamp the Russia-Saudi deal.

Meanwhile, it’s been a terrible time for palm oil, the ubiquitous commodity used in pretty much everything. Traders this week will be looking for prices to break out of an unprecedented run of quarterly losses. Conversely, investors will be asking whether iron ore’s astonishing run to a five-year high can last.

Agriculture commodity traders will be looking for signs of improved U.S. crop conditions in reports Monday and Tuesday. This week will also see the world’s biggest platinum producers enter wage negotiations with labor unions, just as the companies report bumper profits from higher metal prices.

Oil’s Troubled Waters
The outcome of OPEC’s meeting with its allies in Vienna through Tuesday may be somewhat of a foregone conclusion after Russian President Vladimir Putin said he agreed with Saudi Crown Prince Mohammed Bin Salman to extend the OPEC+ deal at current production levels for the rest of this year and potentially into early 2020. Combined with the U.S.-China trade truce, their verbal agreement gave oil prices an initial boost as the week started.

At the start of two days of meetings in Vienna, the ministerial committee that advises Saudi Arabia, Russia and other countries in the OPEC+ coalition recommended extending curbs for a further nine months. That’s likely to be ratified by a full OPEC meeting this afternoon. Saudi Arabia and Russia are the largest members in the group and are usually able to steer the alliance toward their preferred strategy.

Crop Watch
Record rainfall this spring resulted in the slowest corn plantings in U.S. government records dating back to 1980, as well as the slowest soybean sowings in decades. The poor start to the U.S. growing season has the crops in the worst shape since the blistering drought year of 2012.

Traders are now looking for signs that a long-awaited bout of heat will boost plant growth. On Monday, the U.S. Department of Agriculture releases the weekly crop progress and conditions report. That could help provide clarity for the market after a separate USDA report on Friday showed larger-than-expected corn sowings, sending prices crashing. On Tuesday, commodity traders will keep watch for the Purdue agriculture sentiment report for June, which will give the market some insight on the grower outlook for the farm economy after the rains.

Palm Toil
The world’s most consumed vegetable oil just finished a record seventh straight slump in the second quarter. Persistently high stockpiles in the top growers amid lackluster demand are the key factors keeping palm depressed and with the high-production cycle approaching, the expectation is that those inventories will keep building. Adding to the pressure are some key data for Malaysia over the weekend showing an almost 20% slide in exports in June.

The best hope for bulls might be a colossal weather-related disruption such as the Midwest deluge that lifted grains out of their stockpile-induced slump last quarter. But with Australia saying that the immediate likelihood of an El Nino had diminished, that doesn’t look to be on the cards.

Platinum Dilemma
Talks between the world’s biggest platinum producers and labor unions start in earnest this week over a three-year wage deal for the roughly 167,000 miners working in the sector in South Africa. The negotiations were always going to be tough, but have been complicated after higher prices for palladium and rhodium, which are mined alongside platinum, delivered windfall profits to the mining companies.

Against that backdrop, the industry’s biggest union has asked for a pay increase of as much as 48%. The companies say that would trigger job losses and mine closures, but even more is at stake as President Cyril Ramaphosa bids to reset the struggling South African economy. An amicable settlement will help lure foreign investors, while a repeat of a strike five years ago could send metal prices soaring and undermine Ramaphosa’s reform agenda.

Shock and Ore
Iron ore is in the midst of a wild rally, advancing more than 60% this year to the highest since 2014 on a stream of supply disruptions, including the closure of a significant portion of Vale SA’s output following a deadly dam disaster in January. As investors assess the second-half outlook, port stockpiles in China declined for a 12th week in the longest streak since 2012, adding to the bullish signs for the steel-making material.

At the same time, demand for iron ore is being fueled by Chinese steel mills that are churning out record amounts, a topic that will be in focus as industry participants gather at a conference in Shanghai starting Tuesday. While the restart of a third of Vale’s shuttered capacity may take some of the pressure off on the supply side, Australia just said its exports this year are likely to drop for the first time in almost two decades.

Bulls & Bears
Gold’s rally in June surpassing $1,400 an ounce spooked traders and analysts who think the move — the largest monthly gain since 2016 — was too abrupt. Roughly 56% of those surveyed were bearish on the metal, according to a Bloomberg survey. Prices last week reached the highest since 2013 amid expectations for looser monetary policy and rising geopolitical tensions.

Bullish sentiment for corn persisted a ninth week amid reports that crops had been in the worst shape since 2012. Crop progress had reached 96% compared with 100% a year earlier. Copper traders were split, with bullish and bearish sentiment coming in at 38% each. Terminal subscribers can see other commodity surveys here and the full bull/bear survey here.

Source: Bloomberg Business News