This article originally appeared in Business in Vancouver on December 10, 2021.
Marc Desormeaux, Senior Economist, Scotiabank
Prior to the discovery of the omicron variant of COVID-19, November had been a period of relative calm for many major commodity prices. Some of that reflected firmer economic ground as the global recovery continued, but we also saw various government interventions influence market pricing. Could we be headed for a long-awaited period of more stability, or will November be a blip on the radar? And what role could the new virus mutation play in the months ahead?
Gold is always a barometer of global economic news but lately has become a strong gauge of markets’ inflation fixation. After the US reported a 6.2% y/y CPI advance—the fastest pace of inflation reported in that country in more than 30 years—gold surged above the 1,860 USD/oz mark for the first time since June. Later, news broke that US President Biden would keep Jerome Powell as Chair of the Federal Reserve; markets interpreted as a hawkish signal, and the yellow metal lost an outsized 50 USD/oz in a single day. Prices of silver, also commonly used as a hedge against inflation, followed a similar pattern.
We think that inflation is being driven by global supply chains’ inability to meet demand in this stage of the global economic reopening and will ease as we work through these imbalances in the coming year, but that does not mean that the road ahead won’t be bumpy. Not all parts of the world are reopening at the same pace and any setbacks—omicron-related or other—will almost certainly contribute to volatility. Moreover, if this past month is any indication, markets are unlikely to take above-trend inflation readings in stride—even when they are widely expected.
Oil prices began November firm but fell noticeably toward month-end. The climb above 80 USD/bbl witnessed during the last two months in large part reflects spillovers from the natural gas market, as exceptionally tight global gas supplies have prompted a draw on inventories of alternative fuels like crude. Late November downward pressures came from global growth concerns vis-a-vis new lockdowns in Europe—before omicron—and expectations that strategic petroleum reserves could be released in the US and Asia to combat supply shortages.
Our view is that all the factors underlying recent crude price movements will persist in some form in the coming months. Our last forecast included very high prices for natural gas over the next few quarters on the assumption that the global supply crunch would remain in place. We also expected a “two steps forward, one step back” trajectory as crude markets responded to pandemic news flow. Finally, discussions about the release of strategic petroleum reserves speak not only to the dire potential impacts of energy shortages, but also to the pressures faced by political leaders—particularly in the US—with inflation so far above the target rate. OPEC+ production policy adds to global supply-demand and political dynamics.
Chinese economic developments and policy are almost always front-and-centre in commodity markets; we note two major items in November. The first relates to steel production, which has been throttled back significantly amid government efforts to reduce air pollution before February 2022’s Winter Olympic Games in Beijing. Data released for October showed that after a strong start to 2021, output had been scaled back so significantly in the second half of the year that year-to-date production is now below levels for the same period last year. That may enable a lifting of some restrictions on China`s industrial sector in the coming months, which in turn should support metals prices. The second item was an apparently constructive meeting between President Biden and Chinese President Xi. Though that appeared to offer a modest boost to copper prices, trade and diplomatic relations between the world’s two largest economies remain one of the dominant uncertainties of our era. Their ebbs and flows will undoubtedly continue to influence commodity prices and economic prospects in the years to come.
The severe storms and mudslides in British Columbia also have implications for pricing volatility. With roads and rail routes out of Canada’s largest lumber-producing region blocked, Western lumber prices witnessed their steepest one-week increase since May. Longer-term, data and projections from the scientific community indicate that extreme weather will become more prevalent; by extension, so too could shortages of any products whose transportation infrastructure is disrupted by climate change.
At the time of writing, the severity and transmissibility of the omicron variant—as well as potential consequences for new public health restrictions—are still being studied, but the contagion of fear will very likely remain. In any case, COVID-19 represents just one uncertainty in the economic and commodity market landscape, and we should prepare for more volatility in the coming months.