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What to Watch as Commodities Markets Brace for Hits to Supply

·5 min read

(Bloomberg) -- Supply issues are set to dominate commodities trading in coming days, with Europe’s natural gas shortage in focus along with an OPEC+ decision on what’s next for oil flows.

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The prolonged closure of a key gas route from Russia threatens more turmoil for global gas and power markets, and spells deep trouble for Europe’s economy. The region’s leaders will consider extraordinary measures in response. The OPEC+ gathering later Monday comes after Saudi Arabia flagged the possibility of supply cuts for crude.

Read More: EU to Consider Special Interventions as Power Crisis Worsens

The extreme weather watch for agricultural and power markets shifts to the Atlantic hurricane season and to California, where soaring temperatures threaten wildfires and a buckled grid. Australia, one of the world’s top grain exporters, will update its crop forecasts on Tuesday.

In China, which is just recovering from its own historic drought, trade figures on Wednesday will provide a checkup on the health of its commodities imports. The data will be released against a baleful backdrop of power shortages, a property market in crisis, and the government’s stringent Covid Zero rulebook, which has now been thrown at the metropolis of Chengdu.

Crude Cuts

Oil prices burst higher to start the week, as traders prepared for an OPEC+ meeting held against a highly fluid backdrop for the global market. Crude is coming off three straight monthly losses, its longest slump in over two years, and has tumbled below $100 a barrel on fears over slower economic growth in China and tighter monetary policy in the US.

Coalition leader Saudi Arabia has signaled it’s prepared to cut production -- which would throw into reverse the recent trend of increases -- to bring markets back into equilibrium. That move had received enthusiastic backing from some of the cartel, but with inflation still ravaging the world economy and Europe’s prospects darkening, Riyadh may be reluctant to risk inflaming relations with the White House and could instead opt to hold output steady.

California Heating

“This multi-day event is going to get much more intense,” the grid’s CEO Elliot Mainzer said.California remains in the grip of blistering heat. September started out hot across the US West and chances are it’ll linger into mid-month. The state’s power grid operator warned Sunday that the risk of blackouts is at the highest level so far.

The heat wave is exacerbating drought conditions, taxing agriculture and raising the risk of wildfires, while prompting Californians to crank up air conditioning and stress the state’s power network. The grid operator said it expects electricity demand on Tuesday to near 50.1 gigawatts, just short of a record set in 2006. One gigawatt is enough to power 750,000 Californian homes.

Softs Supply

Traders of coffee, sugar and cotton are closely tracking forecasts of weather developments across the Gulf of Mexico, as the Atlantic hurricane season enters its peak. The first hurricane of the season, which formed west of the Azores, has been named Danielle, but its meandering mid-Atlantic path poses no threat to the region.

Violent storms can threaten sugar cane in Florida and Louisiana, the top US growers, and citrus crops in Florida, the biggest domestic supplier of fruit for juice.

Cotton crops across the southern states are also vulnerable to extremes. Drought has already hurt top US grower Texas, crimping global supplies and contributing to the 17% surge of cotton futures in August, the biggest monthly jump since late 2010. American cotton supplies are even more important now after catastrophic flooding ruined a big portion of the crop in Pakistan, the fifth-largest producer.

Severe storms can also cause damage to coffee crops and infrastructure in Central America, where some areas are still recovering from hurricane damage of two years ago.

Wheat Optimism

Better news may be due from Australia, where the government is set to release a quarterly update detailing what it thinks the size of the upcoming wheat crop might look like. Wet conditions across the nation this year have given many growers reason for optimism. After ramping up plantings, farmers are expected to pull off another bumper crop, and the report is likely to see an upward revision to an already fairly buoyant production forecast.

The prospect of more supplies should offer some relief to a world facing uncertain grain reserves. Extreme weather has trimmed output in parts of Europe, and there are concerns for the crop in Argentina -- the southern hemisphere’s other big wheat producer. As La Nina saps soil moisture there, farmers have pulled back on sowing due to dryness. Drought is also shrinking crops from the US Farm Belt to China. And even as shipments start flowing from Ukraine again, there are fears over the next harvest as a chunk of farmland was lost in the war.

Chinese Metals

China’s import data for August should help form views on the direction of metals prices. While the government’s intention to spend more on infrastructure will help revive consumption of materials used in construction, there are doubts over whether it’ll be enough to fully offset the impact of virus-related curbs on economic activity and a teetering property sector.

Last week’s purchasing managers’ indexes suggest some grounds for optimism that conditions have at least bottomed. The steel reading in August showed that the industry was still shrinking, but the pace of the decline narrowed sharply and, lockdowns permitting, China is now heading into one of its peak periods for construction activity. Traders will look to the trade data to see if that has translated into more overseas demand for items like iron ore and copper.

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