Commodities Corner: Second fiddle

Company News

by Glenn Dyer

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Commodity prices took a battering last week after the Fed’s 0.75% rate rise and smaller rises from central banks in the UK, Brazil and Switzerland startled markets out of their cocoons.

While attention was on the big falls late in the week in sharemarkets, commodity prices saw a real shakeout, with oil, copper, silver, iron ore leading prices sharply lower by Friday.

Iron ore prices ended at their lowest for six months at around $US121 a tonne for 62% Fe fines delivered to northern China.

The rate hikes and recession fears after the Fed’s stunner hit confidence in oil and other commodities.

A stronger US dollar in the wake of the Fed rise hit commodities as well. At the same time bond yields steadied and rose but the stronger greenback Friday, sent the Aussie dollar back under 70 US cents for the second time in a week.

Oil prices tumbled more than 6% to a four-week low on Friday on worries that interest rate hikes by major central banks and as traders started focussing on President Biden’s meetings in Saudi Arabia even though they are just on a month away.

There are fears that meeting might see the Saudis boost output or scrap the OPEC+ production cap.

US West Texas Intermediate (WTI) crude slid 6.8% to finish at $US109.56 a barrel on Nymex in New York for the biggest one-session drop since March 31. Oil recovered to just over $US110 a barrel in late trading Friday.

Brent futures (the global benchmark crude) slid almost 6% to settle at just over $US113 a barrel (and then edged a touch higher in afterhours trading).

For the week Brent crude was down 7.3% and WTI dropped 9.2% in one of the biggest weekly for commodities this week.

US drilling rig use rose again last week – up seven to 740 by Friday. This was the highest level since March 2020.

Oil rigs numbers rose four to 584, the highest level since March 2020. Gas rigs grew three to 154 the highest they have been since September 2019.

The rig count rose for 22 consecutive months through May. But crude oil production has remained largely flat over the past few months.

It rose to 12 million barrels a day, the highest level since April 2020, according to data last week from the US Energy Information Administration.

US natural gas prices (on Nymex) fell 7% to $US6.94 a million British thermal units, finishing below $US7 for the first time since late April after the shutdown of the Freeport LNG facility in Louisiana in the wake of a fire.

That slashed US export capacity by around a third at a time of rising demand in Europe.

Other commodities took a hit as well.

Iron ore fell for a sixth session on Friday, its steepest weekly slump in six months, as Chinese steel mills opted to reduce output amid weak profits and deteriorating demand prospects.

Benchmark 62% Fe fines imported into Northern China fell 5.76%, to $US121.64 per tonne, the lowest since December 17.

That’s despite production data showing another near record month for crude steel production in May, after a solid month for April which saw output up 192 million tonnes for the two months.

Copper prices slid sharply to end just over $US4.01 a pound in New York. The 6.6% slide for the week ignored the Chinese production (and earlier trade data) and reacted adversely to the central bank rate rises and general gloom.

LME copper fell to $US9,100 a tonne, down nearly 15% from its yearly high in March. Comex gold and silver were hit by the Fed’s aggressive monetary policy move last week which hit Comex gold futures which fell 1.9% last week to end at $US1,840.60 an ounce.

Comex silver eased 1.55% to $US21.73 an ounce.

Grain futures were mixed – wheat on hold while traders waited to get the latest on the state of the US drops and approaching harvests, with the amount of export grain blocked in Ukraine due to the war forecast to triple by the end of the year to 75 million tonnes according to Ukrainian data.

Corn prices rose back to near $US8.00 cents a bushel and sugar prices were firm with rumours of more bans emerging from India.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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