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Commodity Weekly: With China theme adrift, time to focus on your breakfast plate

Picture of Ole Hansen
Ole Hansen

Head of Commodity Strategy

Summary:  The commodity sector began February on the backfoot as optimism over the speed of a post-Covid recovery in China started to moderate. Losses, apart from US natural gas which continued its month-long decline, were led by crude oil and fuel products as well as copper and iron ore - commodities which have recently benefitted from expectations that a pick-up in demand from China would more than offset any concerns about a slowdown elsewhere. Also a closer look at the reasons behind the latest run up in prices of orange juice, coffee and sugar.

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The commodity sector began February on the backfoot as optimism over the speed of a post-Covid recovery in China started to moderate and investors instead focused on gaining exposure to the stock market which, despite forecasts for the opposite, has bounced back strongly – especially the tech-heavy Nasdaq which has gained more than 15% since the start of the year. Losses, apart from US natural gas which continued its month-long decline, were led by crude oil and fuel products as well as copper and iron ore – commodities which have recently benefitted from expectations that a pick-up in demand from China would more than offset any concerns about a slowdown elsewhere.

The Bloomberg Commodity Index (BCOM) traded lower for a second week, near a one-year low, with losses in energy, industrial metals, and precious metals being only partly offset by grains and not least broad softs sector gains.


Three major central banks led by the US Federal Reserve all hiked rates as expected this past week, but subsequent comments led the market to believe the end of the current rate hike cycle is getting closer. Not least the ECB – the most hawkish G10 central bank – which indicated it would evaluate the subsequent path of its monetary policy during its March meeting. The comment eroded a key fundamental driver of EURUSD upside, resulting in a sharp rebound in the dollar following a fresh post-FOMC meeting low. Gold reached a fresh cycle high on Wednesday following the dovish FOMC rate hike, before tumbling through support as the dollar turned higher and after the monthly US job report shocked the market with 517,000 jobs added in January, far exceeding estimates.

While Chinese economic data continues to support expectations for an economic rebound, the market has adopted a more sanguine view on the speed and timing of a pick-up in demand. There is little doubt that the world’s largest consumer of raw materials will provide underlying support for key commodities from crude oil to copper as the year progress. However, in the short-term the market may have run ahead of itself regarding the timing and strength of this rebound. Lower prices this week have subsequently forced a reduction by hedge funds of recently established longs – especially in crude oil, fuel products and industrial metals – and potentially exaggerated the correction currently seen.

Gold sees sharp pull back after hitting fresh cycle high

Gold’s short-term technical outlook deteriorated towards the end of the week after the FOMC-led rally to a fresh cycle high, and near resistance at $1963, was replaced by a sharp reversal as the dollar strengthened, especially against the euro following a dovish rate hike from the ECB. The turnaround in the dollar highlights how gold continues to track broader USD trends. Gold’s sell off was extended following a very strong US job report, thereby further weakening the short term technical outlook with Thursday’s bearish engulfing candle on the daily chart pointing to a temporary top in the market.

Gold company ETFs see mounting inflows while bullion-backed lingers

An interesting divergence between ETFs that tracks mining companies and those tracking the actual price of bullion has emerged following gold’s increased popularity since the November low. Gold companies and ETFs tracking the major miners are getting more popular among investors, as the gold price has gained 17% from its cycle low, with the outlook possibly set to improve further if central banks eventually ease interest rates. Historically, gold has rallied strongly when the Fed pauses and cuts interest rates and together with strong underlying demand from central banks, the market is pre-empting the Fed’s expected turn to easing. The largest gold miner ETF fund VanEck Gold Miners ETF (GLD) has seen inflows rise $400, suggesting retail investors are increasing their positions. Other popular gold ETFs so far this year include iShares Gold Producer UCITS ETF (IAUP) and iShares MSCI Global Metals and Mining Producers ETF (PICK) with inflows into those ETFs rising as well this year. 

These significant inflows have occurred at a time when total holdings in bullion-backed ETFs have seen no pick-up – with total holdings still lingering near a three-year low. This potentially confirms that recent gold strength has been driven more by actual physical demand than so-called paper demand. An observation also supported by the fact that the aggregate open interest across COMEX futures has dropped to a November 21 low at 468,000 contracts. In other words, we have seen no significant pick-up in open interest despite the mentioned strong rally.

Gold’s rollercoaster ride this past week has, from a technical perspective, raised the prospect of a long overdue correction. Technical traders will have turned more negative following Thursday’s bearish-engulfing candle, while a close below the 21-day moving average – currently at $1914 – would signal some additional loss of momentum. A close below could see a short-term reversal lower towards $1872, or even $1845.

Source: Saxo

Crude oil pressured by speculative long liquidation as China demand optimism fades

Crude oil is heading for a +4% loss on the week as China optimism fades and US stockpiles continue to climb. Ahead of the Chinese Lunar New Year the market had been pricing in the prospect for a strong recovery in China, but this is now being challenged amid questions over the timing and extent to which the pick-up will be able to offset softness elsewhere. We believe that Chinese demand and additional sanctions against Russian fuel exports starting on February 5, together with OPEC+ price support through its actively managed production have created a soft floor under the market. In the short-term, the market remains troubled by long liquidation from hedge funds forced to reduce recently established long positions.

During a six-week period to January 24, money managers added 163 million barrels of Brent crude oil longs, and with 95 million of those having been bought during the last two weeks. This highlights the short-term challenge the market is now facing, and why the current correction may end up being deeper than what may otherwise be justified given current fundamentals.

Your unbalanced breakfast

While copper and gold have stolen much of the attention so far this year, surging soft commodity prices, especially during the past week, have seen the sector rise to the top of the performance table. The Bloomberg Softs index, which includes Arabica coffee, sugar, and cotton, but not surging Robusta coffee and orange juice, trades up 7.3% so far this year. Weather woes across key growing regions, speculators covering short positions and – in the case of sugar – rising gasoline prices lifting demand for biofuels have all played their part.


Arabica and Robusta coffee futures in New York and London reached a three-month high on rising concerns the world may see a third consecutive deficit, led by a shortage of Robusta beans. Recent gains have been led by Robusta which, following a second half slump last year, went on to recover strongly last month, primarily driven by supply concerns. ICE monitored Robusta stocks have fallen to their lowest levels since 2016 when contract rules were changed. In addition, exports from Vietnam, the world’s second biggest exporter of coffee, and primarily Robusta, sank by 31% year-on-year in January.

Meanwhile, Arabica coffee continues to recover from a five-month-long correction which saw the price slump 40% between August last year and January 11. Since then, the futures price has surged higher by 29% to reach a three-month high at $1.82/lb. The fundamental driver behind this is a deteriorating outlook for the coming season in Brazil, with forecasts pointing to a small 2023 crop for the third year in a row. Delayed harvests in Central America and worries about Peru’s next crop amid political unrest have added further upward pressure on the price.

These developments have forced a major turnaround from hedge funds who in recent weeks have amassed the biggest Arabica coffee net short in more than three years. It highlights the importance of watching the weekly COT update, as a change in the technical and/or fundamental outlook can have an outsized price impact when positions are elevated.  

Global supply concerns also remain the key driver behind sugar's recent rapid ascent, culminating this past week in the March futures contract in New York reaching a November 2016 high close to 22 cents a pound. The latest run up in prices was driven by news from India, the world’s second biggest grower, after the Indian Sugar Mills Association reduced its estimate for the country’s output this season by 6.8% to 34 million tons. This development will likely reduce exports to 6.1 million tons, down from 9 million previously forecast. Adverse weather conditions and mills diverting more cane toward ethanol are being cited as the main reasons behind the reduction. Thailand, the second biggest exporter after Brazil, may increase its exports as production is expected to rise by 14% to 11.6 million tons, thereby potentially preventing sugar from advancing further at this stage.

Orange juice futures, meanwhile, hit a record high near $2.45 a pound, and using the BCOM OJ Index it is showing a YoY gain of more than 90%. Prices have been driven higher by Florida’s citrus crisis which has seen the key state collect the smallest crop since 1936. Frost damage and citrus greening – a disease spread by insects – can be added to the challenges caused by several hurricanes during the past few years. In addition, both Brazil (wet weather) and Mexico (rising fresh fruit demand) have seen juice production being challenged at a time of robust demand.

All of the above have added to the costs of an average breakfast while ample supply of wheat, especially from the Black Sea region has seen wheat prices trade softer so far this year. If the preference is for bacon, that price has also come down with US lean hog futures responding negatively to rising availability of stock. The latest Cold Storage Report from the USDA showed total frozen poultry supplies on December 21, 2022 were up 7% from the previous month and up 23% from a year earlier.

Source: Saxo


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