In July, energy commodity prices were supported by advances in crude oil and coal prices across regions. In the category of non-energy commodities, base metals showed a broad-based advance mainly as a result of strong momentum in the Chinese economy, as well as reduced supply due to weather and strike related disruptions in key suppliers Chile and Indonesia. Agricultural commodities meanwhile advanced mainly in the first half of the month on top of dry weather in the US plains but generally declined thereafter after supply fears receded. Prices for precious metals declined on average but recovered in the second half of the month on lower expected real interest rates in the US.
Trends in selected commodity markets
After two months of average declines there was a recovery in oil prices in the second half of the month on improving signs of market rebalancing supported by overall commodities market sentiment. At the same time, improving global manufacturing prospects yielded support to base metal prices. The Markit global manufacturing PMI rose to a three-month high of 52.7, supported mainly by some acceleration in China. Agricultural commodities were supported by adverse weather conditions in the US plains, though as weather conditions improved the larger share of the gains were reversed. Meanwhile, a lower expected path of interest rate increases by the US Federal Reserve (Fed) in the second half of the month was supportive of gold prices while the US dollar generally weakened.
Agricultural prices advanced with increases in food, beverages and raw materials groups. Increases in food prices were led by higher soybean and wheat prices, particularly in the first days of the month as dry weather in the US northern plains from the end of June to the beginning of July fuelled concerns about the output of that region. However, with dry weather receding, market attention turned towards expectations persistent large stocks in the marketing year 2017/2018. The US Department of Agriculture increased its expectations for global ending stocks of soybean, rice and corn, while seeing a marginal decline for wheat. Sugar prices advanced on top of a strengthening of the Brazilian currency, and a reduction on the taxes on ethanol at the end of the month, both developments which are expected to encourage that a higher share of the Brazilian sugarcane output be diverted towards ethanol rather than sugar production.
Base metal prices experienced a broad based advance following strong performance of the construction and manufacturing sectors of China in the 2Q17, which in the case of manufacturing appears to have further strengthened in July as shown by the Caixin Manufacturing PMI reading of 51.4, vs. 50.4 the previous month. At the same time, some disruptions from key suppliers were also supportive of prices. Copper prices surged to two-year highs also supported by lower output in Chile – down 5.7% y-o-y in June according to the country’s statistics institute - mainly related to torrential rain and mine strikes the previous months, while in Indonesia the continuation of a strike in the Grasberg mine – the world’s second largest – also continued to affect supplies. Nickel prices jumped mainly on uncertainties regarding the mining policies of the government, which had appeared eager to relax mining restrictions the previous two months. Aluminium prices increased at a smaller pace as the China output in the month of June was reported at 9.1% higher y-o-y according to the International Aluminium Institute (IAI), and accounted for the majority of the 5.7% y-o-y global output gain in that month. Iron ore prices jumped on strong demand for steel making. In June, global steel output rose by 3.2% but largely due to a 5.7% y-o-y increase in steel output in China, according to World Steel Association.
Energy commodity prices advanced led by rising crude oil prices on increasing optimism about market rebalancing after a series of stock drawdowns in the US. Natural gas prices were relatively stable in the US though they declined at the end of the month on expectations that cooler weather at the beginning of August would reduce demand. In Europe, hub prices were relatively weak for most of the month but strengthened at the end of the month due to expectations of a heat wave at the beginning of August. Meanwhile, natural gas inventories in the EU-28 were at 64% full at the end of July, versus 51.2% at the end of the previous month, according to Gas Infrastructure Europe. Thermal coal prices rebounded for the second consecutive month on increased thermal power demand in China following a heatwave during the month, reduced hydroelectric output due to flooding and reduced supply from Indonesia and other suppliers.
Average energy prices in July increased by 3.0% m-o-m, mainly due to a 3.2% increase in average crude oil prices. Natural gas prices increased in the US by 0.8%, while average import prices in Europe decreased by 3.7%. Australian benchmark thermal coal prices increased by 8.1% m-o-m.
Agricultural prices increased by 0.8% in July, with average food prices increasing on average by 0.7%. Soybeans and Hard Red Winter wheat increased by 7.4% and 6.8%, respectively. In the group of beverages, Arabica coffee prices increased by 4.5%.
Average base metal prices increased by 3.7% in July, with mixed movements across the group. Copper, aluminium and nickel advanced by 4.6%, 0.9% and 6.3%, respectively. Average iron ore prices jumped by 17.8%.
In the group of precious metals, gold prices declined by 1.9% on average. However, they increased towards the end of the month on expectations of a lower path of interest rates in the US.
In July, the Henry Hub natural gas index declined. The average price was up by 2cent, or 0.8%, to $2.96 per million British thermal units (mmbtu) after trading at an average of $2.94/mmbtu the previous month.
The Energy Information Agency (EIA) said utilities added 20 billion cubic feet (bcf) of working gas in underground storage during the week ending 28 July. This was slightly below the median analysts’ expectations of a 21 bcf injection. Total working gas in underground storage stood at 3,010 bcf, which was 8.5% lower than at the same time the previous year but 3.0% higher than the previous five-year average.
Investment flows into commodities
Open interest (OI) increased in July for selected US commodity markets such as copper and precious metals, while it declined for agriculture, livestock, crude oil and natural gas. Meanwhile, in monthly terms, speculative net length positions increased for agriculture, crude oil, natural gas, copper and livestock but declined for precious metals.
Agriculture’s OI decreased by 4.4% to 4,955,448 contracts in July. Meanwhile, money managers switched their stance to a combined net long position of 32,156 lots. Net long positions increased in the soy complex, corn and wheat.
Henry Hub’s natural gas OI decreased by 6.0% m-o-m to 1339,013 contracts in July. Money managers increased their net length by 9.8% to 85,692 lots.
Copper’s OI increased by 6.4% m-o-m to 276,573 contracts in July. Money managers increased their net long positions by 32.7% to 73,811 lots on the strong performance of the Chinese economy.
Precious metals’ OI increased by 1.1% m-o-m to 677,017 contracts in July. Money managers decreased their net long positions by 74.9% to 38,847 lots, mainly because of decreases in the first two weeks of the month. The trend reversed in the second half of the month.
