Oil rallies on Opec compromise while metals challenged by dollar and trade war Oil rallies on Opec compromise while metals challenged by dollar and trade war Oil rallies on Opec compromise while metals challenged by dollar and trade war

Oil rallies on Opec compromise while metals challenged by dollar and trade war

Ole Hansen

Head of Commodity Strategy

The Bloomberg Commodity Index has seen its year-to-date gains disappear following four weeks of heavy selling. The broad-based index, which tracks 22 major commodities evenly split between energy, metals and agriculture, has been hurt by a stronger dollar and trade war angst as well as expectations that Opec+ will increase production in order to cap crude oil’s upside. 

The current robustness of the US economy compared with the rest of the world has led to the current divergence in monetary policy between the Federal Reserve and other major central banks around the world. As a result, the global economy, especially emerging market economies carrying a heavy debt load, has seen a more challenging environment as the dollar strengthens and liquidity becomes tighter. 

Adding to this, the current risk of trade protectionism means questions are being raised about the impact on growth and subsequent demand going forward. This is potentially one of the biggest challenges commodities will face over the coming months. 

Industrial metals have been caught at the center of these concerns, not least following a tough couple of weeks for China where weakness in key economic data and trade concerns helped send the Chinese CSI 300 index down to a one-year low. Zinc was hardest hit as it slumped to a ten-month low while HG copper once again looked for support at the bottom of the range it has stayed within for the past nine months.  

Source: Bloomberg

Gold and silver spent the week trying to consolidate following the latest slump which took gold below key support thereby attracting additional technical selling. 

Agriculture commodities were led lower by the crops potentially being negatively impacted by trade wars. Not least cotton and especially soybeans which at one point dropped by more than 18% from the May peak.

Opec crude oil meetings the centre of attention

Most of the attention once again was directed towards the energy sector as the market waited for the outcome of Opec and Opec+ meetings in Vienna. Faced with rising pressure from emerging market economies feeling the economic impact of rising fuel costs, a stronger dollar, and higher (dollar) funding costs, the Saudis felt the need to adjust production instead of risking slowing demand growth.  

Once again, however, the decision had become a political hot potato. Not least after President Trump in recent tweets singled out Opec as being the culprit behind surging oil prices. Iran’s oil minister instead put the blame squarely on the US given the current sanctions on Venezuela, and soon Iran as well.  

Given the political influence of US sanctions these two countries initially showed strong opposition, but in the end the cartel managed to find a compromise because of the need to maintain stable prices and a desire to ensure sufficient supplies to keep the upside capped. 

By keeping the production ceiling from December 2016 in place the group instead opted to raise production in order to bring its compliance back to 100% in order to offset the near 1 million barrels/day. The group is currently producing below its stated target. The move initiated by Saudi Arabia was probably also seen as way to pre-empt any market worries about an even bigger shortfall once US sanctions against Iran officially begins this November.

In the short term we are likely to see crude oil being supported by continued geopolitical risks related to supply concerns from Venezuela, and not least Iran, as the deadline for the implementation of US sanctions approaches. These concerns may, however, eventually be replaced by a shifting focus towards a continued rise in non-Opec supply and demand growth which may begin to suffer due to a slowdown among emerging market economies.

Saudi Arabia and Russia seem to have drawn a line at $80/b as being the level above where they fear that demand destruction could emerge. On that basis we maintain the view that Brent crude oil over the coming months will remain range-bound between $71 and the low $80s before downside price pressure begins to emerge ahead of the year end and into 2019.  

Source: Saxo Bank

Gold’s negative correlation to the stronger dollar has provided the main directional source during the past couple of months as seen below using EURUSD. But the dollar showed signs this past week of pausing after EURUSD failed to break below €1.15 while the Dollar Index ran out of buyers above 95. However, until precious metals pick up other themes such as inflation, trade wars and rising recession risks the dollar’s behaviour will hold a major sway over the market, in both directions. 

Source: Bloomberg

Gold not shining so brightly any more

Our positive outlook for gold has been challenged following its rapid descent this past week from $1,300/oz to $1,260/oz. Despite having seen the technical outlook deteriorate, thereby attracting fresh short selling, our view on gold and silver remains constructive. This, given the raised risk of an economic slowdown combined with rising inflation hitting the market. Having picked a strong fight on trade with friends and foes it is also our belief that President Trump will sooner or later go on the attack against the stronger dollar as greenback strength complicates his vision of reducing the US trade deficit. 

For silver, the technical outlook, as mentioned, remains challenged, with the metal so far managing to bounce ahead of $16.10/oz which is the trend-line support going back to the January 2015 low. Gold, meanwhile, needs a break back above $1,286 before altering the technical outlook. 

Source: Saxo Bank

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)

Saxo Markets
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 Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML 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 Markets 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