WCU: Commodities rise ahead of crucial week

WCU: Commodities rise ahead of crucial week

Commodities 8 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  Global markets, led by emerging market bonds and stocks, advanced alongside US stocks where a robust earning season has so far helped offset the negative impacts of a prolonged government shutdown and global growth worries.


Given what is on the plate next week one can argue that we are now moving from the starter to the main course in terms important market moving events. Among the most important we find:

  UK Parliament vote on Brexit ‘Plan B’
  Deadline for Huawei CFO Extradition Notice
  US FOMC Meeting
  US-China Trade talks in Washington
  Further developments in Venezuela

So far, January has presented a very friendly investor environment with global markets continuing to recover from the December onslaught despite continued worries about an economic slowdown hitting major economies. The International Monetary Fund has lowered its global economic forecasts for 2019 and 2020 in response to risks including trade tensions and rising interest rates. However, the reduction in global growth from 3.7% to 3.5% was viewed as optimistic given the impact of a prolonged US government shutdown together with a weaker outlook for Europe and not least China, which last year saw the slowest rate of expansion in almost 30 years. 
Commodities, still heading for their best monthly performance since April 2016, have recorded strong gains so far this months in both energy and industrial metals. These two sectors have both managed to rally despite the current focus on slowing growth and with that, the risk of a slowdown in demand. 

This highlights the importance of not only focusing on macroeconomic prospects but also looking out for tightening fundamentals. The Opec+ agreement to cut oil production has supported the sentiment change in energy. Industrial metals have found support from the progress being made on the trade front while pockets of looming shortages and rising demand have helped offset the almost daily dose of headline risks.
Soft commodities are mixed with cocoa continuing its month-long decline on abundant supplies in West Africa, the world’s top-producing region led by the Ivory Coast. Sugar has been benefiting from the stronger Brazilian real and the prospect of increased demand for cane towards ethanol production as crude oil recovers.

A lack of US data due to the US shutdown has left the grain sector increasingly rangebound and struggling for direction. Wheat is being held up on speculation of a slowdown in Russian exports as domestic prices rise. Soybeans traders, meanwhile, are focusing on the prospect of a trade deal while also being supported by concerns about the size of Brazil’s crop following a recent dry spell. 

WTI crude oil remains stuck in a $50 to $55/barrel range with ongoing production cuts from the Opec+ group of nations being offset by global growth worries. So far, the Energy Information Administration, the International Energy Agency and Opec have all kept their 2019 outlooks for global demand growth stable. 

Downward revisions, however, are now likely to surface following the aforementioned downgrade from the IMF and the OECD’s composite leading indicator, which in November dropped to 99.3 points, a six-year low and a level that has previously signalled recession

Venezuela’s deepening crisis supported prices during a week where US crude stocks rose the most since November and gasoline inventories climbed to a record. President Maduro’s dreadful regime, which has driven more than 2 million people out of the country while leaving the rest in poverty and misery, is finally seeing a strong challenge from Juan Guaido, the elected leader of the National Assembly. He has declared himself acting president under article 233 of the Constitution, which authorises him to become interim president in the event of “serious misconduct” on the part of the elected president. 

The prospect of a major disruption in Venezuela combined with the risk of the US government ordering a halt to imports from Venezuela helped narrow WTI’s discount to Brent crude. The prices of Mexican and Canadian oil, two alternatives to Venezuela’s heavy crude oil, both outperformed WTI crude oil. 

The outcome of this uprising could have a major short- and long-term impact on the global oil market. The deteriorating economic outlook and lack of foreign investments in Venezuela’s ageing oil industry have triggered a 50% collapse in production during the past few years. The country’s abundant heavy crude reserves are just what the world needs at a time where the US barrel is getting lighter and lighter due to rising shale production.
 

The recovery since the December trough has so far been relatively shallow with the 38.2% retracement at $55.55/b yet to be challenged. Venezuelan uncertainty has added another dimension to an oil market already struggling to digest multiple moving parts. The price could rise should additional sanctions further reduce exports, not least to US refineries along the Gulf of Mexico geared towards handling heavy crude oil.

While awaiting further developments, the market is likely to remain rangebound within the highlighted $50/b to $55/b trading area. The level of speculative positioning in WTI crude oil remains clouded in uncertainty with the US CFTC not issuing any data since December 18 due to the government shutdown.

Source: Saxo Bank
Gold continues to hold its ground. Despite headwinds from surging stocks and higher bond yields, spot gold has now since December 28 managed to trade sideways within a relatively tight $1,277 to $1,300/oz range. Gold markets received an additional bid on Friday on speculation , first mentioned in the Wall Street Journal, that the Fed may be preparing to reduce the scale of its quantitative tightening programme. If true we have possible melt-up scenario in stocks while the dollar could weaken.

While data covering the speculative behaviour from hedge funds in the futures market remain unavailable, investors have continued to accumulate exposure to gold via bullion backed ETFs. Total holdings have reached 2,253 tons, the highest since 2013, in response to investors looking for protection against both macroeconomic and geopolitical uncertainties. Answers to some of these uncertainties may be found next week with trade talks, Brexit vote and the Federal Open Market Committee all potentially having a market moving impact.

While we will not rule out the short-term risk of a deeper correction, we maintain a constructive view on gold as highlighted in our Quarterly Outlook published earlier this week. Using the run up from $1,200/oz as a starting point, we will be looking for support at $1,260/oz followed by $1,247/oz.
Source: Saxo Bank

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • 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

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

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. Android is a trademark of Google Inc.

©   since 1992