Commodities: up and down for $100 barrel rumours

Talk that Saudi Arabia has its sights on US$80-US$100 a barrel oil again and of more U.S. sanctions on Russia ignited a rally in commodities and resource stocks on Thursday, though the potential boost to inflation hit fixed-income assets.

It was set to be the strongest day for the commodity complex in eight months as Brent crude futures climbed past US$74 a barrel after a near 3 per cent jump overnight.

The surge came on a Reuters report that OPEC’s new price hawk Saudi Arabia would be happy for crude to rise to US$80 or even US$100, a sign Riyadh will seek no changes to a supply-cutting deal even though the agreement’s original target is now within sight.

The leap in oil combined with fears that sanctions on Russia could hit supplies of other commodities to light a fire under the entire sector. Nickel jumped the most in 6-1/2 years on talk Nornickel – the world’s second-biggest producer of the metal – could be impacted.

Aluminum prices reached their highest since 2011, its raw material alumina touching an all-time peak before retreating when Russia floated the idea of a temporary nationalization of sanctions-hit giant Rusal.

“It has been a very erratic day, it’s a bit crazy,” said Rabobank metals sector economist Casper Burgering. “Nickel went up by almost 10 pct and aluminum by almost 8 per cent and now are coming right back down.” Expect more volatility, he said.

Such increases, if sustained though, could fuel inflationary pressures and investors hedged by selling sovereign bonds.

Yields on U.S. two-year Treasuries stood at levels last visited in 2008 at 2.43 per cent and 10-year German yields went above 0.57 per cent for the first time in almost a month.

“Saudi Arabia wants higher oil prices and yes, probably for the IPO, but it isn’t just that,” an OPEC source told Reuters.

“Look at the economic reforms and projects they want to do, and the war in Yemen. How are they going to pay for all that? They need higher prices.”

OPEC and its partners next meet formally on June 22 but a ministerial monitoring panel will gather in Jeddah, Saudi Arabia, on Friday and are expected to make noises about the broader supply and demand in the oil market.

The bullish sentiment in markets comes amid wider optimism about economic growth. The global economy is expected to expand this year at its fastest pace since 2010, the latest Reuters polls of over 500 economists worldwide suggest, but trade protectionism could quickly slow it down.