The Commodities Feed: Oil maintains gains amid Persian Gulf escalation

Oil prices have remained strong, with ICE Brent trading above $95 per barrel following increased hostilities between the US and Iran. Iran reportedly fired missiles into neighboring Gulf countries, which has propped up crude prices, but the rally may falter if shipments through the Strait of Hormuz continue smoothly. Iraq exported its highest volume of oil since the start of the US-Iran war in August, totaling 2.35 million barrels per day, with 2.26 million barrels traveling via southern routes.

This necessitates the use of the Hormuz Strait. Meanwhile, Saudi Arabia maintained its official selling price for its flagship Arab Light at a $2 per barrel discount for October loadings, indicating a less tight market than anticipated.

Despite this, refined product markets continue to face significant tightness. Data from Insights Global shows that refined product inventories in the ARA region dropped by 118,000 barrels last week to 4.15 million tons, with naphtha, gas oil, and jet fuel leading the decline. Gas oil inventories are now below 2022 levels. Unless Persian Gulf or Russian diesel flows improve, the market is likely to tighten further as winter approaches.

Middle distillates remain tight in both Europe and the US, with diesel cracks in the US above $100 per barrel and retail diesel prices hitting their highest point since mid-2022. Singapore's refined product stocks fell by 140,000 barrels over the week, with declines in both light and middle distillates. In gas markets, Asian LNG spot prices reached their highest levels since 2022, causing the JKM-TTF spread to widen, which raises questions about whether flexible cargoes should continue to Europe.

In the US, natural gas markets experienced a slight decline, with front-month Henry Hub futures falling 1.45% despite EIA storage data showing a 30 million cubic feet increase over the week. The market had anticipated a 31 million cubic feet increase, but storage levels remain well above the 5-year average. In the metals sector, central bank gold demand remained strong in July, with net purchases of 23 tonnes reported by World Gold Council data.

Emerging market central banks, led by China and Poland, continued to be the primary buyers, with China's central bank extending its buying streak to 21 consecutive months and Poland adding 8 tonnes for the year. Central banks in the Czech Republic, Kazakhstan, Malaysia, and Bolivia also increased their holdings. Russia was the largest seller, cutting reserves by 6 tonnes.

Although central bank buying has slowed compared to a year ago, official sector demand continues to support the gold market. An unexpected weaker-than-expected ADP employment report on Wednesday sparked a 2% rise in gold prices, bolstered by comments from US Federal Reserve official Christopher Waller suggesting he is open to maintaining rates at the next FOMC meeting, assuming no surprise inflation data.