Commodity Markets 1/2022

Commodity prices receded in December, amid inflationary pressures in major economies, which led to announcements of monetary policy revisions by the G4, namely, the US Federal Reserve (Fed), the Bank of England, the European Central Bank and the Bank of Japan. Additionally, the production of selected commodities increased month-on-month amid increases in manufacturing activity. These production increases also reduced supply uncertainties except for EU natural gas, which continues to face supply challenges.

The energy commodity index experienced the biggest decline, m-o-m, led by the decline in average crude oil and US natural gas prices, which were partially offset by an increase in EU natural gas prices. The non- energy commodity index increased, m-o-m, supported by the agricultural sector, but was offset by price declines in precious metals, while base metals prices remained essentially flat over the same period.

Implications of the pandemic were largely shrugged off in December, as production increases across most commodities was the main contributor for price declines, except for average crude oil prices. As seen in November when news of the Omicron variant was first released, average crude oil prices declined in December m-o-m amid uncertainties around the pandemic. However, even in the face of a record-breaking increase in cases, investors are now more focused on the impact monetary policies will have on the short- term outlook of commodity markets as increases in US interest rates will increase the cost of capital and hinder commodity producers expansion plans while favouring low-cost and equity based commodity producers.

Trends in selected commodity markets

The energy price index continued its m-o-m decline, but at a slower rate of 3.1% in December. The December decline was mainly due to decreases in US natural gas and crude oil average prices, which were partially offset by gains in Australian coal and outlier EU natural gas prices. The average index level ended 2021 82% higher than in 2020, signalling a strong recovery after the 2020 slump.

The non-energy index climbed 1.3% m-o-m, supported by strong agricultural and mineral indices, which were partially offset by a decline in precious metals, while base metals remained essentially flat over the same period. The index closed 2021 19% higher than the previous year, mainly due to a strong recovery in base metals (46.8%) as industrial activity recovered from the 2020 lockdowns.

The Henry Hub natural gas price continued to decline m-o-m. The average monthly price went from $5/MMbtu in November to $3.7/MMbtu in December, a 25.6% fall. The price decline was mainly due to production increases in December in most US producing regions amid a 2021-2022 winter season that began with the lowest inventory levels seen since 2018. US working gas underground storage went from 14,449 billion cubic feet per day (bcf/d) in November to 16,705 bcf/d in December, a 15.6% increase m-o-m. As reported in last month’s MOMR, temperature forecasts for the month of December were reported to be warmer than average, also contributing to the decline in prices.

The year 2021 ended with US natural gas prices on average 91.5% higher than in 2020. Lower inventories and demand outpacing supply for much of 2021 in the US were the main contributors. The weekly average for US working underground gas storage went from 3,050 bcf/d in 2020 to 2,707 bcf/d in 2021, a 11.3% decline y-o-y, while consumption averaged 83.5 bcf/d in 2021 compared with 83.3 bcf/d in 2020.

Natural gas prices in Europe climbed back in December, following November’s decline. The average Title Transfer Facility price increased by 37.7% m-o-m to $38/mmbtu. The increase in price was mainly due to lower inventory levels and underdelivery from Russia across the main supply routes. Average injection capacity to storage went up by 36.8% m-o-m from 1.9 bcf in November to 2.6 bcf in December. However, this was not enough to counter a 45% increase in withdrawals, which led to a 19.8% decline in average monthly storage from 2,796 bcf to 2,268 bcf amid the arrival of seasonal colder weather.

Natural gas prices in Europe ended 2021 at a record high average increase of 397.1% compared with 2020. This was mainly due to inventories remaining consistently lower in 2021; Inventories went from averaging 3,003 bcf in 2020 to averaging 2,039 bcf in 2021, a 32.1% decline. Injections were higher in 2021, averaging 11.3%, but were offset by higher average withdrawals in 2021 of around 20% compared with 2020.

Australian thermal coal prices bounced back to a 7.7% average increase in December on the heels of an announcement by the Indonesian government of an export ban on coal to ensure adequate supplies for state- run power plants. The ban led to a rise in China’s coal futures, as Indonesia accounts for about 40% of global seaborne exports, according to Bloomberg.

Prices for thermal coal closed 2021 127.1% higher than the previous year. According to data from the National Bureau of Statistics, coal output only grew by 1.1% on average in the January–November timeframe y-o-y, while thermal power output grew by 6% on average in the same timeframe y-o-y. The average percentage growth gap between prices and supply indicates that growth in prices was mainly driven by the demand side.

The base metal price index remained essentially flat m-o-m, with mixed movement across group components. The index was carried by an increase in aluminium prices, which was offset by declines in copper (1.8%) and lead (1.2%). Aluminium prices rebounded by 2.2% following a decline the previous month. Inventories went up 4.2% at the London Metal Exchange (LME) following coal production increases for power generation in Asian markets. The 2021 inventory, however, remained lower compared with 2020. The LME registered 400,000 tons less in December 2021 compared with December 2020, which represents a 30% decline in inventories.

Average monthly copper prices continued declining m-o-m to fall 1.8% in December, while the LME posted 88,950 tons in December, up from 76,450 in November. Prices continued to be impacted by the financial markets amid a rising dollar value. Nonetheless, the 16.4% increase in stock levels shows that physical markets remained supportive m-o-m, as industrial activity picked up in the Asian markets. Y-o-y, December stocks were down 18% compared with stocks held at the end of December 2020 (107,950 tonnes).

In the group of precious metals, all three metals declined m-o-m following the announcements of interest rate increases in the coming months by the US Fed to curb inflation. Gold prices declined by 1.7% m-o-m, while silver and platinum fell 6.8% and 9%, respectively. Gold prices remained relatively stable throughout 2021, only growing by 1.7% on average compared with 2020.

Investment flows into commodities

Money managers’ net length positions declined across the board in selected commodities following news of tighter monetary policies ahead. Investors’ focus is shifting to the economic recovery ahead of 2022 and the implications that future interest rates will have on commodities overall.

Table 2 – 2: CFTC data on non-commercial positions, 1,000 contracts

Note: Data on this table is based on monthly average. Sources: CFTC and OPEC.

Henry Hub’s natural gas open interest (OI) declined by 10.7% during the month of December. Money managers continued to increase their net short positions, going from 11,517 contracts in November to  34,008 lots in December, amid physical market indications of production increases in most producing regions across the US.

Gold’ OI declined by 11.4% in December amid announcements by the US Fed of short-term increases in interest rates. Money managers’ net length declined from 126,594 contracts to 88,085 lots.

Copper’s OI declined by 15% in December. Money managers decreased their net length m-o-m from 23,424 contracts in November to 14,155 lots in December, as receding financial market sentiment continued.