The Hamas attack on Israel and Israel’s counter-strikes in the Gaza Strip have increased the market prices of major commodities such as oil and gold by as much as 6 per cent in the past week.
Let’s have a look at some commodities, with a focus on oil.
Oil prices jumped on Oct. 7 after the Hamas attack on Israel. Prices then fell during the week as expectations increased that the war would have minimal impact on oil flow from the Middle East or prompt sanctions imposed on Iranian oil. But prices rose again last Friday as the Israeli military called for civilians to leave Gaza ahead of a ground invasion.
Iran’s involvement in the crisis is leading some forecasters to say oil could reach US$150 a barrel if restrictions are imposed on the flow of oil from the Persian Gulf. About 21 million barrels of oil a day, or 20 per cent of global consumption, flows through the Strait of Hormuz.
Elsewhere in oil news, last Thursday the United States imposed its first sanctions on the owners of three tankers transporting Russian oil that was priced above the Group of Seven’s price cap of US$60 a barrel. The cap was established late in 2022 for anyone buying Russian oil and shipping through operators or insurers based in the European Union or other countries (including Canada) who signed on to this price cap. Both companies sanctioned had used U.S.-based service providers while shipping the oil.
On the demand forecast side, the International Energy Agency and OPEC have diverging views. The IEA, in its most recent monthly report, lowered its forecast for growth in oil demand in 2024 to 880,000 barrels a day from one million on the basis of weaker global economic conditions and increased electrification. OPEC maintains that demand will rise by 2.25 million barrels a day on the basis of rebounding growth in China.
Gold is trading on the basis of two factors: safe-haven demand and Treasury yields. A month ago, gold rose to the US$1,947 level, then quickly fell to US$1,812 as Treasury yields climbed. Gold has since jumped back to the US$1,915 level with the conflict in Gaza and investors waiting for further monetary policy decisions from the U.S. Federal Reserve.
Other commodities in the news:
Copper prices have been on a downward trajectory this year, counter to the backdrop of lower future supply and increased demand from electrification. Reports from S&P Global and the U.S. Energy Information Administration project copper demand to double from current levels by 2035. As investingnews.com reported, “The average age of the world’s top 10 copper mines is 95 years old,” said Jamie Keech of Vida Carbon during a copper-focused panel at the 2023 Vancouver Resource Investment Conference. Rising interest rates and the outlook for slower global economies have, at least in the short term, caused the price of the red metal to fall this year.
Lumber prices have been holding in the US$450 to US$550 per thousand board foot level year to date, driven by reduced housing demand owing to higher mortgage rates. According to madisonsreport.com, housing starts in the United States are in the 1.3 to 1.4 million unit range but need to be 1.5 to 1.6 million to fill the housing gap. Homeowners with low mortgage rates are not interested in selling because of the immediate increase in borrowing costs for the next purchase. This sentiment will change with mortgages coming up for renewal and an expected cut in rates starting in mid-2024.
Lithium carbonate prices continue to fall on reduced demand and a weakened Chinese economy. China has a supply backlog of electric vehicles after it halted its EV subsidy program for consumers. That buildup is putting pressure on battery demand and hence lithium pricing.
The conflict in the Gaza Strip, along with the Federal Reserve’s next steps, strength of the consumer and unemployment levels, are all being closely watched for their impact on commodity prices.
Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.
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