WCU: Gold lifted by Fed doves while oil pauses

WCU: Gold lifted by Fed doves while oil pauses

Commodities 10 minutes to read

Ole Hansen

Head of Commodity Strategy

Summary: Commodity prices continue to climb with precious metals and agriculture driving the rally.

Commodities traded higher for a second week, albeit at a slower pace, with gains being driven by precious metals and – for a change – the agriculture sector. Precious metals received a boost from a sharp drop in bond yields after the US Federal Reserve signalled no further rate hikes this year while also slowing its balance sheet reduction.

The dollar initially dumped on the news before once again being pumped higher on Friday when dismal PMI data from both Germany and France provided some renewed support for the greenback. Stocks, and with that the general level of risk appetite, initially rose before pausing in response to ongoing concerns about the outlook for economic growth.

The energy sector saw WTI and Brent crude oil both attempt to move higher amidst tightening supply from the Opec+ group of producers. In the process, they both recouped half their October-December losses before pausing around $60 and $70/barrel, respectively. A big, counter-seasonal drop of 10 million barrels in US crude stocks supported a narrowing in the spread between the two global oil benchmarks.

The industrial metals index, led by zinc, reached a 24-week high before growth concerns and the reversal in the dollar created a technical signal that could lead to a deeper correction over the coming weeks. Not least copper which dropped to a one-month low in response to a sharp decline in German manufacturing activity.

The Bloomberg Commodity Agriculture sub-index, which recently hit a record low, rose for a second week. Weather related disruptions in the US supported grains while the swine fever outbreak in China has led to surging demand for US supplies.

Momentum-chasing money managers had until March 12 accumulated a record short position across 14 major agriculture commodities of more than 600,000 lots. With the fundamental outlook beginning to improve, these positions are now being scaled back and as a result we could see the sector continuing to climb higher over the coming period. Focus on the most shorted commodities which are soybeans, corn, wheat and cotton.

Another sector which has seen prices come under pressure in recent months has been global gas prices. Apart from a milder than normal winter in Europe and Asia and bulging stocks, it is the continued rise in US exports of Liquified Natural Gas that has supported a steep drop in gas prices in both Europe and Asia this past winter. US LNG has flooded Europe since October last year when ample stocks in Asia led to cargoes being diverted to Europe instead.

Russian gas giant Gazprom, which up until now had dismissed concerns about US LNG taking market share, has felt the impact to such an extent that it now says US exports have become their biggest competitor (Source: Reuters).

Converted to USD/therm for comparison reasons, Dutch gas (TTF), the European benchmark, has dropped to a near two-year low at $4.8/MMBtu. In Asia, the LNG Japan/Korea (Platts) benchmark that traded above $11/MMBtu last October has since more than halved to the current $4.7/MMBtu. The sell-off, however, is likely to pause sooner rather than later as US producers will increasingly be out of pocket when adding the costs of liquefaction, shipments and regasification back to natural gas.

The Opec+ group of producers’ recent meeting in Baku, Azerbaijan, left the market with the clear impression that crude oil will continue to climb higher. Several Opec producers, not least Saudi Arabia, need oil back above $80/b to meet their fiscal obligations and they are unlikely to be satisfied with Brent crude oil below $70/b.

On that basis the market now expects that supply will be kept tight beyond June to support further price appreciations. This is a strategy that would work well into a world of strong growth and demand but potentially not into one that is seeing the US yield curve continuing to flatten and where recession risks have risen to the highest since 2008. While Opec, together with Russia, can control output, it has no influence on demand, and as the price of oil goes up so does the tax burden on everyone else.

In addition, we note that despite all the almost one-sided supportive news flow in recent weeks and months, the combined net-long in Brent and WTI has only reached 450k lots, well below the 830k we saw last October before the price collapse. This is probably due to a certain reluctance from macroeconomic funds to go all-in when the recessionary clouds on the economic horizon seems to be getting darker.

Based on these observations, we see further upside to oil into Q2 but for now adopt a short-term bearish stance in the belief that $60/b (WTI) and $70/b (Brent) will present temporary lines in the sand. The well-being of the stock market will send an important signal as to whether demand growth concerns will re-emerge as a focus to offset the price-supportive focus on (falling) supply.

The dramatic turnaround seen during the past few months by the Fed is seen as bullish for gold as the return to a dovish stance highlights the risk of a gold-supportive recession within the next 12 months. The immediate future, however, may not yet provide the spark gold needs to break strong resistance. We do, however, expect that a formidable challenge can be mounted later this year in response to a weaker dollar, stable to lower bond yields and concerns about global stocks’ ability to forge higher amid raised growth concerns.

If you are bullish gold, then, consider silver: it remains the forgotten metal trading 12% below its five-year average relative to gold. Another is platinum, which should be supported by its historic $700-plus discount to palladium and $400-plus discount to gold. As we have often mentioned, we need to keep in mind that many investors buy gold to own an insurance policy against adverse movements across other investments such as stocks.

On that basis it is worth keeping a close eye on flows in and out of exchange-traded products, which are often used by long-term investors. As long equity markets continue to show the current resilience, gold is unlikely to mount a strong enough challenge at the massive area of resistance between $1,360 and $1,380.

Support, meanwhile, remains unchanged with $1,275/oz being the major line ahead of the 200-day moving average at $1,247/oz.

Quarterly Outlook Q2 2023: The Fragmentation Game

Bank runs raise the stakes in the Fragmentation Game
A new fragmented world order can render some of today's infrastructure obselete, but it also calls for massive new investments across the globe, which requires a new set of strategic and tactical investment strategies.

Steen Jakobsen,
Chief Investment Officer
Read article
China in the global Fragmentation Game
As globalisation turns to fragmentation, China seems set on playing a role in the global economy, while simultaneously working towards proofing its own economic situation from external shocks and crises.

Redmond Wong,
Market Strategist
Read article
A whole new world of higher interest rates
The recent bank runs and ensuing challenges are reminicent of something we've seen before. Will it end like the S&L crises of 1986 and 1995?

Chris Dembik,
Head of Macroeconomic Research
Read article
Equities: Into the world of unknowns
Equity markets need to recalibrate to another - fragmented - global world. What's your view on equities in this market - are they going up or down?

Peter Garnry,
Head of Equity Strategy
Read article
India and Southeast Asia offer calm in the storm
With every development comes new opportunites, some of which could be in India. Have you considered the country as a part of your diversification strategy?

Charu Chanana,
Market Strategist
Read article
Protecting a long stock market position from turbulence
A collar is an option strategy that allows some protection while maintaining some upside potential. What investment would you like to use a collar strategy for?

Hans Oudshoorn,
Trainer Academy
Read article
Commodity market focus: DM weakness versus EM strength
There are arguments to be made for many commodities to have upside. Which are you paying the most attention to this quarter?

Ole S. Hansen,
Head of Commodity Strategy
Read article
FX: What happens when a tightening cycle ends before inflation is defeated?
In a very challenging macro environment, which currencies do you think will come out on top?

John J. Hardy,
Head of FX Strategy
Read article

Access both platforms from your single Saxo account.

Preview platform Open Account

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/en-gb/legal/disclaimer/saxo-disclaimer)

Manage Consent

Details Cookies

Important margin product information

Cookie policy

Necessary

WCU: Gold lifted by Fed doves while oil pauses

Ole Hansen

Share

Latest Market Insights

Quarterly Outlook Q2 2023: The Fragmentation Game

Bank runs raise the stakes in the Fragmentation Game

China in the global Fragmentation Game

A whole new world of higher interest rates

Equities: Into the world of unknowns

India and Southeast Asia offer calm in the storm

Protecting a long stock market position from turbulence

Commodity market focus: DM weakness versus EM strength

FX: What happens when a tightening cycle ends before inflation is defeated?

Your browser cannot display this website correctly.