Commodities bolt out of the gates to kick off 2021

The second chart above shows how the speculative interest across 24 major commodities has reached a four-year high at almost 2.4 million lots representing a nominal value of 121 billion dollars. The top three in terms of net nominal exposure being crude oil ($30 bn), gold ($26 bn) and soybeans ($12 bn). The chart also shows that while the two previous peaks in speculative interest were primarily driven by energy, the recent build up has been spread across all three sectors. Not least the agriculture sector, which led by the three key crops, has seen a revival following several years of underperformance.

Crude oil reached a fresh ten-month high in early trading on U.S. versus Iran rumblings and vaccine-optimism before turning lower at the prospect for what increasingly looks like a grim period ahead with extended lockdowns seen across winter hit regions across the northern hemisphere. On the supply side, the market is also waiting for a OPEC+ decision on whether it can keep lifting output into a surging virus environment.

The immediate outlook for crude oil, especially at current levels, may be somewhat challenging as the global recovery in fuel demand continues to be pushed forward. OPEC is forecasting crude oil demand will rise to 95.9 million barrels/day this year, still well below the above 100 million barrels/day peak seen before the pandemic emerged a year ago. A recovery pace at this speed may also challenge OPEC+ which currently has close to 8 million barrels/day of spare capacity which they want to funnel back into the market at some point.

The speculative interest in crude oil, from a growth and reflation prospect, however, are likely to support the price through these first few demand challenging months of the year. During this time we see the upside for Brent crude oil limited to $55/b with support at $49/b followed by $46.6/b.

Gold (XAUUSD) surged above $1900/oz in early trading with the next level of resistance being the November high at $1965/oz. The reflation element combined with a weaker dollar and lower real yields all points to further short-term gains. While ten-year US breakeven yields – an expression of future inflation expectations – have reached a two-year high close to 2%, real yields, a key driver for gold, has slumped to -1.09% and near the lowest for this cycle.

In the US, the Georgia Senate run-off elections on Tuesday may further strengthen the reflation sentiment and with that gold, if polling projections are correct in handing victory to both Democrats and with that the Senate majority. This on expectations that a Senate majority secured by the vote of the Vice President would make it easier for a Joe Biden administration to boost stimulus and increase spending.

Silver (XAGUSD) jumped more than the three percent with support from gold, copper and a weaker dollar. The XAUXAG ratio is once again approaching 70 (ounces of silver to one ounce of gold) while the spot price is facing resistance towards $27.50/oz.

HG Copper also jumped on the first day of trading, supported by a weaker dollar, not least against the Chinese Yuan which surprisingly was allowed by the PBoC to strengthen by more than 1% overnight. Chinese manufacturing PMI expanded for an eight consecutive month which suggests continued strong demand for metals from the world’s by far largest consumer.

Soybean (SOYBEANSMAR21), corn (CORNMAR21) and wheat (WHEATMAR21) all trading higher supported by a weaker dollar, bright demand outlook led by China and dry weather threatening production in South America. Especially in Argentina, the world's biggest exporter of soy products with dry conditions also building in Brazil. Soybeans has surged past $13/bu for the first time in 6-1/2 years while corn has recorded its longest run of gains in six decades.