Topping our charts to watch this week is the price of nickel on the London Metal Exchange, after a surge above $100,000/mt last week caused trading to halt. Our writers also study the impact of the Russian-Ukrainian conflict on implied inflation as well as methanol prices and gasoline demand in the United States as workers begin to return to the office.
1. LME nickel trade remains suspended after ‘messy’ trade and stock drop
What is happening? The London Metal Exchange suspended nickel trading at 08:15 GMT on March 8, after prices more than doubled day on day to hit $101,365/mt in early trading. Prices had fallen to $80,000/mt at the time of the suspensions, but that was still well above the March 7 close of $48,078/mt. Prices did not reflect fundamentals and were instead driven by a combination of uncertainty regarding the war in Ukraine and sanctions against Russia, low global nickel inventories and market speculation.
And after? When nickel trading will resume remains uncertain, although the LME said it was doing everything possible to reopen the market in the safest and fastest way possible. It is unlikely to reopen on March 14, as it said it was aiming to provide a resumption date no later than 2:00 p.m. GMT the previous working day. The appropriate measures for a safe reopening that LME is working on include price ranges, both for nickel and for all other physically deliverable contracts, on which it will publish a notice as soon as possible.
2. The Russian-Ukrainian conflict could affect the long-term inflation outlook
What is happening? Implied inflation and commodities have started their recovery from the deflationary effects of the coronavirus in the spring of 2020. Until recently, the recovery in both cases has been somewhat uneven, but steady and more or less coincidental. However, implied inflation and commodities rose sharply in the wake of the Russian-Ukrainian conflict. Many countries are currently assessing their vulnerability to key inputs to their economy, both from a security of supply and price point of view.
And after? The short-term outlook for five-year implied inflation has risen from around 2.75% before the conflict to nearly 3.5% more recently, but the 20-year valuation has risen from 2.4% to almost 3%. This is significant, both in the upside and what it may portend. Countries can now choose to address their vulnerability by sourcing locally, but at a higher price. In fact, the rise in longer-term implied inflation could signal a paradigm shift in how economies approach the supply of key inputs and the higher prices that may be needed to reduce these vulnerabilities.
3. Methanol prices up following Russian sanction, logistical problems
What is happening? The European methanol market is looking for alternatives to materials of Russian origin amid growing concerns about sanctions and disruptions to logistics and infrastructure that limit Russian methanol deliveries to Europe. As a result, the FOB Rotterdam marker has been on a strong upward trend since late February. Russia exported 1.65 million tons of methanol to the EU in 2021, according to customs statistics of foreign trade of the Russian Federation. Meanwhile, methanol consumption in the EU and other European countries was estimated at between 9 and 9.5 million tonnes per year, according to market sources.
And after? Although sanctions are yet to be applied for methanol, the exclusion of some Russian banks from the SWIFT global payment system has also left market participants wondering how they can pay Russian sellers for the material. Europe will seek to cover supply losses with domestic production, the cost of which is high due to the high prices of raw materials – natural gas – and energy. The high prices also mean that Europe remains an attractive destination for methanol trade flows from abroad, which could further stimulate arbitrage from the United States, Trinidad, Guinea and the Middle. -East.
4. Return to power helps normalize US gasoline demand
What is happening? In the United States before the pandemic, commuting accounted for about 1/3 of total gasoline demand. At this point, the biggest contributor to the gasoline demand shortfall, relative to pre-pandemic norms, appears to be the work-from-home component. Before the pandemic, 25% of the working population were already working from home at least part-time. Data indicates that 35.5% had worked remotely in May 2020, partly due to the pandemic, and this share fell to 15% in January 2022. This implies that around 60% of the workforce was working at home in May 2020 and that has now dropped. at 40%. Decomposing gasoline demand to isolate the impact of P/T suggests that the degradation has diminished, but not fully evaporated, and that total gasoline demand therefore remains reduced relative to pre-pandemic norms.
And after? With most pandemic restrictions lifted, the deficiency of working from home is expected to continue to decline. In the fourth quarter of 2021, demand was 300,000 bpd lower than normal, while in January this deterioration worsened to around 400,000 bpd, possibly due to omicron impacts or d other influences. Although the WFH component of gasoline demand should improve overall, the sharp rise in gasoline prices could begin to temper the discretionary component of gasoline demand, while any reduction in overall employment would be a double whammy for demand.