Commodity wrap- Oil, Gold, Copper (22.03.2022)

Oil:

• The European Union could theoretically decide to ban Russian oil imports this week.
• Hungary is opposed to such a decision. Europe is concerned that this could halt the transfer of gas from Russia
• It is speculated that the departure of foreign companies from Russia may lead to a reduction in oil production by as much as 3 million barrels a day. Western oil service companies (such as Haliburton and Schlumberger) account for only 15% of all services. On the other hand, these companies are over 50% responsible for advanced methods of increasing productivity.
• According to Goldman Sachs, the medium-term oil scenario indicates that the oil supply from Russia may fall by 1.5 million barrels per day, which could lead to an increase in the price to USD 120 per barrel (near current levels). The same scenario points to a drop in prices to $ 110 next year. The worst-case scenario is 165 million barrels a day - provided both China and India will not buy additional oil from Russia

Foreign companies that provide services on the Russian oil market are responsible for more than 50% of the advanced methods of increasing productivity. The termination of their operations may mean that production from Russia may not be able to grow in line with the OPEC + agreement. Source: Bloomberg

Scenarios for the oil market according to Goldman Sachs. The scenario of a decrease in supply by 4 million barrels per day is unrealistic as it would require the lack of involvement of China and India. Source: Goldman Sachs

Gold:

• Bond yields are rising, although at the same time the yield curve has flattened almost completely
• The Fed is ready to raise interest rates by 50 basis points
• Gold remains above $ 1,900, although yields point to lower valuations for gold
• ETFs have held the most gold in over a year, which indicates a lot of uncertainty among investors regarding the war
• ETFs have been buying gold 8 days in a row, the amount of gold in vaults has increased by 7% since the beginning of the year (silver only increased by 1.4%)​​​​​​​

ETFs are buying gold, which may indicate that the market downturns are constrained by rising interest rates and yields. Short-term support is located around $ 1890-1900 an ounce. Source: Bloomberg

Gold price is testing the support in the form of the lower bound of the triangle formation. Should break lower occur, downward move may accelerate towards support at $ 1,890, although the recent rise in yields indicates potentially lower levels. Source: xStation5

Copper:

• Copper is currently the most oversold metal on the Shanghai Stock Exchange (net open interest -13,000 positions)
• Chinese brokers continue to hold short positions on net nickel, but short positions have more than halved in recent days
• Further stimulus packages in China may lead to rising extraction and thus, in the longer term, limit the price growth 
• On the other hand, copper may be exposed to a decline in economic activity in China due to the coronavirus
• Inventories have rebounded recently, which may show decreased consumption in China (50% of global copper demand)
• Capital Economics does not rule out a "hard landing" in China, which pushed prices below $ 5,000 per ton in 2016
• Credit impulse starts to rebound in China, but the 12M change remains negative. The 1.5-year impulse shift indicates that price may be nearing its peak​​​​​​​

The number of short positions in China is not excessively high, although there is still a risk of a short squeeze, as was the case with the nickel market. Short positions on the LME are extremely low, which may indicate a contrarian signal. Source: Bloomberg

Copper is currently the most sold-out metal on contracts in Shanghai. Source: Bloomberg

Copper inventories have rebounded recently, which may indicate declining demand. Source: Bloomberg

China's credit impulse (18 months ahead) suggests copper price may be near its peak. If government stimulus is not geared towards investment, copper may come under pressure. Source: XTB, Bloomberg