Commodity Weekly: Weather woes keep agriculture commodities on top

Commodity Weekly: Weather woes keep agriculture commodities on top

Ole Hansen

Head of Commodity Strategy

Summary:  The commodity sector, with the exception of some key food items, remains on the defensive this month as the current surge in virus cases in major economies clouds the short-term outlook for growth and demand. In this update we take a closer look at some of the winners and losers, including wheat, corn, gas, copper, gold and crude oil.


The commodity sector, with the exception of some key food items, remains on the defensive as the current surge in virus cases in major economies clouds the short-term outlook for growth and demand. In addition, the prospect for an earlier-than-expected return to a tightening regime by the US Federal Reserve has helped put upward pressure on bond yields and the dollar, thereby reducing the appeal for investment metals, such as gold and silver.

The macro-economic outlook remains clouded by the current third Covid-19 wave which continues to spread across Asia and parts of the US, thereby creating a great deal of uncertainty with regard to the short-term demand for key growth and demand-dependent commodities from crude oil and gasoline to copper and iron ore. With this in mind, the increased possibility of the US tapering its massive asset purchase program is unlikely to be followed by others, potentially leading to rising US Treasury yields and a stronger dollar.

As in the previous week, pockets of strength remained with several key agriculture commodities continuing to find support following what up until now has been a very volatile weather season across some of the key growing regions of the world. Cold weather in parts of Brazil has hit the sugar cane crop while also causing extensive damage to the region’s coffee as well. Elsewhere, extreme heat leading to dryness have sliced the expectations for this year’s grains crop, especially corn and wheat.

In its latest World Supply and Demand Outlook (WASDE) the US Department of Agriculture forecast the lowest US wheat harvest in 19 years with global supplies suffering a further downgrade in response to large reductions to estimates from drought-hit fields in Canada and Russia. The prospect for lower shipments from Russia, the world’s biggest exporter, saw the high protein milling wheat future traded in Paris jump to a three-month high above 255 per tons, some 35% above the five-year average.

Gas prices in Europe rose to another record before retreating with supply concerns being somewhat offset by weaker sentiment in the broader energy market given the latest wave of Covid-19. In the US, gas prices headed for their biggest weekly loss following a bigger-than-expected weekly rise in stocks, but forecast for another incoming heatwave will likely limit the correction with tight winter supplies, just as in Europe, a risk that may continue to support prices ahead of winter.

In Europe, an unexplained reduction in flows from Russia combined with rising competition from Asia for LNG shipments has made it harder to refill already-depleted storage sites ahead of the coming winter. These developments have led to rising demand for coal, thereby forcing industrial users and utilities to buy more pollution permits, the price of which are already trading at record prices. All in all, these developments have led to surging electricity prices which eventually will be forced upon consumers, thereby adding to the already rising cost of everything.

Gold spent most of the week trying to recover from the price collapse that followed the stronger-than-expected US jobs report on August 6. The sell-off culminated during the early hours of the Asian session last Monday when the yellow metal, within a short period, tanked more than 70 dollars. Coming into August, sentiment was already hurt by gold’s inability to rally in response to the July slump in Treasury yields. A drop in yields that concluded just days before the slump when US 10-year inflation-adjusted yields hit a record low at -1.22%.

Having struggled to rally amid favorable yields, gold immediately turned lower at the first sign of higher yields and once key technical levels in the $1750 to $1765 area were taken out, the flood of sell stops during a very illiquid time of day took it briefly down to the March double bottom below $1680, where fresh bids from physical gold buyers in Asia emerged once again.

The short-term outlook remains challenged by the risk of yields and the dollar both moving higher ahead of the late August meeting of central bankers at Jackson Hole. The annual symposium which in the past has been used to send signals of changing policies or priorities to the market.

A weekly close above $1765 in gold would create a bullish candle on the chart and it may help send a supportive signal to a market still dizzy following the latest rollercoaster ride. However, in order to look for a recovery, silver needs to join in as well and, so far, it is struggling with the XAUXAG ratio trading above 75 ounces of gold to one ounce of silver, its highest level and silver’s weakest against gold since December.

Source: Saxo Group

Copper’s recent and price-supportive focus on potential supply disruptions in Chile eased as BHP workers at the Escondida mine, representing 5% of global output, voted to accept a final wage proposal. In recent weeks, the threat of supply disruptions have offset surging Covid-19 cases and worries about a Chinese slowdown hitting demand. With the risk of disruptions fading the market could, just like oil, see a period of sideways trading while the current virus outbreak is being brought under control. While resistance has been established above $4.4/lb, support has been equally strong below $4.20/lb. Overall, however, we still see further upside with the price of High-Grade copper eventually reaching $5/lb, but perhaps not until 2022 when continued demand for copper towards the green transformation and infrastructure projects increasingly could leave the market undersupplied.

Crude oil remains one of the biggest losers so far this month, only surpassed by iron ore and silver. Following several months where the main focus was on OPEC+ and its ability to support prices by keeping the market relatively tight, the focus has once again reverted to an uncertain demand outlook caused by the rapid spreading of the Delta coronavirus variant, particularly in key importer China. A development that has led to growth downgrades and raise questions about the short-term demand outlook for oil and fuel products from the world’s biggest buyer.

While some of the major bulls on Wall Street see the disruption from the Delta variant being transitory and only negatively impacting demand for a couple of months, both the IEA and OPEC in their latest monthly oil market reports cut their demand outlook for the remainder of the year. The latest wave is leading to a renewed reduction in mobility around the world with the biggest concern being the flare-up in China, where a still-low number of infected has been met by an aggressive approach to contain the outbreak.

However, the flexibility exhibited by the OPEC+ group during the past year will likely prevent a deeper correction should demand growth suffer a bigger-than-expected headwind from the current outbreak. With this in mind and considering the lack of response from US producers despite high prices, we maintain a constructive view on the direction of prices into yearend.

Source: Saxo Group

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

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, 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. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such 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.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

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

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.