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It’s no surprise that we’ve seen crude oil prices hit their highest level this year, around $83 a barrel, recovering strongly from the 15-month low seen in March, as slowing supplies from Russia, production cuts by OPEC+ and falling US inventories, are adding to a tightening market. Oil markets are also being boosted by signs of moderating US inflation.
Russian shipments have fallen below 3 million barrels a day for the first time in eight weeks, after Moscow vowed to cut production. And, in the US, oil inventories at the key Cushing, Oklahoma, storage hub have fallen for a sixth consecutive week, to their lowest level since January. This reinforces that US shale production is not recovering in line with higher prices.
The oil market’s structure is also signalling strength as WTI’s prompt spread — the difference between its two nearest contracts — is in backwardation, the highest this year on a closing basis. WTI’s move into backwardation and the pace of the changes across the futures curve, are bullish signals for traders to take up long positions. The combination of speculative buying and declining inventories sets the stage for stronger prices heading into the US summer. The OPEC+ group has reasserted itself in the market with its production cuts, which have provided a very stable floor under crude, allowing it to rally on fresh news.
Let’s not forget the demand side, with oil intrinsically linked to China’s economic recovery. The world’s biggest crude importer and second-biggest refiner will continue to boost output as the consumer and industrial sectors recover this year.
Big news this week is that Chinese provinces plan to boost spending on major construction projects by almost a fifth this year, as Beijing continues to rely on infrastructure to spur an economy being hindered by consumers still bruised from years of pandemic restrictions. About two thirds of China’s regions have announced spending plans for major projects such as transport infrastructure, energy generation and industrial parks this year, adding up to more $1.8 trillion, according to Bloomberg estimates – up 17% compared to last year.
While a recovery in consumer spending following the end of coronavirus restrictions is still expected to be the main driver of growth this year, the provincial spending plans will help boost investment in manufacturing and infrastructure. Recent data show the infrastructure boom may already be taking off, with an index measuring construction activity surging during March to its highest level in more than a decade.
Gold is continuing to trade solidly around the $2,020 per ounce level, with a very solid current support base around the $2,000 mark. Gold took overnight developments in its stride, despite the likelihood that the Federal Reserve will keep raising interest rates as the core CPI remains high. Gold is up 20% over the past six months and new highs are in sight this year on the back of investor and central bank buying.
Australia’s strategic advantage in Battery Materials
While Australia has long been a global mining leader, its downstream capability is becoming more pronounced. There’s currently a debate going on as to whether we should go the whole hog and move into EV battery manufacturing, but there are both pros and cons of doing that. According to a recent Grattan Institute report, our abundance in terms of raw materials does not necessarily translate into an advantage as a manufacturer.
But this doesn’t mean that we shouldn’t look to value-add. We’re already starting to do this in the lithium sector, where rather than just mining and producing spodumene concentrate, we are increasingly moving towards exporting refined lithium. While Australia ranks as the world’s biggest producing country of lithium raw materials, we currently only export a small amount of refined lithium, with the market dominated by China, which produces 80% of the world’s lithium hydroxide – a key ingredient in the lithium-ion batteries used in electric vehicles.
Domestic companies like IGO (ASX: IGO), Pilbara Minerals (ASX: PLS), Mineral Resources (ASX: MIN) and Liontown Resources (ASX: LTR) are either actively involved or looking at significant upgrading of their spodumene deposits to produce a higher-value product, including lithium hydroxide.
Within a few years, Australia will account for up to 10% of global lithium hydroxide capacity, which will more than double before the end of the decade.