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Our Materials Price Index (MPI) fell another 4.3% last week, its
fifth decline in the past six weeks. In a change from recent
patterns the decline was narrow with only five out of ten
subcomponents falling. That said, the change in commodity prices is
clear with the MPI now 30.5% lower than its all-time high
established back in early March. Commodity prices, as measured by
the MPI, are now 11.2% lower than in October of last year.
Price declines last week were most notable in the energy portion
of the MPI due to downward movement in natural gas and coal. The
sub-index dropped 11.3% primarily due to improving European natural
gas fundamentals. Spot prices of European liquefied natural gas
(LNG) fell to $27.62/MMBtu, from a high of $41.26 the previous
week. This is the lowest price for three months and the largest
weekly price decrease this year. Prices were responding to the news
that European Union natural gas storage levels were more than 90%,
up from 30% in February and that consumption has been cut by more
than 10%. The statement from European Commission President Ursula
von der Leyen that the European Union has commenced work to "cap
prices" also served to calm markets last week. It was not all good
news on energy prices, however, with oil prices rebounding 5% after
the latest OPEC+ meeting. OPEC+ announced a voluntary reduction in
its August 2022 production target of 2 million barrels/day; this is
an effective cut of 1 MMb/d since some members are unable to
produce as much as allocated. Brent Crude, the international oil
benchmark, reached $97/barrel after the announcement up from a low
of $89/barrel the previous week.
Market focus returned to the weakening demand outlook last week
and this continues to weigh on commodity prices. Strong labor
market data in the US convinced markets that central banks will
continue to aggressively target inflation. US nonfarm payroll
employment rose 263,000 in September, and the unemployment rate
declined 0.2 percentage point to 3.5%. The gain in payrolls was in
line with expectations, but the decline in the unemployment rate
generally was not. The result was an increasingly bearish market
outlook with interest rate rises to continue. This central bank
action remains the key factor in the downward price correction in
commodities over recent months. Although supply-side risks in
energy markets remain, demonstrated by the OPEC+ announcement last
week, weak demand will dominate pricing. This sharp decline in
commodities foretells a slowdown in goods price inflation into
2023.
Posted 13 October 2022 by Michael Dall, Associate Director, Pricing and Purchasing, S&P Global Market Intelligence
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
