Energy – Hurricane Rafael shuts in oil production

Oil prices faced pressure yesterday as the US dollar surged with the clarity of the election results. However, the oil market managed to recover a significant portion of these losses as the trading session progressed.

The impact of a Trump presidency is still uncertain with several opposing forces potentially at play. USD strength is likely to provide headwinds not just to oil but to the broader commodities complex, as we witnessed yesterday. Furthermore, a Trump administration could see an increase in oil and gas leasing on federal land, which had fallen significantly under Biden. However, US supply growth is going to remain largely price-dependent. On the flip side, a Trump presidency also opens the door for a more hawkish US stance against Iran, which could mean stricter enforcement of oil sanctions. Stricter enforcement of sanctions potentially leaves a little more than 1m b/d of oil supply at risk.

Hurricane Rafael in the US Gulf of Mexico continues to put oil and gas supply at risk. According to the Bureau of Safety and Environmental Enforcement (BSEE), a little over 304k b/d of US Gulf of Mexico oil production has been shut in due to the hurricane, while 131 mcf/day of natural gas production has also been shut.

The EIA released its weekly inventory report yesterday which showed that US commercial crude oil inventories increased by 2.15m barrels over the last week, slightly less than the 3.1m barrel build reported by the API the previous day. While refines increased their utilisation rate by 1.4pp over the week, a 1.41m b/d WoW decline in crude oil exports would have helped to contribute to the crude build. Refined products also saw builds over the week with gasoline and distillate stocks increasing by 412k barrels and 2.95m barrels respectively. Implied demand also fell over the week, with implied gasoline and distillates demand falling by 331k b/d and 475k b/d respectively.

Chinese trade data for October released this morning shows that crude oil imports into China remain under pressure with 10.56m b/d of crude imported last month, down 4.9% MoM and 8.7% lower YoY. This leaves cumulative imports so far this year down 3.4% YoY. These numbers will do little to ease Chinese demand concerns.

Metals – Slump on dollar strength as Trump wins election

The metals complex came under pressure yesterday, driven by a stronger dollar and a risk of tariffs after Trump won the US presidential election. 

Copper led industrial metals lower, following three days of gains on better-than-expected data from China. Beijing is expected to unveil more support measures later this week at the National People’s Congress Standing Committee meeting. If more fiscal measures are announced, this will likely boost metals prices.

In precious metals, gold also slumped, weighed by a rising dollar. However, while a stronger dollar may act as a headwind for the precious metal, this could be offset by a geopolitical uncertainty that may accompany a Trump presidency. Gold has long been a safe haven asset during times of elevated geopolitical risk.

Trump’s proposed policies, including tariffs and stricter immigration controls, which are inflationary in nature, could limit interest rate cuts from the Fed. A stronger dollar and tighter monetary policy could provide headwinds to gold and industrial metals. Tariffs also provide a downside risk to global growth, which would be negative for industrial metals demand. However, for gold, increased trade friction could add to the precious metal’s haven appeal.

Agriculture – Soybeans fall on China trade uncertainty

CBOT soybean prices initially sold off on the back of the US election outcome with the market down around 2% at one stage yesterday. The concern for soybeans is that they get caught up in any potential trade tensions, like we saw during the trade war under Trump’s previous presidency.

There are reports that Ivory Coast exporters are rejecting truckloads of cocoa beans due to the bad quality of beans, adding fresh supply threats to the global market balance. There are estimates that an average of eight to 10 trucks (35t of each) of cocoa beans have been sent back daily by top bean exporters and grinders over the last two weeks, as beans are full of mould and smaller than usual. Recent data also indicates that bean arrivals at the Ivory Coast ports have dropped week on week, as heavy rainfall last month made it difficult for producers to dry the beans while also delaying harvesting.

The General Statistics Office of Vietnam released trade volume estimates for October which show that coffee shipments rose to 44kt, up 1.5% YoY. However, cumulative coffee exports fell 11.2% YoY to 1.15mt over the first 10 months of the year.

Source: AP

German industrial production fell by 2.5% month-on-month in September from +2.6% MoM in August. On the year, industrial production is down by almost 5%. The drop was driven by all sectors. Activity in the construction sector fell by more than 1% MoM, after the first tentative signs of bottoming out over the summer months.

At the same time, German exports dropped by 1.7% MoM in September, from +1.5% MoM in August. With imports surging by 2.1% MoM, Germany’s trade surplus narrowed to €17bn from €22.7bn in August.

The zigzagging of German industrial data suggests that German industry has not yet entered a period of full bottoming out. In fact, industrial production in the third quarter was still some 2% down compared with the second quarter. 

We now expect a winter recession in Germany

German industry has been the best example of the entire economy’s problems over the last few years: stuck between cyclical and structural headwinds and coming to terms with the fact that the traditional macro business model of cheap energy and easily accessible large export markets is no longer working. This is why four-and-a-half years after the start of the pandemic, German industrial production is still more than 10% below its pre-pandemic level. 

Inventories have remained at elevated levels for an unprecedented long time. Still, the stabilising of industrial orders in recent months keeps the hope of at least a weak cyclical rebound in industry alive. At the same time, however, capacity utilisation in manufacturing is at its lowest level since 2020. It's only in food and apparel production where capacity utilisation is currently at historical averages. This is not exactly a flattering picture for an industrial powerhouse.

Looking ahead, the last 24 hours have darkened both the short and long-term outlook for the German economy. A second term in office for Donald Trump in the US with the expected new trade tensions will hit the German economy, which has 10% of its exports going into the US. It doesn’t require a lot of imagination to see US tariffs on European cars sending the German automotive industry into deeper problems.

Uncertainty about US support for Ukraine will not only weigh on investment and consumption prospects but is also an important political topic in Germany. This brings us to last night’s news of a collapse of the German government and possibly new elections in March next year. In the shorter run, this collapse is likely to weigh on sentiment and is likely to hold back investments and consumption. On a more positive note, a new government could, and emphasis is on could not will, finally end the current economic policy paralysis in Germany and provide the country with the long-awaited economic policy certainty and guidance on how to restore growth and competitiveness. The policy prescriptions of deregulation, lower taxes, reducing red tape and investments in infrastructure, digitalisation and education are all very well known. Implementing them without – at least temporarily – deviating from the fiscal debt brake currently looks like an almost impossible challenge.

As a result of these last 24 hours, a technical recession in Germany over the winter has become our base case. Looking beyond the winter, the German growth outlook will heavily depend on the ability of a new government to strengthen the domestic economy amid a potential trade war and even stronger industrial policies in the US.

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