WCU: Commodity rally resumes to trigger multiple breakouts
Head of Commodity Strategy
Summary: The commodity sector is showing renewed strength following a six-week period of consolidation. While individual news and developments supported all three sectors of energy, metal and agriculture, the overall performance was also being supported by a surprise drop in U.S. Treasury yields accompanied by a weaker dollar. The rally saw major commodities from crude oil to copper and gold break their recent ranges with traders watching the weekly closes for signs of more to come.
The commodity sector is showing renewed strength, and following a six-week period of consolidation, the Bloomberg Commodity index was on track for its best week in four months. While individual news and developments supported all three sectors, the overall performance was also being supported by a surprise drop in U.S. Treasury yields accompanied by a weaker dollar.
Several key commodities, including crude oil, copper and gold broke higher, thereby potentially signaling renewed momentum attracting fresh buying from speculators. While the global number of new daily Covid-19 cases look set to hit record levels, the market has taken comfort from strong economic data from the world’s two biggest economies.
Crude oil was heading for its best week since early March and in the process both WTI and Brent crude oil broke out of their consolidation ranges. Strong economic data from the U.S. and China, the world’s biggest consumers, was enhanced by positive demand outlooks from OPEC and the International Energy Agency. Despite short-term Covid-19 related challenges, both increased their outlook for 2021 demand based on an expected strong pickup into the second half. Production restraints from the OPEC+ group of producers, has supported a rapid reduction in the massive overhang in global oil inventories that built up last year. Together with vaccination campaigns gathering pace, these developments have raised the prospect for increased mobility and increased fuel demand into the second half.
The potential risks that may scupper fresh attempts to drive prices higher are the prospect for rising U.S. production and the resumption in the Iranian nuclear negotiations driving a further increase in oil sales on top of what has already been registered since Biden won the U.S. Presidential election. In addition, several nations, including India, are grappling with sharp rises in Covid-19 cases which could see the number of new global cases hit a new record soon.
Having broken out of the month-long consolidation range, Brent will now be looking to build on this with the price potentially settling into a new range between $65 and $70 but probably not much higher until the current virus surge is brought under control, as the risk of spreading would challenge the elevated expectations for 2H demand growth.
Crude oil, copper and gold traders will be watching the weekly closes following multiple breakouts of recent ranges. Crude oil trades up more than 6% on the week with the now levels of support being $65.50 in Brent and $62.25 in WTI. HG copper meanwhile has broken its recent consolidation range to trade above $4.14/lb and gold has recovered to break above $1765/oz which is now support.
Copper, one of the raw materials with the strongest fundamental prospects, was another key commodity that poked its head above its recent $4 to $4.2 consolidation range. The move came in response to a report from Goldman Sachs titled "Green Metals - Copper is the new oil", in which they raised their price forecasts and now say that by 2025 copper could rise by more than 60%
The green transformation remains the key source of increased demand as usage in EV’s and renewable energy projects such as solar and wind surge. At the center of the forecast is a warning from both Goldman’s and Trafigura Group that the market will be ‘drastically’ short of copper in the next few years unless prices rise sharply to spur supply. High startup capex and the 5 to 10 year period from investment decision to production could create a prolonged period of mismatch between surging demand and inelastic supply.
The biggest short-term challenge remains the ongoing developments in China, the world's top consumer. In an attempt to curb rising asset prices through the use of leverage accounts, the People's Bank of China has been tightening liquidity. One of the biggest casualties so far has been the stock market where the CSI 300 has lost 18% since hitting a decade high back in February.
Gold, the most interest rates and dollar sensitive commodity, rallied to challenge and eventually break resistance at $1765/oz a key level that we have been highlighting in our latest updates. While rates and the dollar sets the overall direction, it is clear the loss of momentum in recent months was a major reasons why money managers at the beginning of March had cut bullish futures bets by 85% from the peak last February.
During the past month, however, buyers started to return and the recent rejection below $1680 helped trigger a 53% increase in the net long to 7.7 million ounces during the week to April 6. As per the chart above, a sustained break higher would significantly improve the technical outlook and potentially kickstart renewed momentum and with that demand from investors in both futures and exchange-traded funds.
Grains: The Bloomberg Commodity Grains Index reached a near five-year high on a combination of strong demand at a time where farmers in the US, Canada and Europe are already battling with dryness this early in the planting and growing season. Adding to this are ongoing worries in South America and the risk is for a continued decline in already falling global stock levels. These developments have driven corn prices to an eight-year high while spring-wheat (Minneapolis) futures have rallied to a near four-year high with Chicago wheat also picking up some momentum.
Lumber: The cost of building an average new U.S. house has jumped by more than $24,000 as the cost of lumber continues to surge higher. Years of low prices had cut supply and closed mills just before last years unexpected boom as the pandemic and lockdowns sparked a wave of DIY upgrades, renovations and purchase of bigger homes. An acute tightness across the entire timber supply chain has seen the lumber future, currently at a record $1260 per 1000 board feet length trade more than $800 above the average price seen during the previous five years.
Please join us next Tuesday for our monthly webinar where we take a closer look the latest developments driving the price action across the commodity sector. To sign up for this and other webinars covering the major asset classes please visit www.webinars.saxo