Commodity weekly: Weak dollar driven rally

Crude oil: focus shift from demand to supply concerns

Crude oil prices are heading for a third weekly gain with unplanned supply disruptions in Libya and Nigeria being added to a list that already includes voluntary cuts from Saudi Arabia and Russia. The impact of this is starting to be felt with some crude varieties showing increased signs of tightening. Together with the improved market sentiment triggered by a softer dollar following the weaker-than-expected US inflation print, it has helped move the focus from China and recession-led demand concerns towards a price-supportive focus on tightness.

With regards to demand, monthly oil market reports released this past week from the IEA and OPEC both pointed to a strong second half for global demand. While the IEA trimmed its forecast and OPEC lifted its expectations, they both agree that demand this year will rise by more than 2 million barrels a day, and together with production cuts, the market seems be moving towards a more price-supportive phase.

In our latest crude oil update we noted that Brent crude trades back above $80 and WTI above $75, both for the first time since early May. The positive momentum this has created is currently providing support, with funds being forced to reduce bearish oil bets originally established as a hedge against an economic slowdown. The combined net long in Brent and WTI held by managed money accounts in the latest reporting week to July 3 was 280k contracts and near the lowest belief in higher prices in more than ten years.

Brent extended its gains above resistance-turned-support at $78.50, and further gains will bring resistance at the 200-day moving into focus, in Brent at $82.55, and WTI at $77.60.

Silver takes the lead in strong comeback for precious metals

Gold and especially silver raced higher after the weaker June inflation and PPI reports helped send the dollar sharply lower while once again bringing forward the timing of a US peak rate scenario. Gold was heading for its best week since April, yet it is worth noting that the 1.8% advance was less than the 2.2% broad dollar decline – highlighting the risk of a pullback should short covering lift the greenback. Silver meanwhile rallied hard before finding some resistance ahead of $25.25, a level that if reached could see the white metal challenge the downtrend from the 2011 high just below $50.

Our long-held bullish view on precious metals has only been strengthened by recent developments but we remain cautious about calling an end to the current correction. Not least considering the risk the FOMC may throw another spanner in the works by sticking to their hawkish view on rates at their next meeting on July 26. In the short-term, gold’s weak dollar-dependent recovery is unlikely to step up a gear until we see it break above $1980 at a minimum – an area of resistance defined by several recent highs and lows. Read more in our latest gold specific update here.

Boxed in copper looking for a break

Copper was heading for its best week since March while the 4.5% jump in the Bloomberg Industrial Metal Total Return Index put the sector on track for its best week since early January when the focus on China’s reopening triggered a strong start to the year before disappointment eventually led to fresh selling. The prospect of easing US inflation raising optimism as the current and aggressive rate hike cycle may be nearing an end was the main catalyst. It helped weaken the dollar while lowering the risk of recession that has weighed on the market in recent months. In addition, the metal market also took comfort from Chinese policymakers repeating calls to support the world’s biggest commodity-consuming economy.

Copper traded back above its 200-day moving average, however there is narrowing room for maneuver – potentially forcing a technical breakout within the next few months. Copper stocks monitored by the three major futures exchanges in New York, London and Shanghai dropped for a tenth consecutive week to 226k tons and near the 201k ton multi-year low reached last December. Despite seeing the global manufacturing sector – the key engine for global metals demand – in contraction for the tenth month in a row, the copper market has been holding up very well amid low stockpiles and surging green demand replacing the dependency on traditional drivers such as property construction and home appliances.