Commodities dented by worries over Delta variant and China’s economy

Broad rally in raw materials prices loses momentum in the face of ‘growing uncertainties’

FT Reporters

Opec and its allies failed to reach an agreement on raising oil production earlier this month © REUTERS

From crude to copper and corn, commodity prices slipped on Monday, knocked by the spread of highly infectious coronavirus variants and concerns about slowing growth in China, the world’s biggest consumer of raw materials. 

Brent, the international oil marker, fell as much as 1.7 per cent to $74.27 a barrel, while copper dropped 1.1 per cent to $9,390 a tonne — leaving it more than $1,000 below the record high reached in May.

Gold was also weaker as the dollar rose, something that makes the previous metal more expensive for holders of other currencies. 

It fell 0.6 per cent to $1,800 a troy ounce. 

Corn was trading at $6.23 a bushel, down 20 per cent from this year’s peak in May, as some market bulls retreated owing to the recent rains in the US midwest.

The rapid spread of the Delta coronavirus variant and signs of slowing growth in China are clouding the outlook for commodity markets, which have enjoyed a blockbuster run over the past year. 

There is also increased uncertainty about oil supply after Opec and its allies failed to reach an agreement on raising production earlier this month.

“Infections are on the rise in several countries around the world and if restrictions need to be added or reinstated again, they could have an impact on economic growth, and consequently on oil consumption,” said Louise Dickson, oil markets analyst at Rystad Energy.

Over the weekend, finance ministers from the G20 warned that the rapid spread of the Delta variant was casting a shadow over the improving economic outlook in Europe.

Meanwhile, analysts at JPMorgan said on Monday that modelling of the UK Delta outbreak suggested a hospitalisation level that could require reintroduction of some restrictions.

Oil prices hit a three-year high of almost $77 a barrel last week in the wake of the Opec impasse before reversing course on concerns that the latest spat could eventually lead to increased output from members.

Stephen Brennock, analyst at brokerage, PVM said the disagreement between the so-called Opec+ group could be a precursor to a “pump-and-grab scenario, meaning a lot more oil potentially gets put on the market”. 

He said it was not surprising that hedge funds had gone on the “defensive” and reduced their bullish bets on crude to a six-week low.

Industrial metals were also under pressure on Monday as investors weighed Beijing’s decision on Friday to cut the reserve ratio requirement (RRR) for all banks so they can lend more.

China’s central bank estimates this could release Rmb1tn ($150bn) in long-term liquidity to the market.

Warren Patterson, head of commodities strategy at ING, said the RRR cut could provide some support for raw materials, which have been under pressure as investors have cooled on the so-called reflation trade.

“However, the impact from the latest China RRR cut may prove to be shortlived as the macro market is still faced with growing uncertainties,” he said.

Economists at Morgan Stanley said the RRR cut was a response to the “recent growth hiccup” in China amid a resurgence of coronavirus, supply chain disruptions, and a further moderation in domestic consumption.

Better weather in the US has led to hedge funds and other speculators to take profits on their positions in corn over the past few weeks. 

Dave Whitcomb at Peak Trading Research said there was also seasonal selling by financial investors. 

“July is the most negative month of the year for agriculture markets,” he said.

Neil Hume, David Sheppard and Emiko Terazono in London 

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