Commodity weekly: Euphoric growth outlook lifts oil as silver slumps

Ole Hansen

Head of Commodity Strategy

Summary:  Weekly commodity update focusing on the euphoria in the oil market and other growth depending commodities as the markets increasingly look for a post-pandemic growth boom. A focus that helped lift the dollar and yields, thereby further adding to the unease in precious metals, not least silver having just witnessed a major pump and dump. Also the continued rise in global food costs which is beginning to raise alarm bells at the UN FAO.


It has been another dramatic week across financial markets with global stocks trading near all-time highs as corporate profits rebound and central banks remain supportive amid the pandemic while in the US, President Biden is pushing to fast-track his stimulus package. All of this just one week after stock markets suffered a short, sharp correction in response to worries that the Reddit-inspired attack on shorted stocks and silver could destabilize the markets and trigger a dash-for-cash similar to what we experienced during the early stages of the 2020 pandemic.

Commodities traded higher with pockets of weakness mostly concentrated in precious metals where silver suffered a brutal correction following the failed and fundamentally flawed attempt to squeeze a non-existent short. The silver correction added to weakness in gold as it struggled to put up a defense against a dollar which reached its highest level since October and a renewed jump in bond yields, at this stage mostly on the back of rising US recovery and growth expectations instead of fears about rising inflation. 

Inflation, however, is already on the rise as seen through higher food and fuel costs as well bottlenecks in global transportation and supply lines forcing costs higher. The latter driving a three to four-fold increase in the cost of transporting goods in containers from China to the rest of the world while adding an additional cost to already rising food commodities such as soybeans and corn. Inflation is a focus that we feel convinced will continue to grow over the coming months, especially once the headline numbers start to reflect the year-on-year rise in fuel costs that started last April.

A strong week for the energy sector with crude oil trading higher by 8% while natural gas surged by 17% on the outlook for cold weather and an unusually big weekly reduction in stocks. Brent crude oil meanwhile is marching toward resistance at $60/b, the 61.8% retracement of the 2018 peak to the 2020 low, driven by a tightening market on expectations that OPEC+ is committed to supporting further price gains by restraining global supplies even as demand outlook improves as the vaccine-led recovery in global mobility increases. Speculative demand remains firm with added support from the continued risk appetite seen through elevated stock markets.

In addition the market is increasingly pricing in a belief that last year’s price crash together with an increased investor focus on environmental, social and corporate governance (ESG) could led to a future shortfall due to lack of investments towards exploration. However, before we reach that stage, global demand needs to recover from the current 94 million barrels/day and back towards 100 million seen a year ago, while OPEC+ slowly returns 7 million barrels/day of still capped production.

Source: Saxo Group

The Bloomberg Agriculture index which tracks the performance of nine soy, grain and soft commodities has rallied by 41% during the past six months to reach an almost four-year high. The main drivers behind the surge has been Chicago traded corn (+66%) and soybeans (+56%), both reaching seven-year highs. The sharp rally was driven by substantial buying of soybeans and more recently corn by China as it seeks to restore its grain reserves, dry weather concerns in South America, Russian export tax on wheat and lower-than-expected production of key crops in the US.

To top it all up we are seeing the combination of strong momentum and fundamentals driving a record amount of speculation in key crops while continued disruption in the shipping industry has driven freight prices for grains and oilseeds to their highest levels since October 2019.

These developments led to a warning from the UN FAO that the current trajectory of prices could create a ‘big issue’ for poorer, import-reliant countries. The warning came after its Global Food Price index showed its longest monthly rising streak in a decade after jumping 4.3% in January to show a year-on-year rise above 10%. The index, which tracks quotes for 95 different food items split into five different categories, reached its highest monthly average since July 2014.

    Silver’s go it alone rally, inspired by conspiracy theories and ill-informed traders in the r/WallStreetBets (WSB) group on Reddit, almost ended before it began. After failing to break above $30/oz, now a double top, the trade idea crumbled fast. But unfortunately not before having sucked 3,500 tons of new investments into exchange-traded funds, most of which are now under water. The accumulation of positions in ETF’s during a three-day period exceeded the amount that had been bought during the previous seven months.

    Without strong support from gold, which instead drifted lower in response to a stronger dollar and rising bond yields, the rally was doomed to fail. Not least given the lack of fundamental reasons for the gold-silver ratio (Ticker: XAUXAG) moving to a seven-year low at this point in the cycle. The ratio traded down to 62.35 (ounces of silver to one ounce of gold) on Monday before rallying back towards 70, the 10-year average.

    While premiums for silver coins and small bars due to strong retail demand has been rising, thereby forcing unfortunate buyers into paying a huge and potentially loss-making premium above the prevailing spot, the LBMA in London reported that one billion ounces or 28,350 tons of silver traded in the London spot market on Monday. Despite being triple the level seen in recent months, the LBMA said  "throughout this period, the market continued to demonstrate liquidity and durability, and no issues arose impacting either trading, settlement, or the efficiency of the daily price auction."

    Despite the recent setback, we maintain a bullish view on precious metals but given the current focus on a post-pandemic growth sprint, demand for safe havens has faded. We see renewed inflation focus and a potential reversal of the recent dollar strength as the key drivers that eventually will help attract renewed buying of gold and especially silver, given its use in industrial applications. Not least in solar panels which is likely to provide increased demand use as more and more governments actively support the green transformation.

    After collapsing by 14% from the Monday peak, silver has managed to find support ahead of $26/oz, with further weakness depending on the level of weak longs in need of being reduced further. Gold meanwhile remains stuck in a downtrend from the August high with resistance currently at $1830 followed by $1875. Support remains the early December low at $1765, which also equals the 50% retracement of the 2020 March to August surge.

    Source: Saxo Group
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