Sanctions against Russia and high global demand still dominate what is happening in the commodity markets but fresh cases of Covid in China will add a cooling element to prices.
Commodity supply flows, particularly for oil, gas and metals, are being redrawn to accommodate US, UK and European sanctions on Russian commodities. Trading giant Trafigura has said sanctions had a large impact as customers turned to the company for help to reorder their supply chain.
War in Ukraine has changed global oil supply dynamics
Alongside its peer Vitol, Trafigura phased out purchases of oil from Russian oil producer Rosneft even before the EU brought in restrictions on Russian oil imports on 15 May. As the company reported a record profit for the six months to the end of March this week Trafigura’s chief executive Jeremy Weir said he saw “no let-up” in the market conditions that have driven up the prices of almost every commodity since the start of the year.Although Weir warned of potentially “parabolic” oil and metal prices in the latter part of 2022 the latest lockdown measures in Shanghai and Beijing introduced Friday could tamper with this trend. Large parts of China are still operating at near normal levels so this will not be enough to seriously knock down oil and metals prices but given Shanghai’s importance as an industrial hub it will play a role in how much further prices can rise.
Shanghai relaxed its two-month lockdown only a week ago, but 11 fresh cases recorded Thursday led to a new lockdown. The first set of anti-Covid measures introduced in March knocked the Chinese city’s industrial production by 7.5% year-on-year. Beijing is experiencing a similar sequence of events and has seen new restrictions introduced this week.
China’s dominant role in the commodities markets
For close to twenty years China has driven the demand for commodities, with massive infrastructure projects, urbanisation, construction and the move from the rural areas into the cities leading an unprecedented growth in demand. This expansion had already started slowing down before the first Covid outbreak with China’s GDP beginning to come down from the double figure growth post 2010. But after the new wave of Covid in March the forecasts for the Chinese economy have been written down several times and that process will continue for as long as the outbreak lasts.
China is playing a significant role in modifying the effects on Western sanctions on Russia as it is increasing its purchases of Russian oil at lower prices. The discount for Russian oil over Brent crude is trading in a range of between $29 and $35 a barrel, not insignificant when Brent is trading at above $120/bbl.
Real-time cargo tracking company Vortexa Analytics says that China seaborne Russian oil imports are estimated to have reached a near-record high of 1.1 million barrels per day (bpd) in May, up from 750,000 bpd in the first quarter and 800,000 bpd in 2021. This estimate doesn’t include China’s two other import routes for Russian oil: through oil and gas swaps using pipelines from Kazakhstan and, using the rail lines across Siberia.
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