WCU: Commodities continue broad price rally WCU: Commodities continue broad price rally WCU: Commodities continue broad price rally

WCU: Commodities continue broad price rally

Ole Hansen

Head of Commodity Strategy

Summary:  August turned out to be the strongest month for the broadly-exposed Bloomberg Commodity Index, since April 2016. Four consecutive months of gains have seen the index claw back most of the pandemic-driven collapse back in February and March. All of three major sectors traded higher on the month, with natural gas, silver, corn and RBOB gasoline leading from the front. Gold, which finished July near a record high, is one of the few recording a small loss on the month.


August turned out to be the strongest month for the broadly-exposed Bloomberg Commodity Index, since April 2016. Four consecutive months of gains have seen the index claw back most of the pandemic-driven collapse back in February and March. An unprecedented amount of central bank stimulus, rock-bottom U.S. and global interest rates, recent dollar weakness, weather worries and demand for inflation hedges are all seen as key reasons behind the current rally.

All the major sectors traded higher on the month, with natural gas, silver, corn and RBOB gasoline leading from the front. Gold, which finished July near a record high, is one of the few recording a small loss on the month. The final week of the month saw the grain sector, which up until recently was the most shorted by speculators, record strong gains. Adverse weather in the U.S. and elsewhere has led to a downgrade of yield forecasts while strong Chinese buying of corn and soybeans has supported the demand side.

Industrial metals also had a strong finish to the month with tight supplies in some markets, unprecedented stimulus and U.S. interest rates stuck at zero providing the support. Adding to this, economic data surprises from major consumers such as China and the U.S.

Crude oil and especially fuel products rose ahead of Hurricane Laura slamming into the Texas/Louisiana coastline on Thursday. This was, however, quickly followed by a price correction after the hurricane narrowly missed the region’s key energy infrastructure. With two more storms currently on route across the Atlantic bowling alley, a much needed crude oil correction is unlikely to emerge at this stage.

U.S. Fed Chair Powell unveiled the conclusion of the Fed’s long-term policy review. In it, he declared that the Fed is now running with a “flexible average inflation targeting” regime, really nothing new relative to expectations, and the lack of explicit levels and of any opinion on the desirability of yield-curve control policy meant that this speech, and the Fed’s conclusions, were well-flagged and offered nothing new. Perhaps Fed Chair Powell was reluctant to egg on financial markets, which are looking frothy here, especially the technology-heavy Nasdaq which continues to make new record highs.

From a gold and silver perspective, the speech in our opinion did nothing to alter our positive outlook. Higher inflation tolerance with the Fed seeking an average inflation of 2% could see interest rates stay low for the next five years. In the short-term, no mention of yield-curve control saw U.S. ten-year nominal yields move higher, thereby potentially reducing the appeal for precious metals. Key, however, remains developments in real and breakeven yields. As long as real yields remain anchored around –1% while inflation expectations (break evens) move higher, gold should be able to withstand a potential steeper yield curve.

Source: Saxo Group

The biggest short-term risk to gold remains the emergence of a workable and widely distributed vaccine, together with a sharp correction in stocks leading to gold liquidation from investors in order to raise cash in hurry.

Having found support earlier in the week at $1900/oz, the market is still in range-bound mode with $2015/oz the big level that needs to break in order to attract fresh technical buying that could trigger a resumption of the rally.

Crude oil remains range-bound following another hurricane scare that briefly saw the market test the upper bounds of the current range. Crude oil and gasoline both reached five-month highs as the focus temporarily moved from the pandemic impact on demand versus OPEC+ production cuts to the U.S. Gulf coast. At the end of the week, the sector could breathe a sigh of relief after the hurricane missed key energy assets, especially the world’s biggest concentration of refineries.

What now follows will be several weeks of disruption to imports and exports of oil, fuel and natural gas, as well as production and refining activity. These disruptions will be visible in the “Weekly Petroleum Status Report” published on Wednesdays by the U.S. Energy Information Administration.

WTI crude oil struggled to find a bid as production shut-ins from oil rigs in the Gulf of Mexico were more than off-set by lower demand from refineries and a halt to exports. It highlights, and in our opinion supports, the view that crude oil may struggle, at least in the short-term to rally much further. While fuel demand in the U.S. continues to recover, the pandemic is currently gathering momentum across Asia and Europe. And while renewed lockdowns are unlikely, the impact on fuel demand is being felt. At the same time, OPEC+ are struggling to reign in more than 2 million barrels/day from countries that have yet to reach agreed production targets.

A break below $43/b may increase the risk of long liquidation taking the price lower towards $41/b and potentially as low as $38.5/b, the July 30 low. As mentioned, the potential hurricane threat from two storms currently building in the Atlantic may, at this stage, limit the downside risk. Brent crude oil, meanwhile, has yet to break out of its narrowing range, currently defined to the downside by the 50-day moving average at $43.75/b and to the upside by the 200-day at $45.80/b.

    Source: Saxo Group

    Commodity investments can be done through exchange-traded funds. There are several options but if the view is to achieve broad exposure to commodities for the reasons mentioned at the top, there are several ETF’s fulfilling that purpose. Some homework, however needs to be carried out with regard to the kind of underlying exposure these ETF’s have to the individual commodities and sectors.

    Three of the major ETF’s providing a broad exposure to commodities as well as their individual sector exposures are shown below. A strong year so far for metals and weakness in energy have resulted in a relative better performance in the two ETF’s that carry the lowest exposure to energy and highest to metals. Please remember that local restrictions may apply as to which ETF’s are best suitable.

    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
    The Circle 38
    CH-8058
    Zürich-Flughafen
    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 series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed 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.