Downside pressure on commodity prices mounting

There have been a few developments this week that have exacerbated downside risks to our current commodity price forecasts. First, new COVID-19 cases continued to surge to record highs in China, increasing the possibility of harsh widespread lockdowns. China’s demand for industrial metals has been surprisingly resilient recently, as industry has generally been sheltered from any restrictions so far. But, at the margin, it still adds to the reasons why we expect industrial metals prices to reverse more of their gains from earlier this month. Meanwhile, any restrictions that seriously curb mobility and transport usage that authorities do implement will more than likely dent China’s oil demand.

Second, reports released this week suggesting that the G7 oil price cap could be set somewhere in the region of $65-70 per barrel pose another downside risk to our forecasts. Given that the price of Russia’s Urals crude oil has already fallen to within this range over the past week or so, that suggests the cap might have only a limited impact on Russia’s supply. However, EU countries are currently split, with some reportedly seeking a lower cap, so we are waiting to see what price is actually agreed.

Looking ahead, we will continue to monitor virus infection numbers in China and the authorities’ response. And we will hold a Drop-In on the consequences of China’s spiralling COVID situation on Tuesday. Meanwhile, China’s manufacturing PMI release on Wednesday and Thursday might give us a steer on how demand for commodities held up as the virus situation began to deteriorate this month. Finally, we will be looking out for any signs that the US labour market is softening in employment data on Friday.

China Drop-In (29th Nov.): Join our special briefing on the global macro and market consequences of China’s latest zero-COVID lockdowns. Register here.