Commodities Week Ahead: New China Lockdowns Spook Oil; U.S. Jobs Data Awaited

China’s intensifying COVID-19 crackdown, which has led to a shuttering of its Shanghai financial hub, could hit oil demand and other key commodities through this week, despite positive forecasts for the US jobs report for March.

It could also be a volatile week across markets, with investors expecting US inflation data in the form of personal income and spending numbers on Thursday, a day before the jobs report.

J.P. Morgan (JPM), in a report before the weekend, cited falling mobility numbers in Eurasia and California. The Wall Street bank said it was the clearest sign yet of the demand destruction in oil, which has mostly held about $100 a barrel since hitting nearly $140 after the Feb. 24 invasion of Ukraine.

In Monday’s Asian trading, London-traded Brent, the global benchmark for oil, was down $3.23, or 2.6%, at $114.14 per barrel by 12:00 PM in Singapore (12:00 AM in New York). Brent rose almost 12% last week for its biggest weekly gain since the invasion of Ukraine.

US crude’s West Texas Intermediate (WTI) was down $3.51, or 3.1%, at $110.39. WTI was up 8.8% last week.

Even gold, a hedge against political and economic troubles, was down in Monday’s Asian trade.

The most-active gold futures contract on New York’s COMEX, April, was down $10.10, or 0.5%, at $1,944.10 per ounce. The benchmark gold futures contract rose 1.3% last week.

In China, Shanghai announced on Sunday it would lock down the city in two stages to carry out COVID-19 testing over a nine-day period, after a new daily record there for asymptomatic infections, just as the world thought the pandemic was ending.

Shanghai has battled a new COVID-19 surge for nearly a month and Saturday was the highest daily number of cases there since the initial outbreak receded. The city recorded 2,631 new asymptomatic cases, which accounted for nearly 60% of China's total new asymptomatic cases that day, plus 47 new cases with symptoms.

Shanghai authorities have previously resisted a broad lockdown of the city to avoid destabilizing its economy and opted for a more bespoke "slicing and gridding" approach, which involves screening neighborhoods one by one.

Under the new order, public transport, including ride-hailing services, in these areas will be suspended when they are locked down, the city government said on its official WeChat account, adding that unapproved vehicles will not be allowed on the roads. It also said that all firms and factories will suspend manufacturing or work remotely during the lockdown, apart from those involved in offering public services or supplying food.

In a report, JPM said high crude prices were not the only demand-destructive force in commodities. The crisis in Ukraine, crippling financial sanctions in Russia, and the continued spread of the highly infectious Omicron variant in China have an even more direct impact on regional fuel consumption than high prices. It added that it expects China’s activity to contract in March and April, prompting a 1.1-percentage point cut to China’s 2Q GDP growth. 

As a result, the Wall Street bank cut 1.1 million barrels daily (mbd) off its 2Q22 demand forecasts, followed by about 0.5 mbd cuts to both 3Q and 4Q. On net, this trims 420,000 barrels daily on average from the bank's expectations for 2022 global oil demand as high prices, COVID restrictions, and geopolitical conflict drive demand destruction in Russia, China, India, and Europe.

While the US has been relatively isolated so far (despite the highest gasoline prices on record), JPM's demand revisions are heavily concentrated in Europe, which remains the epicenter of the geopolitical shock. Since the start of the Russia-Ukraine war, the bank's economists have downgraded the growth in the region by over 2-percentage points and have raised inflation forecasts by nearly 3-percentage points.

Consequently, JPM has cut its expectations for 2022 Eurasia oil demand by 270,000 barrels daily due to sanctions imposed on Russia. Eurasia demand for jet fuel will come in 130,000 barrels per day lower than the previous estimate, as roughly half of Russian civil aircraft will end up grounded as a result of airspace bans and shortages of parts. JPM also revised Europe oil demand down by 160,000 barrels daily on average for 2022 due to sensitivity to high prices and lower expectations for economic growth in the region

In California, vehicle miles traveled (VMT) has been tracking closely to 2018-19 levels since late last year. But it has deviated from the 2019 trend twice so far this year: once, as Omicron cases spread through the state, and again starting at the end of February as oil prices spiked.

The Biden administration, meanwhile, is considering another release of oil from the Strategic Petroleum Reserve (SPR) that could be bigger than the sale of 30 million barrels earlier this month, a source said. In total, the US and other members of the International Energy Agency (IEA) released about 60 million barrels from reserves.

"They definitely have the capacity to do significantly more—they (IEA members) have about 1.5 billion barrels of SPR inventories. By all means, this was the whole idea of an SPR, to provide relief in emergency times," said Natasha Kaneva, head of commodities research at J.P. Morgan.

Friday’s nonfarm payrolls report for March could help markets get a sense of whether the Federal Reserve’s roadmap for rate hikes is too aggressive or not aggressive enough.

Economists are expecting the US economy to have added 475,000 jobs, after 678,000 were created in February. Average hourly earnings are forecast to increase 5.5% year-on-year, while the unemployment rate is expected to tick down to 3.7%.

Indications of continued strength in the labor market would underline the case for a more aggressive pace of rate hikes as the Fed battles to curb soaring inflation.

The Fed hiked rates by a quarter percentage point on Mar. 16 but since then Fed Chair Jerome Powell has indicated that the central bank is prepared to raise rates in half-point increments if it is warranted, despite fears that this could trigger an economic downturn.

Ahead of the jobs report, the US government is set to release February figures on personal income and spending on Thursday. The report contains personal consumption expenditures data, a gauge of inflation closely watched by the Fed.

Economists are expecting the core PCE price index to rise 5.5% on an annual basis, staying well above the Fed’s 2% inflation target.

The economic calendar also features updates on consumer confidence, job openings, private sector hiring, jobless claims and the ISM manufacturing PMI.

In addition, New York Fed President John Williams, Philadelphia Fed head Patrick Harker, Atlanta Fed President Raphael Bostic and Richmond Fed President Thomas Barkin are to make appearances during the week.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.

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Written By: Investing.com