Commodity Weekly: Week of carnage leaves no one safe

Commodity Weekly: Week of carnage leaves no one safe

Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Summary:  The worst week on Wall Street since 2011 was replicated by an equally challenging week for commodities which left the Bloomberg Commodity Index down 6% on the week. Hardest hit was the energy sector with the crude oil market increasingly looking to OPEC and Russia for support. Gold struggled as deleveraging hurt the price despite overwhelming support from developments elsewhere.


The worst week on Wall Street since 2011 helped trigger an equally challenging week across commodities. The broad-based Bloomberg Commodity Index lost more than 6% with all components showing red. The accelerated weakness was sparked by the inevitable news that the China-born coronavirus had spread from Asia to the rest of the world. While the U.S. has yet to see any pickup in cases, the market was spooked by the apparent unpreparedness in Washington.

The increased risk of a global pandemic could still have a major negative economic impact. A drop in consumer confidence, behavior and spending may further negatively impact company earnings already under pressure from broken supply lines as China, the world’s production center of everything, struggles to get back to work.

28OLH_WCU1

The biggest casualty was the energy sector with crude oil and products collapsing in response to the biggest demand shock since the 2008-09 global financial crisis. Crude oil hurled towards the December 2018 low at $50/b on Brent and $42.4/b on WTI, and Brent crude oil has now slumped by more than 20% since the OPEC+ group decided to cut production on December 6. Faced with a rapidly falling outlook for 2020 demand growth and so far robust non-OPEC production, the group is increasingly under pressure to make further cuts.

OPEC and OPEC+ meet in Vienna on March 5 and 6 and baring any last minute cancellation, due to the virus threat, an additional production cut may be announced. Saudi Arabia has been pushing for deeper cuts with speculation focusing on a one million barrel/day cut. Russia has up until now been holding back, but with oil priced in Russian Ruble falling to an October 2017 low, we may see an increased interest from Moscow in striking a deal.

Brent crude oil has returned to a December 2018 low at $50/b. A major psychological level from where the market recovered strongly in early 2019. With non-OPEC production also potentially getting hurt by the recent price slump and rising credit spreads, we see the seeds to a recovery being sowed around these levels.

28OLH_WCU2
Source: Saxo Bank

The ongoing demand shock also helped drive renewed weakness in copper with the High Grade variety once again falling towards the critical support level at $2.48/lb. The combination of mining companies still adding supply and a prolonged slowdown in China, the world’s biggest consumer, is likely to leave an overhang of supply which may add further downside pressure to the price. A break of the mentioned level carries the risk, based on Fibonacci extension theory, that the price slump could be extended towards $2.38/lb or in the very worst case to $2.23/lb.

In my latest Commodity Weekly, I wrote about gold being in the midst of a perfect storm of positive price drivers with the stronger dollar being one of the few challenges. Fast forward a week and the picture has, despite renewed dollar weakness and a slump in global bond yields, become somewhat more challenging.

The biggest weekly sell-off in stocks since 2011 combined with a spike in volatility helped trigger deleveraging by hedge funds across most asset classes with the exception of secure government bonds. With the “paper” long in gold through ETF’s and futures already at a record, the yellow metal was also, despite the supportive outlook, left exposed to long liquidation.

Silver took a major hit and slumped to a two-month low close to $17/oz. With silver deriving half of its demand from industrial applications, the global growth worries left it exposed to selling. As a result, the gold-silver ratio, which expresses the value of one ounce of gold in ounces of silver, jumped to a near 30-year high at 95.5, a technical level from where some selling of the ratio emerged.

Gold’s weakness occurred despite overwhelmingly supportive developments in rates and yields. During the past week the expectations for future rate cuts by the FOMC rose with three 25 bp rate cuts now priced in for 2020, with the first expected at the March 18 meeting. Ten-year real yields slumped to -0.30% while the total amount of negative yielding debt rose to $14.2 trillion.

28OLH_WCU3

For a non-interest or dividend paying asset such as gold, the above-mentioned developments are all supportive. The fact the market struggled to react, amid the overriding need for funds to reduce exposure across markets, has left the metal open to a correction. Given the potential for stocks stabilizing the short term outlook may offer lower prices and better entry levels for those looking to gold as a longer term investment. Support, as per the chart below, is currently found towards $1600/oz ahead of $1550/oz, a level that represents the uptrend from the June 2019 low.

28OLH_WCU4
Source: Saxo Bank

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.