Oil prices retreated slightly from their 7-year highs on 08 February as markets began to price in the impact of additional supply from Iran if sanctions against the country are lifted. If talks with the country prove fruitful, Iran could supply another 2 million barrels per day at short notice alleviating concerns around supply tightness. On the other hand, the Russia-Ukraine situation continues to unfold. Markets are currently pricing in a geopolitical risk premium in oil prices. If tensions subside, prices may also cool down in the coming weeks. For now, uncertain variables could push oil prices in either direction. 

We recently highlighted the improved outlook for platinum and palladium as the semiconductor shortage facing the automobile industry eases this year. When we shared this view in January, we stated that markets were yet to price in the improved outlook. Palladium has moved sharply since then but largely due to a different reason. Markets have priced in a geopolitical risk premium in several commodities produced by Russia, i.e., markets are anticipating supply disruption in the event of escalating geopolitical tensions. Russia accounted for around 36% of total palladium mine production in 2021 (according to Metals Focus). Thus, palladium is among the commodities most impacted by geopolitical tensions. We may see more volatility in the asset class as the events on this front unfold in the coming weeks. 

In January, the tech heavy NASDAQ 100 fell to its lowest point since June last year as growth equities moved to price in multiple interest rate increases from the US Federal Reserve this year. Focus now turns to the first quarter earnings for US companies. FactSet reported on 28 January 2022, “At this point in time, more companies are beating EPS (earnings per share) estimates than average, but they are beating estimates by a smaller margin than average.” Strong first quarter earnings in the tech sector could lift risk sentiment especially given many investors might see the dip in January as an attractive buying opportunity. 

Nickel has started the new year on a strong footing and was among the top performing commodities over the last month. Nickel, a crucial battery metal, remains tight as apparent from its backwardated futures curve as well as declining inventories on exchange. Aluminium, too, has made meaningful gains over the last month. Aluminium production tends to be very energy intensive which is why rising global energy prices have caused many aluminium smelters in both China and Europe to cut production. This has exacerbated the tightness that was created when China initiated a drive to decarbonise its coal-intensive aluminium industry last year.

Tin has been a standout performer among all commodities since the pandemic started around March 2020. The rally was triggered by Covid-related supply shortages from several tin producing nations. The ongoing challenges facing global shipping continue to put pressure on the supply of the metal. Tin’s futures curve remains in backwardation highlighting the market’s expectation of tin supply remaining tight for months to come. Tin has continued to build positive momentum in recent months and has started the new year at all-time highs.

The US dollar was facing headwinds from the US twin deficit (a combination of the current account and budget deficits) before the pandemic. The pandemic revived the dollar’s fortunes with haven demand for the currency rising during turbulent market and economic conditions. At the start of January 2022, however, the US dollar has not matched the sharp increase in US Treasury yields. It is possible that as the dollar’s haven demand dissipates, the pressures on the currency from the twin deficit become more apparent again. The price movements in January so far might be a harbinger of this.

Both Brent and West Texas Intermediate (WTI) benchmarks have continued their positive momentum from December into January. It appears that oil markets are reacting positively to Fed Chair Powell’s statement that Omicron will not create a lasting dent on US economic recovery. Sentiment appears to be driving prices right now while fundamentals appear balanced as US production is set to increase in 2022 to match any expected increases in demand. The US Energy Information Administration (EIA) is expecting the global oil market to be oversupplied this year. 

October was a month of two halves for industrial metals. The sector made significant gains during the first half of the month before losing some ground in the second half. Zinc was particularly volatile as prices rose sharply when European producer Nyrstar announced on 13 October that it would cut zinc production by 50% at three European smelters due to the surge in energy prices. This exacerbated concerns of an already tight zinc market given production cuts in China. 
Nonetheless, industrial metals pulled back in the second half of the month as China moved to ease the crunch in energy prices. Bloomberg reported that China is expected to cap thermal coal prices until May next year. Markets are expecting some of the severe near-term tightness in industrial metals to ease as a result. Still, production is expected to remain curtailed while demand continues to rise. This should continue to fuel the sector.

According to FactSet, analysts have increased earnings estimates for companies in the S&P 500 for the fourth quarter by 0.9% - the smallest increase in six quarters. In the meanwhile, US equities have maintained their positive momentum at the start of November with both the S&P 500 Index and NASDAQ Composite Index hitting new highs. Within the S&P 500 Index, consumer discretionary stocks have taken the lead among the sectors in the last one month with automobile companies like Tesla and Ford driving performance. 

West Texas Intermediate (WTI) oil prices briefly breached $85/barrel on Monday 25 October, their highest level in 7 years. Oil prices remain buoyed by rising global demand and the wider crunch in energy markets. The Organization of the Petroleum Exporting Countries and its Partners (OPEC) is expected to meet on 04 November. If the group decides to add more supply relative to planned increases of 400k barrels per month currently, this may cause prices to ease.