The word systemic is in the news again. With the failure of Silicon Valley Bank and Signature Bank, the U.S. Federal Deposit Insurance Corp. invoked the systemic risk exception in order to be able to guarantee uninsured deposits.
Now the questions for commodity investors are: Has SVB and Signature helped the U.S. Federal Reserve slow its interest rate tightening cycle and ultimately support commodity prices, or is a recession more probable leading to lower commodity demand?
On March 22, the Fed raised its benchmark rate by another 25 basis points. (A basis point is 1/100th of a percentage point.) The collective raising of interest rates coupled with the bank failures is leading to a credit tightening cycle. These factors usually mean we will enter an economic slowdown or recession, which dampens commodity demand.
Let’s look at how some commodity prices have moved over the past month and their outlook.
Oil
On Sunday, the Organization of the Petroleum Exporting Countries, including Russia and others, announced a production cut of 1.16 million barrels a day. This cut is on top of a two million barrels a day reduction that was announced in October. Crude oil had been trading in the US$70 to US$80 a barrel range from December until two weeks ago when it broke down to US$67. Sunday’s announcement sent the price of oil back up to US$80 Monday.
The International Energy Agency sees demand in 2023 higher by 100,000 barrels a day based on China reopening and higher volumes of air traffic. By the fourth quarter of this year, the IEA expects demand to be two million barrels a day higher than supply, leading to upward pressure on prices. Over the past three months, supply has been building at a faster rate than demand, which led to the recent fall in prices. Longer-term projections for the price of oil are higher based on supply constraints.
Natural gas
The price of natural gas is down to US$2.10 per million British thermal units from a high in August of US$9.81. The price is down 24 per cent over the past month and off 64 per cent year-over-year.
Higher prices in 2022 resulted in more production and ultimately an oversupply, which drove prices down to current levels. Any surplus is usually consumed during colder winter weather but this winter was unseasonably warm in many places, resulting in reduced demand. Also of note, the Freeport LNG terminal (representing 17 per cent of U.S. liquefied natural gas export capacity) has restarted but has not ramped up to full production yet.
Gold
Gold prices hit US$2,000 an ounce again in the past month. Gold breached the $2,000 level in August, 2020, and again in March, 2022. Gold’s historic high was in August, 2020, at $2,075. Higher inflation, falling interest rates, the potential for a pause or rate cut by the Fed after the bank failures and a falling U.S. dollar are all supporting gold’s price.
Lithium
Lithium prices are expected to remain at or below current levels as supply continues to exceed demand out to 2025. Adding to the supply side, on March 13, Iran announced it had discovered an 8.5 million tonne lithium carbonate equivalent deposit, which would represent almost 10 per cent of global reserves. Demand for electric vehicles in China has slowed this year after the Chinese government halted subsidies for buyers of the cars.
Wheat
Wheat prices remain near 18-month lows as supply continues to improve. Wheat prices shot up over US$12.50 a bushel a year ago when Russia invaded the Ukraine, threatening supply. Ukraine is responsible for 9 per cent of world wheat export, Russia 19 per cent. But in 2022, Russia harvested a record 153 million tonnes of wheat leading to current lower prices. The Black Sea grain deal was extended again on March 18 for a further 120 days (Russian authorities claim it is 60 days). The grain deal allows the passage of Ukrainian wheat, corn and other commodities through the Black Sea to global markets.
Price expectations for most commodities are still being driven at a macro level by inflation, interest rates and recession fears – and now credit tightening. Commodity markets will to continue to be volatile through 2023 as the inflation and recession battle plays out.
More about the author
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.
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