On Wednesday, commodities prices fell across the board and crude was no exception. However, Brent eventually closed just about 0.4 percent lower and thus outperformed the most of commodities. Backwardation in the front-end of forward curve (ICE) slightly heightened and the spread between 1M and 6M contract hit the highest level in six weeks although the situation in North Sea physical market remained rather calm.
Yesterday in late evening, Reuters reported that Sudan and South Sudan reached an agreement on disputed common border which should lead to restart of oil production. Recall that before the crisis, Sudan produced about 500 thousand barrels of oil per day (see the chart).
Base metals erased previous gains on Wednesday and thus more or less followed a sell-off of risky assets. Moreover, some traders might have closed positions ahead of 5 days holiday in China which starts next week. Prices of both copper and aluminium thus fell by more than 1.5 percent.
The aluminium market continues to cope with the overproduction of the metal and the large stocks in LME warehouses, on the one hand, and with high premiums on the purchases of the metal outside the LME on the other. The high premiums are likely preventing a significant decline in the production of the metal, and this limits the latitude for a significant price increase in the months to come. Not even demand is likely to encourage a price increase now. The economic growth deceleration in China, the recession in the Eurozone, and the fairly poor economic growth in the United States have all overshadowed the positive monetary effects of this round of quantitative easing (QE) in the U.S. Bear in mind that QE significantly boosted the price of aluminium in the past (90 days after the announcement of QE I and QE II, the price was up by 30% and 20% respectively). Given the above factors, we expect that the aluminium price may hover around its current levels, with a risk of a moderate decline, in the last quarter of this year.
Chart of the day:
Oil production in Sudan. Shaded area marks 5Y range.