Head of Commodity Strategy
Summary: The commodities sector has reverted to a small gain during the first two weeks of trading with strong gains in energy, and to a lesser extent softs and precious metals being offset by losses across industrial metals and the grains sector. Range bound crude oil and gold both received a boost as tensions in the Middle East moved up a notch after the US and its allies launched retaliatory strikes against Iran-backed militants in Yemen. Elsewhere the industrial metal market is looking for additional support from the Chinese government while a very shorted grains market awaits news on supply and demand as well as stock levels.
The commodities sector has reverted to a small gain during the first two weeks of trading with strong gains in energy, and to a lesser extent softs and precious metals being offset by losses across industrial metals and the grains sector. The focus in the market remains firmly on the macroeconomic landscape where concerns about an economic slowdown, not least in China, the world’s top consumer of raw materials, are being offset by expectations that the People’s Bank of China (PBoC) may lower rates soon. In addition, several major central banks – led by the Federal Reserve – remain on track to embark on an aggressive rate cut cycle sometime in the coming months.
In addition, geopolitical risks associated with Houthi attacks on ships in the Red Sea continue to attract a great deal of attention, in the process diverting the focus in energy markets away from a current weak demand outlook. During the past couple of weeks, Brent and WTI crude oil futures have gyrated within narrow ranges, before breaking higher on Friday after the US and UK launched airstrikes against Houthi rebels in Yemen, in the process driving the geopolitical risk premium even higher.
The crude oil market, in a downtrend since October, began the year consolidating within a narrow range - in Brent between $75 and $79 - as the tug-of-war between demand and supply concerns continued to create choppy but overall directionless price action. This stalemate, however, showed signs of changing with Brent making attempts to break above $80 and WTI above $75 after the US and UK launched airstrikes against Houthi rebels in Yemen, in retaliation for numerous attacks on ships in the Red Sea which have impacted normal flows of energy and goods north through the Suez Canal. In turn, the cost of shipping a container from China to Rotterdam since early December has surged from around $1400 to above $4500 dollars as the rerouting of ships leads to longer journey times and delays. An example of this is Tesla, which recently announced it would halt production for two weeks at its giga factory in Berlin due to lack of components, initially reducing production by 5000 to 7000 cars.
However, while supply disruptions are still an unrealised threat, the physical market is showing signs of actual weakness, to a certain extent reducing the geopolitical risk impact. An example of weaker demand fundamentals was signalled by Saudi Aramco after it lowered the premium it charged Asian customers for deliveries in February to the lowest level since November 2021, following a weakening of spot differentials for Middle Eastern crudes due to weak Chinese demand and rising supply from non-OPEC producers.
Having seen both Brent and WTI breaking the downtrends in place since late September, both crude benchmarks may see additional momentum buying, driving up the risk premium to levels that looks unsustainable unless a real disruption occurs to supplies from key Middle East producers. Potentially adding fuel to the rally are once again speculators – such as hedge funds and CTAs – who started 2024 with the smallest WTI and Brent net long in recent memory, not least due to the biggest gross short since 2016 have been supporting the rally through short covering. In the short-term, as per the chart below, the next key level of resistance in Brent can be found around $82, a break above which could trigger an additional technical reaction towards $85.
Overall, we see Brent crude oil remain rangebound around $80 per barrel during the first quarter with the very weak positioning, OPEC+ production restraint, and incoming rate cuts potentially leaving the risk/reward skewed slightly to the upside. The biggest downside risk is a disunited OPEC+ leading to a collapse in the current agreement to keep production down, and the upside from a major geopolitical event disrupting the flow of crude oil and gas from the Middle East.
Hours after a stronger-than-expected US inflation print for December helped send gold prices lower, but not through key support in the $2010 area, bullion prices rose strongly after the US-led airstrikes on Houthis triggered a fresh round of safe haven demand. In addition, the market was supported by movements in bond yields and short-term interest rates which concluded that firmer inflation would not derail the prospect of a precious metals-supportive cut in interest rates, perhaps as soon as March.
This past week, Saxo’s strategy team released their Q1 2024 outlook titled “What happened to the future?”. In the commodities section, we outlined the reasons why we believe 2024 could become the “Year of the metals” with focus on gold, silver, platinum and copper. In precious metals, we believe the prospect for lower real yields and lower funding costs as central bank rate cuts will drive a revival in demand from interest rate-sensitive investors. Adding to these developments a fragmented world supporting continued demand from central banks and haven demand from others, the potential for a fresh record remains on the cards.
In the short term, gold's ability to hold above key support in the $2015 area, thereby preventing additional long liquidation from funds which started the year with an elevated long position, has given bulls renewed belief in higher prices with focus now on resistance at $2088, the December 28 high.
Industrial metals have posted a weak start to the year as the outlook for global manufacturing and construction remains under scrutiny, for now more than offsetting calls for stronger stimulus measures in China, and the potential positive impact of restocking once an expected series of rate cuts from major central banks begin later this year. The Bloomberg Industrial Metal index trades down 3.6% on the month with losses being led by aluminum which jumped 12% last month on tight supply worries following utilization cuts at refiners in China and after a deadly explosion in Guinea impacted shipments and transportation of bauxite, the key raw material in alumina production. This month so far, the market has given back around half of those gains amid an overdone rally and a flood of Russian aluminum being delivered to the London Metal Exchange after the UK government-imposed sanctions limited the ability of UK companies to trade physical Russian metals.
Copper prices, meanwhile, bounced back after eight straight losing days supported by China stimulus bets and the news that Chile scaled back its production growth forecast for this year and next amid declining ore quality, water restrictions and increased scrutiny of new permits. The combination of supply worries and the prospect of an increased chance the PBoC may cut key interest rates soon will, together with a strong push towards electrification, not least in China, continue to provide support in the short term. However, to see a sustained rally towards a fresh record high, the market will need answers to the questions about the timing of and depth of future US rate cuts. Only then may we see renewed restocking by companies that offloaded metals last year amid the rising cost of financing their stockpiles.
The grains sector remains under pressure with the Bloomberg Grains index hitting a fresh four-year low. The sector has been under pressure for more than a year now amid ample supply following a robust 2023/24 Northern hemisphere production season, and after recent rains in Brazil lifted the prospect for soybeans production. On Friday, the market was looking to key reports from the US government on supply and demand, US and global stock levels as well as winter wheat acreage update, to shed further light on the current state of the sector. Ahead of the US and European planting season, the market will continue to focus on weather developments in South America and the dollar, given its impact on the competitiveness of US exports relative to crops sourced from other regions.
According to the latest update from US CFTC covering speculators positioning in the futures market, the grains and soy net short (Six contracts) reached a 3-1/2-year high in the week to January 2. In the last ten-years speculators have only held a bigger end of year short positions on two occasions, the latest being 2017. Combining this with a recent increase in open interest, indicative of a substantial short builds in these contracts. Most of these short positions have been initiated in a narrow price range and are at a significant risk of getting caught offside should the technical and/or fundamental outlook suddenly change, or the above-mentioned government reports spring a bullish surprise.
Commodity articles:
10 Jan 2024: Crude oil stuck as focus alternates
9 Jan 2024: Q1 Outlook – Year of the metals
5 Jan 2024: Commodity weekly: Bumpy start to 2024
4 Jan 2024: What to watch in crude oil as 2024 gets underway
4 Jan 2024: Podcast: Crude oil and gold in focus as a new year begins
21 Dec 2023: Weather, rates and unrest paint muddy picture for commodities in 2023
19 Dec 2023: Crude and gas pop on Red Sea Disruption Risks
14 Dec 2023: Fed's dovish tilt adds fresh fuel to precious metals
13 Dec 2023: Video - Why gold may enjoy a Santa rally for the 7th year in a row
12 Dec 2023: Video - Investing in Uranium
1 Dec 2023: Commodity weekly: Tight supply risks boost copper; OPEC+ struggles to control crude
30 Nov 2023: Precious metals take top spot for a second month
23 Nov 2023: A nervous crude oil market awaits OPEC's next move
23 Nov 2023: Podcast: Will Santa deliver another golden gift
22 Nov 2023: Will gold and silver see another Santa rally?
17 Nov 2023: Commodity weekly: Crude overshoots; silver the comeback kid
16 Nov 2023: Podcast: Silver comeback, watch OPEC as crude oil slides lower
16 Nov 2023: Crude oil weakness adds focus to upcoming OPEC meeting
15 Nov 2023: Soft CPI lifts gold and beaten down silver and platinum
12 Nov 2023: Copper supported by green transformation demand and peak rate speculation
10 Nov 2023: Commodity weekly: Crude oil risks overshooting the downside
Previous "Commitment of Traders" articles
8 Jan 2024: COT: Weakest commodities conviction since 2015
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An underowned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
20 Nov 2023: COT: Crude selling slows, grains in demand
14 Nov 2023: COT: Crude long slumps; agriculture sector in demand
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
