Copper price signals to the wider economy and the US dollar's impact on oil prices are in focus this week. The spotlight's also on the end of Nord Stream's maintenance, as well as the resilience of carbon markets and Brazil's soybean meal and oil record output.
1. Dr. Copper prescribes lower interest rates
What's happening? Copper prices have fallen about 30% since peaking on April 4. "Dr Copper" is frequently cited for its skill in diagnosing the health of the global economy. The drop in copper and other industrial metals prices suggests momentum in the economy is slowing. Even so, inflation concerns remain elevated as illustrated by the Eurozone reporting a new high in its June inflation reading at 8.6%, along with the US consumer price index hitting around 9%, with food and energy the culprits in pushing inflation higher. The ratio of copper prices, relative to gold prices or – more broadly – to precious metal prices, shows good correlation with nominal interest rates.
What's next? Is Dr Copper diagnosing a recession? That remains to be seen, but it does signify a cautionary signal on a slowing economy, according to analysts at S&P Global Commodity Insights. As such, nominal interest rates for longer-term US treasuries have already begun to ease. The 10-year US treasury rates have fallen from their mid-June peak of about 3.5%, to 3.0% most recently, even while the US Fed and other central banks continue to normalize and raise policy rates. This induces a flatter yield curve structure, if not an outright inversion, which remains another cautionary indicator. Further weakness in copper prices, particularly compared to precious metal prices, would suggest long-term interest rates could continue to ease, while central banks may begin to reconsider the pace of normalizing their short-term rates.
2. US dollar strength boosted oil run-up, while now tempering decline
What's happening? Since hitting a low in January 2021, the US dollar has strengthened anywhere from 10%-20%, depending which dollar index you focus on. A broad measurement has strengthened the least, while a measure which narrowly focuses on movement against the euro, British pound, and Japanese yen has displayed the greatest strength. Since oil is priced in US dollars, the impact has exacerbated the run-up in oil prices, particularly since Russia's invasion of Ukraine, in which the divergence has become particularly acute. Since the invasion, Dated Brent had risen from roughly $95/b to a high in early March of about $137. However, adjusted for the strength of the dollar, on a narrowly focused currency basis, that increase reached an adjusted peak of nearly $152/b in early March.
What's next? Dated Brent has fallen from early March highs, with July prices averaging about $113/b. Adjusted for the strength of the dollar, the price has fallen from a peak level of about $152/b to about $131/b most recently, but the July monthly average equivalent is still running just above $150/b. As such, the continued strength in the US dollar is tempering any decline in crude prices, according to Platts Analytics. By keeping prices elevated due to exchange rates and dollar strength, conditions are not allowing for a full passthrough of lower Dated Brent prices that have been seen since early March. As such, any benefit of lower prices in stimulating demand is being diluted, while the prospects for economic momentum continue to look more uncertain, which also potentially undercuts oil demand.
3. Uncertainty over Nord Stream flows loom
What's happening? European gas prices have risen sharply since Russia's state-controlled Gazprom cut flows through the Nord Stream pipeline to Germany to just 40% of capacity in mid-June. And on July 11, Nord Stream flows were suspended completely as the pipeline began its annual maintenance shutdown, which is due to end on July 21. Gazprom said it had been forced to cut flows in Nord Stream due to a delay in the return of a key gas compressor turbine after maintenance carried out by Siemens in Canada.
What's next? There are concerns in Europe that Nord Stream might not return after maintenance work, or that flows will be lower than expected. It also remains unclear how long it will take for the turbine to be returned to Russia and whether all the protocols are in place to allow its return. Without Nord Stream, Europe would likely struggle to meet its gas storage filling target of 80% by November.
4. Voluntary carbon market defies global economic slump
What's happening? Commodity and capital benchmarks around the globe have struggled through the first half of 2022, but one market that has managed to outperform expectations is the voluntary carbon market. While the S&P 500 continues to slump and commodity prices facing extreme uncertainty, carbon credits have been resilient. Nature-based avoidance credits and renewable energy credits, for instance, are each trading around 74% higher today than they were last summer. Traders say this is partly due to the fact that companies with large carbon footprints have remained profitable throughout the year, allowing them to keep to their net-zero targets.
What's next? This trend shows that the voluntary carbon market is growing in maturity and sophistication, experts said. Unlike other commodities, the carbon market is "underpinned by existentially important demand" for climate impacts. This demand is expected to accelerate as corporate net-zero commitments continue accruing.
Related blog: Voluntary carbon markets: how they work, how they're priced and who's involved
5. Brazil seen hitting record volumes in soybean meal, oil production amid higher crush margins
What's happening? Brazilian soybean crush margin July 14 was at $31.39/mt, 55.4% higher than year ago levels. Year-to-date, the average margin stood at $66.54/mt, 51.5% higher than the average for the same period last year. Margins hit a record of $124.96/mt March 28, tracking sharply higher global soybean oil prices as a result of the lingering conflict between Russia and Ukraine. Brazil is one of the world's largest producers and exporters of soybean meal and oil.
What's next? The US Department of Agriculture, in its latest World Agricultural Supply and Demand Estimates report, expects Brazil's 2021-22 marketing year (October-September) soybean meal and oil outputs at historical highs of 38.17 million mt and 9.48 million mt, respectively. Meal exports were projected to reach an 18.50 million mt record, while oil exports were seen at 2.05 million mt amid a lower-than-expected biodiesel mandate for 2022.
With analysis and reporting from Alan Struth, Stuart Elliott, Brandon Mulder, and Jose Roberto Gomes.