WCU: OPEC+ surprise in a week driven by omicron angst WCU: OPEC+ surprise in a week driven by omicron angst WCU: OPEC+ surprise in a week driven by omicron angst

WCU: OPEC+ surprise in a week driven by omicron angst

Ole Hansen

Head of Commodity Strategy

Summary:  The commodity sector traded lower for a second week in response to fresh demand and growth worries triggered by the new Omicron coronavirus variant. In addition, the US Federal Reserve officially changed its focus from job creation to battling surging inflation. The biggest two-week loss measured by the Bloomberg Commodity Index since March 2020 could have been quite a bit worse if OPEC+ hadn't successfully managed to 'sell' another production increase to the market.

The commodity sector traded lower for a second week in response to fresh demand and growth worries triggered by the new Omicron coronavirus variant. In addition, the US Federal Reserve, as mentioned in our latest update, officially changed its focus from job creation to battling surging inflation, thereby raising the prospect for an accelerated reduction of stimulus and rising interest rates. The two-week loss measured by the Bloomberg Commodity Index reached the highest level since March 2020, but it could have been quite a bit worse if OPEC+ hadn’t successfully managed to ‘sell’ another production increase to the market.

Agriculture: Weeks of strong demand for agriculture commodities saw a small reversal as the Omicron variant and improved regional weather developments helped trigger profit taking among some the recent highflyers led by cotton, sugar and wheat. In recent weeks up until November 23, funds had aggressively been buying up food commodities while reducing exposure in energy and metals. The result being an increase in the combined long held across 13 major futures contracts to a six-month high at 1.13 million lots, representing a nominal value of $43.5 billion.

It helps to explain some of the price weakness this past week with recently established longs being reduced, not due to a change in the underlying fundamentals supporting the individual futures markets, but more as part of the general risk reduction seen in response to Omicron uncertainties.

During the week, the UN FAO published its monthly Global Food Price Index for November and it showed a 1.2% increase on the month while Year-on-Year growth slowed to a still very elevated 27.3%. The index now sits less than 0.5% below the 2011 record with last month’s increase driven by strong gains in cereals, such as wheat, dairy and sugar.

Natural gas prices around the world continue to diverge with US prices collapsing to near $4 per MMBtu while in Europe the price of Dutch TTF benchmark gas remains stuck above $30 per MMBtu driven by tight supply and strong cold weather demand. Gas prices in the US on the other hand have come under pressure from milder-than-normal weather and rising production, and this week it drove a 22% price drop, the biggest weekly drop since 2014. While the EU is already witnessing a major energy crisis which could get worse, should we see another cold winter, the US has seen its inventory levels held in underground caverns return to their long-term average, thereby almost completely ruling out the risk of winter shortages.

Crude oil witnessed a very volatile week with traders having to grapple with the risk of another virus-related drop in demand, the recent SPR release announcement and not least the response from the OPEC+ group of producers meeting on Thursday to set their production target for January. Before then, the price of Brent crude oil had slumped by 21% from the October high with very wide trading ranges reflecting a deep uncertainty in the market with prices jumping around as the Omicron news flowed ebb and flowed between bad and less bad.

Heading into Thursday’s meeting, the market had built up expectations the group would come out defending oil prices by reducing or potentially even cancelling the January production increase. Instead, they managed to pull off a remarkable feat by supporting the price while at the same time raising production by the usual 400k barrels per day. There are several reasons why they managed to pull this off:

  • The market had already priced in a significant, and not yet realised, Omicron-related drop in demand
  • The group kept the meeting “in session” meaning they can meet and adjust production levels at short notice before the next planned meeting on January 4
  • The decision to ease political tensions with large consumers, led by the US, potentially resulting in a reduced number of strategic reserves leaving storage due to lack of demand from refineries.
  • Members with spare capacity, such as Russia and Saudi Arabia, wanted to increase production, partly to off-set the short fall from producers such as Nigeria, Angola and Equatorial Guinea who are currently producing around 500k barrels per day below their allocated quotas.
  • Finally, the recent slump in WTI back below $70 and even lower further out the curve may reduce the threat from US producers who could now adopt more cautious spending plans for 2022.

While potentially delayed by a few quarters, we still maintain a long-term bullish view on the oil market as it will be facing years of likely under investment with oil majors losing their appetite for big projects, partly due to an uncertain long-term outlook for oil demand, but also increasingly due to lending restrictions being put on banks and investors owing to a focus on ESG and the green transformation.

From a technical perspective, Thursday’s price action created a so-called Hammer which often signals a reversal of the recent trend. For that to be confirmed Brent crude oil would need a close back above its 200-day moving average, currently at $72.85.

Source: Saxo Group

Gold’s less than impressive behavior continued during a week where it failed to find a bid despite raised Omicron concerns sending Treasury yields lower and, at least temporarily, the dollar lower as well. Adding to this, an unfolding destruction of value across many so-called and up until recently very popular bubble stock names (highlighted in one of our daily podcasts here), the exodus out of these also failed to attract any safe-haven demand for investment metals.

Instead, it slumped to a one-month low at $1762, less than three weeks after its failed upside break to $1877. It highlights a market which during the past five months has seen plenty of failed breakout attempts in both directions, with the end result being a noisy, but rangebound, market struggling for direction. What could change that in the short term remains unclear with the metal on one hand finding support from persistently low real yields and raised virus uncertainties, and on the other struggling with the potential for a more aggressive inflation fighting stance from the US Federal Reserve.

Following the renomination, both Powell and Brainard, the new vice-chair, have come out showing a clear change in focus. Powell, among other comments, has said: “We know that high inflation takes a toll on families, especially those less able to meet the higher costs of essentials like food, housing, and transportation. We will use our tools both to support the economy and a strong labor market, and to prevent higher inflation from becoming entrenched”.

As mentioned, the current technical picture looks very messy with resistance now established at $1792 which coincides with the average price seen these past five months, while the nearest area of support can be found around $1760 followed by $1720.

Source: Saxo Group

The industrial metal sector traded flat on the week with no major price movements seen in bellwether metals such as copper and aluminum. The market focus has started to shift to what may lie in store for 2022, not least the potential price impact from slowing growth in China versus rising demand for the so-called green metals that will be key components in the energy transition away from fossil fuels to renewables.

During the past few months, copper has in our opinion performed relatively well considering heightened worries about the economic outlook for China, and more specifically its property sector which has seen near defaults as well as a slump in home sales. Additional headwinds have been created by the stronger dollar and central banks beginning to focus more on inflation than stimulus. In order to counter Chinese economic growth concerns, Vice Premier Liu He has been out saying growth this year should exceed targets, and the government plans more support for business.

With this in mind, we believe the current macro headwinds from China’s property slowdown will begin to moderate through the early part of 2022, and with inventories of both copper and aluminum already running low, this development could be the trigger that sends prices back towards and potentially above the record levels seen earlier this year.

Staying on the subject of inventories, recently we have seen stock levels of aluminum and copper at the LME fall to their lowest levels since 2007 and 2005 respectively. In fact, the six industrial metals traded on the LME are currently all trading in backwardation, and such a synchronized level of tightness was last seen in 2007.

High Grade Copper has been averaging $4.35 since April with the current action confined to a range between $4.2 and $4.5 while major support can be found in the $4 area. The lack of momentum in recent months has driven a sharp reduction in the speculative long held by hedge funds, a development that could trigger a significant amount of activity once the technical and/or fundamental picture becomes clearer.

Source: Saxo Group

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article


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

Contact Saxo

Select region


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.