Commodities suffered overall declines for the week, pressured by worries over the demand outlook, but natural gas, frozen orange juice, and wheat futures scored impressive gains for the week.
It’s been a “week of declines for more commodity prices, as commodities were caught up in the more widespread selling of financial assets,” with crude-oil among the hardest hit, said Edward Gardner, a commodities economist at Capital Economics, in a note dated Friday.
On Friday, U.S. benchmark West Texas Intermediate crude saw its front-month November contract
CL.1,
CLX23,
settle at $82.79 a barrel on the New York Mercantile Exchange, 8.8% lower for the week, according to Dow Jones Market Data. Global benchmark Brent crude for December delivery
BRN00,
BRNZ23,
ended $84.58 a barrel on ICE Futures Europe, losing 8.3% from a week ago.
Read: Demand destruction sinks oil prices as gasoline inventories send warning signal
At the heart of the commodities sell-off were “ongoing concerns that U.S. interest rates might have to remain higher for longer, especially after [Friday’s] surprisingly strong payrolls” data, Gardner said.
U.S. government data Friday showed that the nation gained 336,000 new jobs in September, while economists polled by The Wall Street Journal had forecast a climb of 170,000 jobs. The better-than-expected employment numbers may convince the Federal Reserve to approve one more interest-rate hike this year, raising the risk of a recession.
The main implication of “higher for longer” interest rates is that commodities “demand could be potentially weaker,” Gardner said.
In Friday dealings, the S&P GSCI index
XX:SPGSCI,
a benchmark for investments in the commodity markets, traded down 5.5% for the week, on track for its worst weekly performance since March 17.
However, Capital Economics’ long-held view is that many developed market central banks will cut interest rates over the next year, with the U.S. Fed starting in the first quarter of next year, “which will lend support to most commodity prices,” he said.
Natural gas
This week, a few commodities managed to buck the downtrend, including natural gas.
“Some say storage may not be sufficient for a cold winter, which is the most likely driver [for the rally], along with excitement ahead of winter, said Beth Sewell, president and chief executive officer at Quantum Gas & Power Services.
Others, however, “say there’s plenty of gas in storage and a slower economy will put a damper on demand,” she told MarketWatch. “Then you have weather forecasts all over the board with some calling for a warm winter and others forecasting it to be 3% colder than last winter.”
“Traders thrive on uncertainty and are focusing on the ‘good news’ to move the market ahead of the season start since temps are a bit cooler over the next few days,” said Sewell on Friday. “We’re also seeing traders covering prompt month short positions, which also contributes to the run up.”
Natural gas for November delivery
NG00,
NGX23,
settled Friday at $3.338 per million British thermal units on Nymex, posting a gain of 14% for the week.
Manish Raj, managing director at Velandera Energy Partners, sees tightness when it comes supplies. Natural-gas producers “can’t fill export orders fast enough, with all export pipelines throttling at full speed,” he told MarketWatch.
He pointed out that the number of active U.S. natural-gas drilling rigs are down by a count of 40, or 25%, from last year. “So while exports are booming, supply remains constrained,” he said. Data from Baker Hughes
BKR,
released Friday show the U.S. natural-gas rig count at 118 for the week, down 40 from a year ago.
Despite the supply-demand picture, the “ultimate controller of prices remains mother nature,” with a harsh winter likely to bring “harsh” natgas prices, whereas a mild winter is likely to help ease prices, said Raj.
OJ and wheat
Frozen orange juice and wheat futures were also among the few gainers in the commodities sector this week.
The most-active November contract for frozen concentrate orange juice
OJX23,
OJ00,
settled at $3.772 a pound on ICE Futures U.S., up nearly 7.9% for the week.
As an agricultural commodity, orange juice is a weather derivative at heart, said Darin Newsom, Barchart senior market analyst, and production in Florida has been hurt in the past number of years from hurricanes and greening disease, which is a disease that affects citrus plants. A drought in Brazil has also led to lower orange production, he said.
So supplies low are low, but “demand isn’t anything to get excited about either,” said Newsom.
There is “very little open interest or trade volume in orange juice futures, making it a thin market,” he explained. “A few orders come in to buy and the market makers run up the price.”
Meanwhile, wheat prices got a boost from worries about risks to grain cargo ships in the Black Sea.
The U.K. has accused Russia of plotting to sabotage civilian cargo ships loaded with grain by planting sea mines on the approach to the country’s Black Sea ports, The Guardian reported on Wednesday.
Newsom said there was “chatter” this week that a Turkish cargo ship hit a sea mine at the mouth of the Danube River on the Black Sea. “This probably triggered some additional algorithm short-covering despite the fact Russia was reportedly putting those mines in over the last number of weeks,” he said.
The wheat, as well as the corn markets are “touchy, and have seen so much selling it doesn’t take much to start a rally,” said Newsom.
December wheat traded in Chicago
WZ23,
W00,
settled at $5.68 1/4 a bushel on Friday, up 4.9% for the week.
Capital Economics’ Gardner said the weekly rise for wheat seems “consistent with reports that Ukraine’s grain exports have fallen by about 28% year on year so far in the 2023/2024 marketing year,” which started in July.
Looking ahead, September inflation data for the U.S., set for release on Thursday, will be closely watched, he said.
Capital Economics expects the data to show a modest 0.2% month on month increase in core prices, which “could dampen higher-for-longer [rate] expectations and boost commodity prices,” said Gardner.
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