WCU: Strong start to year feeds supercycle speculation

Ole Hansen

Head of Commodity Strategy

Summary:  Weekly commodity update focusing on the strong start to 2021 led by energy and industrial metals. Driven by multiple tailwinds from tightening supply, a global market flushed with cash driving speculation across markets and increased demand for inflation hedges. Adding to this, the prospect for a weaker dollar, a vaccine-led recovery in global demand as well as emerging weather worries and the components for another commodity supercycle have started to emerge.


We expect the broad commodity rally that saw the Bloomberg Commodity Index rise by 10% during the last quarter will extend further into 2021. Driven by multiple tailwinds from tightening supply, a global market flushed with cash driving speculation across markets and increased demand for inflation hedges. Adding to this, the prospect for a weaker dollar, a vaccine-led recovery in global demand as well as emerging weather worries and the components for another commodity supercycle have started to emerge.  

All of this during a time when the pandemic is still raging across many countries, especially in winter-hit regions across the northern hemisphere where the prospect for improvement - vaccine or not – is unlikely to occur until warmer weather arrives in March and April. While the rally may pause until the vaccine rollout gathers momentum, the market will have to rely on continued investment demand being strong enough to keep markets supported during the coming months when the negative impact of lockdowns and reduced mobility will be the greatest.

Investment demand was on clear display during the first full week of trading with the US stock market racing higher to reach a fresh record high, led by so-called ‘bubble stocks’ within technology and green stocks following the Democratic majority in US Congress. Bitcoin, another bubble candidate, surged past $40,000 as the alternative investment continues to become more mainstream with institutional demand on the rise.

Speculators have responded very forcefully to the improved sentiment during the past six months and as we enter 2021, they hold a total net long across 24 major commodity futures of 2.5 million lots, representing a nominal value of $125 billion. While the two previous peaks in 2017 and 2018 were primarily led by the crude oil market, the chart below shows how bullish bets have been spread out more evenly between the three major sectors of energy, metals and agriculture.

Overall, the biggest bets are held in crude oil with the combined 614k lots long in WTI and Brent representing a nominal value of $30 billion, gold's 137k lots long at a value of $26 billion and finally the soybean complex where the net long in soybeans, meal and oil reached 399k lots or $19 billion nominal. The net long in crude oil and gold, the two biggest contracts in terms of exposure, remains well below their previous peaks which for crude oil was the 1.1 million lots reached in March 2018 and 292k lots in gold that was reached in September 2019. 

The reflation trade and with that the need to protect portfolios against rising inflation also received an additional boost after the US Democratic Party won both seats in the Georgia run-off elections. Thereby securing a Senate majority which paves the way for President-elect Biden’s plan for additional stimulus and spending to support an economy reeling from the pandemic and in order to patch up a very divided nation. These developments resulted in an unwelcomed rise in US government bond yields for precious metals. The rise above 1% in US ten-year yields, which had been the ceiling throughout the second half of 2020, helped reverse early gains in gold and silver as the dollar responded to these developments by attracting short covering to move higher.

This is a catch-22 for precious metals, with rising inflation expectations inadvertently driving the dollar higher in response to rising yields which may tamper gold’s short-term prospects. Despite this, we remain bullish and based on our forecast for gold to reach $2200/oz, silver’s high beta should encourage continued outperformance with the gold-silver ratio heading towards the low 60’s during 2021, thereby driving the price of silver towards $35/oz.

    Source: Saxo Group

    HG copper, meanwhile, rolled over the strong bid from December to record its best week since July 2020 on a combination of speculative reflation and underlying physical demand. China, the worlds biggest consumer, has been the main driver behind the 75% rally since the low last March and the expectation now is that a vaccine-led global recovery will fuel demand beyond China. Not least as the de-carbonization focus accelerates the electrification process thereby increasing demand for copper due its use as a conductor of heat and electricity. Following the break above $3.65/lb on HG copper, it is difficult to find much in terms of resistance before $4.0/lb.

    Crude oil’s impressive rally since the first vaccine announcements in early November extended into the first week of trading with Brent crude oil breaking above $55/b for the first time since last February. This after OPEC+ faced with an uncertain short-term demand outlook decided to rollover current production levels until March. Topping up the agreement was the surprise unilateral production cut announced by Saudi Arabia, which increasingly is being seen as the guardian of the oil market. The Saudis most likely concluded that the next few months could see the current weakness in Western world fuel demand spread to Asia where infections are rising quickly.

    With this in mind and from a current fundamental perspective, we remain skeptical about crude oil’s ability to forge much higher at this stage. Momentum however remains strong and with this in mind the price can easily reach levels that may otherwise be difficult to justify at this stage of the recovery. We see Brent trade above $60/b later in the when global fuel demand recovers further and OPEC and Non-OPEC spare capacity, currently above 7 million barrels/day, start to reduce through additional OPEC+ led production hikes.

    Source: Saxo Group

    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)
    Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

    Saxo Bank (Schweiz) AG
    Beethovenstrasse 33
    CH-8002
    Zurich
    Switzerland

    Contact Saxo

    Select region

    Switzerland
    Switzerland

    All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved, we have put together a general Risk Warning and a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed here or within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

    This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

    The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

    If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

    Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.