Downside risks to prices are building

Signs of weaker demand in China in the latest PMI data and the announcement that the US will sell off a large chunk of its strategic oil reserve suggest that the downside risks to commodity prices are building. Admittedly, while oil prices fell sharply this week, European natural gas prices surged as Putin signed a decree which, in theory, requires buyers of Russian natural gas from countries deemed hostile to pay in rubles from Friday (though reports suggest there are still ways for countries to get around this requirement). With that in mind, the ongoing war in Ukraine and the associated uncertainty looming over commodity markets will probably prevent prices from finding a clear direction anytime soon. However, assuming the war-related uncertainty begins to ease somewhat in the months ahead, we maintain that a pick-up in supply will drag many prices lower by year-end. Next week is light on key data releases, which means that prices will continue to take direction from the ongoing war in Ukraine and its consequences. Most notably, if Russian demands for payment in rubles keeps natural gas prices elevated, this will add to already-high production costs of many commodities and may force some suppliers to lower output.