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Commodities Corner: Middle East Tensions, Winter Blues Lift Energy Prices

February 13, 2021 at 22:06 by Andrew Moran

Middle East Strife Sparks Late Crude Rally 

US crude oil futures soared during the Friday trading session, allowing West Texas Intermediate (WTI) contracts to target $60 for the first time in about a year. But why did oil prices suddenly enjoy an end-of-week spike? Geopolitical tensions. 

In the Middle East, the Iran-backed Houthis political group announced that it attacked an international airport and airbase in Saudi Arabia with drones. While the Saudis have not confirmed the attacks, Riyadh has been consistently fighting the Houthis since 2015 in Yemen.  

What made the developments even more noteworthy was that President Joe Biden directed the State Department to revoke the Houthis’ terrorist designation, potentially setting up a diplomatic conflict with Saudi Arabia. Political analysts believe that the decision would diminish the US alliance with the Kingdom. 

But why would this matter? In recent months, the Saudis have been an instrumental force in balancing global crude markets, allowing US oil and gas producers to ramp up production. The nation announced that it would curtail output to offset the increased production capabilities of Libya, Kazakhstan, and Russia. Should the US-Saudi Arabia partnership deteriorate, there might not be much of an incentive for Riyadh to go out of its way to balance the crude oil sector, especially with the market beginning to tighten. 

On Wednesday, the Energy Information Administration (EIA) reported that domestic inventories declined 6.644 million barrels in the week ending February 5, beating the median estimate of an increase of 985,000 barrels. Crude stocks at the Cushing, Oklahoma storage facility decreased 658,000 barrels. 

  • Friday Settlement: +$1.49, or 2.56%, to $59.73 per barrel 
  • Weekly Performance: +4.66% 
  • YTD Performance: +23.36% 

Arctic Freeze Not Enough for Natural Gas 

It was a whirlwind week for natural gas prices as the so-called bridge fuel has failed to maintain any kind of momentum. After topping $3 on a couple of occasions during the February 8 to February 12 trading week, the energy commodity failed to match market expectations of rising to as much as $3.30. So, what is going on with natural gas? 

On the surface, it would appear that natural gas would be recording a massive rally. Many parts of the US are being blanketed with Arctic-like temperatures and heavy snowfall, resulting in increased energy demand and production freeze-offs. This could also be one of the coldest Februarys on record. 

The primary issue is that the US possesses a massive amount of natural gas supplies. If output would be affected by freeze-offs, there is still enough inventory to satisfy demand. Unless freezing conditions linger into March, the US can maintain ample levels of supply. And, according to the latest weather forecasts, frigid temperatures are forecast to dissipate toward the end of the month, with the weather expected to approach seasonal norms once again. 

The past week’s EIA supply report did not support natural gas prices either. The US government reported a smaller-than-expected withdrawal of US stocks. Domestic inventories fell 171 billion cubic feet for the week ending February 5. This is lower than the median estimate of 181 billion cubic feet. 

Could natural gas prices face a serious drop once temperatures begin to warm up? It might depend on what the next two supply reports show. 

  • Friday Settlement: +$0.029, or 1.01%, to $2.897 per million British thermal units 
  • Weekly Performance: +0.52% 
  • YTD Performance: +14.24% 

Supply and Demand Impact Platinum 

Platinum is trading at its best level in about six years, buoyed by increasing supply shortages and growing industrial demand. 

In South Africa, disruptions at the nation’s refineries are adding tremendous pressure on output and inventories. For the last few months, a mix of power outages and the coronavirus pandemic have hurt the country’s mining sector, leading to an accumulated backlog that will require months for the industry to catch up. 

Automakers are turning to platinum as an alternative to palladium amid skyrocketing prices. As part of the sector’s efforts to adhere to governments’ emissions regulations, carmakers are utilizing palladium and platinum for their catalytic converters that limit a vehicle’s pollution capabilities. With palladium trading just below $2,400 an ounce, companies are investing more into platinum, which is weighing on global stockpiles. 

Investment demand is another contributing factor to platinum’s 2021 rally. Last year, platinum had lagged behind its metal counterparts. Overall, according to the World Platinum Investment Council, the platinum market is anticipated to remain in a deficit this year. 

Johan Theron, a spokesman for Impala Platinum Holdings Ltd., told Bloomberg that Platinum is essentially joining the gains in the broader commodities market. 

Oil is going up and commodities in general are going up. On a relative basis platinum is low on a historical level. So it’s definitely receiving a lot of investor attention and not necessarily that anything fundamentally has changed in the short-term outlook. 

  • Friday Settlement: +$17.50, or 1.4%, to $1,264.50 per ounce 
  • Weekly Performance: +11.14% 
  • YTD Performance: +17.14% 

USDA Takes a Bite Out of Corn’s 2021 Rally 

The US Department of Agriculture (USDA) released its February World Agricultural Supply and Demand Estimates (WASDE) report — and the numbers disappointed corn prices.  

According to the USDA, the 2020–2021 corn ending stocks were lowered to 1.502 billion bushels, down from the January estimate of 50 million bushels. The market had penciled in a reading of 1.382 billion bushels before the report was released. 

Export projections also disappointed the corn bulls, with USDA researchers raising their 2020–2021 corn exports by 50 million bushels to 2.6 billion. Early forecasts had wanted to see as much as 200 million bushels, especially with stronger demand from China. The USDA increased China’s 2020–2021 corn imports by up to 24 million metric tons, up from 17.5 million metric tons in January. 

For the most part, the conclusion that investors could make from the February WASDE report is that the USDA is monitoring the timing and pace of US corn inspections and shipments before releasing more bullish projections. 

  • Friday Settlement: -$0.015, or 0.28%, to $5.395 per pound 
  • Weekly Performance: -1.73% 
  • YTD Performance: +11.07% 

The World Loves Iron Again 

The iron ore industry is rebounding, and it is not only because of China. Many major economies have seen significant increases in iron imports, with an estimated total global volume of seaborne iron ore discharged at ports in January coming in at 134 million tons, according to Refinitiv data. 

While Chinese imports came in just below 99 million tons in January, imports by the world (minus China) rose 3.3% year-over-year to 34.07 million tons. Industry observers note that this may not seem like a massive spike on a historical level, but it is considered to be a substantial rebound following the coronavirus-induced financial crisis. 

Here were some of the most noteworthy imports from January: 

  • Japan: 7.68 million tons 
  • South Korea: 5.98 million tons 
  • Western Europe: 7.29 million tons 

One of the biggest beneficiaries of this development? Australia. Despite its geopolitical squabble with China, the country’s trade surplus climbed to a six-month high in December due to its iron ore exports. Iron ore exports accounted for a vast portion of both value and volume, according to the Australian Bureau of Statistics. 

  • Friday Settlement: +$0.34, or 0.21%, to $160.08 per ton 
  • Weekly Performance: +3.74% 
  • YTD Performance: +2.5% 

If you have any questions and comments on commodities today, use the form below to reply. 

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