The summer lull in commodity markets will arrive late this year with raised levels of volatility on the back of a barrage of breaking news.
The main market mover this week was the surprise and somewhat controversial announcement from the International Energy Agency that oil consuming nations will release 60 million barrels of oil over a thirty day period. This is indeed only the third time in three decades that such measures have been implemented by the IEA.
With OPEC having failed to reach consensus on a production increase and the U.S. Federal Reserve ceasing quantitative easing in a week’s time it was felt that something else had to be done in order to stimulate the global economic recovery which has been failing recently, not least due to the high cost of energy.
The reason why the market was caught so unprepared for this announcement was primarily due to the belief that Saudi Arabia was in the process of turning up its tap to ensure adequate supplies into the critical autumn period where the expectation is for a considerable tightness in the market. This has helped reduced prices over the last couple of weeks but the IEA clearly felt that more was needed as bottlenecks were still evident due to the continued loss of high quality Libyan oil.
The IEA has a total of 1.3 billion barrels of strategic reserves available for such actions with the U.S. alone holding more than 700 million government controlled barrels in underground storage. On that basis it was not a surprise that the U.S. will be contributing half of the 60 million barrels announced yesterday. As expected the immediate reaction was a steep drop in prices. Brent crude, the leading benchmark for global oil transaction, lost 6 percent and is currently down some 15 percent from the April high but is still one third higher than the 2010 average.
Interestingly Brent crude failed to breach the April low of 105.15 on the news and this could indicate that although we will see a lower range over the summer, potentially between 104 and 115, we would be surprised to see a revisit of the 100 dollar level. For that to happen we will have to see global economic activity deteriorate even further, something that may just have been halted by this action from the IEA.
The longer term risk still firmly points towards higher prices as rising demand will continue to challenge low levels of spare capacity. The IEA’s executive director said that a price spike was feared without the action taken. This is obviously a worrying sign for the future should the Libyan crisis continue as additional releases would not have the same effect.
The Reuters Jefferies CRB index is down 2 percent on the week with all the gains for the year having been erased. Commodities have generally been struggling during May and June on the back of a slowdown in global economic activity and improved projections for agricultural production this autumn.
With the half-year mark coming up it is also worth having a look at the performance year to date and it is a very mixed picture that’s emerging. All three major commodity indexes are back to zero performance on the year so it is all to play for in the second half.
Grain markets have come under some considerable pressure during June as much improved weather has removed some of the worries that caused prices to rally during the sowing season. The S&P GSCI grain index is currently down by 6.5 percent on the year as losses in especially wheat have helped remove some of the inflationary pressures from this sector.
Russia has lifted its export ban on wheat and the Agriculture Ministry there now estimates that the total grain harvest may reach 90 million tonnes, up from 61 million tonnes last year. Significant weather improvements and a 10 percent increase in planted acres should help bring about this much improved situation. The price of high quality milling wheat in Europe fell 6.5 percent on the week as the Russian news combined with the improved weather situation within the European Union has helped remove some of the previous price pressure.
The drought that hit Russia last year did not occur until July and August so until the crop is in the bag the market will continue to trade nervously with weather forecasts being the main driver over the coming weeks.
Gold had an unusually volatile week as a break above the recent high at1,550 was followed by the biggest decline in seven weeks as it got caught up in a general round of risk aversion. Weak economic data from China to the U.S. combined with the IEA announcement had investors heading for the exit across different assets and gold was not immune from this move. As we head into the summer months, which are normally a time of year with weak demand, further losses towards 1,485 can not be ruled out although fundamentals continues to support the yellow metal in the months ahead.
The European carbon market has been suffering heavy losses at one point dropping more than 15 percent to the lowest in almost 15 months. The outlook for the sector looks uncertain and the price has come under pressure due to an oversupply of EU Emission Allowances (EUAs) combined with concerns about future economic growth and industrial activity in the EU. Furthermore the European Parliament has postponed a vote which should target a 30% emissions reduction after 2013. Failure to reach such an agreement will leave energy utilities with a large amount of unused EUAs which they then can sell.
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