Global Commodities: A sense of déjà vu
The desk observes that the recent escalation in geopolitical tensions related to the Strait of Hormuz and ongoing drone attacks on Russian refineries indicate a heightened risk environment for commodities, particularly crude oil and gas. Per the full note from J.P. Morgan Global Research, the impact of these events has seen crude oil flows decline by 31%, exposing vulnerabilities in supply chains. The implications for FX are significant, particularly for currencies heavily correlated with commodity performance, such as the CAD and AUD, given their reliance on energy exports.
What the desk is arguing
The desk highlights a precarious situation in the commodities sector, influenced by geopolitical events that could affect supply and prices. Per the full note from J.P. Morgan, the attack on vessels in the Strait of Hormuz marks a worrying trend reminiscent of earlier conflicts, with crude oil flows currently below half of pre-war levels.
Additionally, the decline in Russian refinery output due to drone strikes presents further risk to oil and gas markets, compounding issues in European energy supplies. Recent flows have dropped to just under 10 million barrels per day, illustrating the market's vulnerability to these tensions.
Where it sits in our coverage
Our consensus target for the CAD against the USD is 1.075, with firms positioning as follows: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns closely with jpmorgan, which is forecasting a stronger CAD, driven by rising energy prices amid geopolitical tensions, while bofa represents a more cautious outlook at lower levels. The current desk analysis leans towards the upper target ahead of a potentially volatile winter for energy supplies.
How other firms see it
Firm insights show a division: jpmorgan aligns with bullish energy and Canadian dollar sentiment, while bofa expresses a bearish view, influenced by tariff and economic uncertainty. This divergence underscores the broad implications of energy price volatility on FX markets.
The trajectory of USD/CAD could be additionally impacted by the evolving gas situation across Europe, as the dependency on non-Russian sources grows critical for market stability.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Geopolitical tensions are impacting crude oil supply chains.
- 02Flows in the Strait of Hormuz have fallen by 31%.
- 03Russian refinery output is down by one-third due to drone attacks.
- 04Investor sentiment aligns bullishly towards the CAD, influenced by energy prices.
Market implications
Watch for a potential rebound in energy prices with crude oil approaching critical supply levels. The expected fluctuation around the 1.075 mark in USD/CAD could be pivotal, especially in the context of upcoming seasonal demand for energy amidst geopolitical tensions.
Risks to this view
A significant de-escalation in Middle Eastern tensions or a substantial increase in Russian crude output could shift market dynamics, driving commodity prices lower and contradicting the bullish CAD outlook. Additionally, adverse economic indicators from Canada might also undermine the CAD's position.
Hello, and welcome to another episode of At Any Rate. I'm Greg Scheer, your host for today, and I head up base and precious metals research at J.P. Morgan.
Just as markets embraced an open strait of hormuze and this incoming oil supply gut, a sense of deja vu has washed over the commodities world this week. President Trump has warned that the ceasefire with Iran may be over after an exchange of missile strikes. While these attacks are not extensive and energy infrastructure seems to be spared, damage to vessels traversing the waterway are derailing efforts to resume normal operations.
Flows have come off 31% from the highs reached at the end of June and are currently tracking just under 10 million barrels per day this week, less than half of pre-war levels. At the same time, while the crude market is repricing developments in the Middle East, Iranian products are focused on an issue 2,000 miles away from hormuze, where Ukrainian drones have brought down Russian refinery run rates by a third of normal levels. There have also been ample discussions in other commodities, namely copper and liquefied natural gas, which we will focus on today.
On copper, uncertainty around tariffs loom large, while the gas situation in Europe is setting up for a difficult winter. To discuss this week's plentiful supply of commodity news, I'm joined today by Otar Digobadze, who leads European natural gas research at J.P. Morgan.
Otar, thank you again for joining. Otar, let's start on oil and petroleum products. What have we really been focusing on this week?
I know we mentioned both the hormuze, but also some significant developments in Russia. Yes. Hi, Greg, and thank you for having me.
So, yes, Russia, there has been some significant developments recently from the Ukrainian drone attacks on Russian energy systems, and more particularly on its refining assets. And as you can imagine, Russian developments have been more on the backside compared to what's been happening in the Middle East. So we estimate that Russian refinery runs are down to about 3.6 million bottles per day from about 5.3.
And this is affecting primarily on international scale its diesel and fuel oil markets, where Russia is a major exporter. But also it increasingly is impacting gasoline markets. So for example, on diesel, Russia is second largest exporter globally, with about 12 percent market share.
And it implemented a diesel ban, export ban, because of these developments and because of loss of domestic supply. For fuel oil, Russia is the largest exporter, with about 16 percent of the world's trade market share. And also this market is also facing shortages.
Gasoline is relatively a smaller issue because Russia is not a major exporter of this particular fuel to start with. But you probably and our listeners also have seen reports that Russia actually started to import gasoline from countries like India and potentially from Central Asia and Belarus as well. But this is still relatively smaller at scale.
But we are watching closely because this additional import demand can tighten gasoline markets as well. In terms of longevity, we think that this is somehow related to the upcoming parliamentary elections in Russia, which is held in September. And our understanding is that Ukraine wants to kind of increase pressure on domestic market ahead of this election.
Overall, this Russian situation is, I think, one of the pieces in the puzzle why we see more tightness in more physical energy markets like products markets and natural gas as well compared to crude oil, for example, which is more influenced by paper trading, what we call it. So that's why we see that, for example, Brent crude oil prices are down from about 25 percent over the last month or so and product prices are broadly flat. Thanks, Otar.
And I guess to pick up on that natural gas component, maybe let's switch gears here and talk about liquefied natural gas, LNG. Given the recent developments we've seen in the Strait of Hormuz, how is that changing the status or how you're viewing the LNG market and its recovery? What are we tracking here?
I know there's been a lot of focus on this Asia-Europe discrepancy. How's that been shaping up? And ultimately, what does that mean for European storage at this point?
So the Asia-Europe ARB, if you will, it's been pretty consistent from the beginning of the conflict and it's been open in favor of Asia. So the premiums of Asian spot prices reached almost $4 per MMBTU at the beginning of the conflict. It stayed at around $2 per MMBTU throughout the quarter.
And it's still trading about $1.3, $1.4 premium, which means that for marginal spot cargos, Asia remains the more preferable option to deliver these cargos. It's obviously having an impact on European situation where the storages are running at historical lows in Northwest Europe at around 50 percent compared to at around 55 percent this time last year, which was the lowest. And more importantly, this gap keeps widening.
So 40 versus 55, we have about 15 percentage point gap at the moment. This was only 7 percentage point as of end of March. And this keeps widening because we keep losing these LNG cargos to Asia.
In terms of situation in Hormuz and the Middle East, our view from the beginning was that Qatar restart and ramp up will be gradual and it will take months instead of days and weeks. So in June, for example, even though there was a ceasefire and even though there was a lot of reports of Qatar wanting to ramp up as soon as possible, we estimated only about 16 percent utilization rate when we measure this by Qatari loading frequency. And when we actually look at the Hormuz exit, it's closer to 10 percent utilization.
Earlier this week, we had a press report saying that Qatar is actually pausing this rapid ramp up. I don't think the rapid ramp up news a few weeks ago or this pause earlier this week materially changes the calculus here. We still expect it's a month-long process.
Currently, our base case is full capacity in September and then lifting of the force measure in September. But the longer this timeline comes under risk, and if we start to price in, Qatar will be being unavailable in winter, even part of the winter, beginning of winter, this might have significant impact on the prices. Thanks Otar.
I think it's interesting that you're unpacking the energy side. It's very much focused on very fundamental drivers on flows and recovery rates and inventories. I think there's a pretty strong contrast with what we're seeing in the copper market, where over the balance of 2026, we actually think the key catalyst for prices is policy, not balances, and in particular, the structure and communication following the U.S. review of Section 232 copper tariffs.
If we take a step back, by June 30th, Trump was supposed to receive a document or a review from the Department of Commerce that details an update on the state of the domestic copper market in the United States, as well as any recommendations on changes to Section 232 as it relates to copper. We're still waiting here collectively for any sort of announcement. To be clear, there's no mandated timeline for Trump to reply to this report or even overall just reply to the report as we understand it.
But ultimately, we do think this is going to be quite meaningful for price formation from here over the balance of 2026. Essentially, what we really talk about is why is copper trading up towards something around $13,500 per ton at the moment? In our view, a material component of this rally in copper over the last six months is an embedded tariff uncertainty, which has created a tug of war between the U.S. and China for copper units.
Globally, the refined copper market is pretty well supplied. But what you have here is China, who is net short and still needs to import copper, being challenged by the flow of copper going into the United States. And that sort of tug of war dynamic, all things equal, has really materially risen China's buying floor.
Whereas even case in point this week, we saw the Chinese import arbitrage reopening as prices trade traded down towards around $13,200. That's multiple thousand dollars per ton, where we have previously seen Chinese buying floor, that import arb really materially swing open. And so what's really important flip point for the LME prices in particular around this tariff review is escalation.
We've been writing that essentially escalation is everything. And what we mean by that is for LME prices, the difference between a bullish and a bearish outcome is how any communication shapes expectations around the future rate of tariffs on specifically refined copper cathode imports. Ultimately, escalation would equal an incentive to still import copper into the U.S. before these tariffs come into force or increase, which is bullish in our view as this U.S. pull on metal continues and China is forced to continue to react to it.
On the other side, no expectations of escalation, even if we see that an outright tariff is immediately announced, is bearish for LME prices as it ultimately results in a closed U.S. import arb window and a long destocking period for the U.S., giving China essentially its pricing power back in this global copper market. Ultimately, we see this tug of war continuing. We do expect the Trump administration to come out with some sort of escalatory tariff scenario in the coming weeks is our base case.
And with that, we ultimately see prices pushing towards around fifteen thousand dollars per metric ton in the second half of twenty twenty six as we continually see a market setup of higher floors and higher ceilings for copper. And it also if they were to follow through as we expect and put out something that continues to stoke U.S. imports, ultimately it still risks pushing this market towards a very bullish pinch point driven by the potential for rapidly dwindling ex-U.S. inventories. So a lot to unpack this week.
Very fundamental in the energy space, tracking the Strait of Hormuz and Russia and what that means for both crude petroleum products and LNG markets in copper. It's a waiting game around how the tariff announcement, if we get one in the coming weeks, will shape the pricing dynamics over the second half of twenty twenty six. Otar, thank you so much for joining me again today.
And to our listeners, thank you again for tuning in to this commodities edition of JP Morgan's At Any Rate podcast. We look forward to continuing the conversation next week. This communication is provided for information purposes only.
Please refer to JP Morgan research reports related to its content for more information, including important disclosures. Twenty twenty six. JP Morgan Chase and Company.
All rights reserved. This episode was recorded on July 10th, twenty twenty six.
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