Commodities scale fresh highs | Expected continuing supply concerns may may keep prices supported

Commodities moved to prominence this week as price surged to fresh multi-year highs as market players chose to focus on supply issues and overlook the increasing challenges for global economy.

Energy market has been in focus for the last few days as natural gas and coal prices still remain high amid fear that efforts to improve supply may fail to materialize in the near term. Higher gas and coal prices fuelled expectations of fuel switching and this helped WTI crude test the highest level since 2014 while Brent crude tested October 2018 highs. Crude oil held on to the gains even as drop in Chinese imports last month showed weaker demand while US crude oil stocks rose for the third consecutive week.

While the energy market remains in focus, industrial metals have witnessed a sharp rise this week as rising energy costs have forced producers to reduce operations. Aluminium, the most energy sensitive commodity, surged to fresh 2008 highs amid concerns that rising power issues may further impact Chinese output.

Zinc price hit the highest level since 2007 following Nyrstar’s announcement that it will cut production by up to 50 percent at its three European zinc smelters from Wednesday due to the soaring price of electricity (Reuters). Other industrial metals also followed suit and moved higher with copper moving closer to the $10,000 per ton level on the LME.

Energy and industrial metals garnered all limelight however gold also managed to break out of recent consolidation and move closer to the key $1800 per troy ounce level.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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Commodities have largely been on an up move for the last several months and market players have continued to accumulate amid worries about further impact on supplies and to hedge against rising inflation pressure. However, there is another side to it also which is not overlooked but overshadowed currently. The continuing rise in energy and commodity prices may hamper incremental demand as well as economic recovery.

Global recovery is already showing signs of stalling with the manufacturing sector struggling amid supply chain issues and sustained rise in energy prices may further hamper industrial activity. China, a major commodity consumer, is already under stress due to slower economic activity and stress in the property market and rising energy costs may worsen the situation.

Overall, energy prices have been on a rise for months however market reactions have intensified with price hitting highs in Europe and Asia. Supply concerns may persist and may keep prices supported however any signs of demand impact could bring a pause to the rally.

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