Head of Commodity Strategy, Saxo Bank Group
Summary: Commodity prices enjoyed a robust week on USD softness and a solid performance by the energy sector.
Gains across commodities were broad-based and have occurred at a time when hedge funds have cut bets on rising prices across 24 major commodities to the lowest in three years. The is due in particular to an overwhelmingly negative view on agricultural commodities. The latest Commitment of Traders report covering speculative positions found hedge funds holding net-short positions in 12 out of 14 major agricultural commodities. At the opposite end, the crude oil-led energy sector remains the most-favoured sector, followed by metals.
The energy sector traded higher with WTI crude oil reaching a four-month high before running into profit taking ahead of key technical and psychological levels. Oil remains supported by tightening supply, both voluntary (from Saudi Arabia) and forced (from Iran and Venezuela). Worries about growth and future demand for crude oil remain just that at this stage, with the market instead responding to the continued tightening of supply.
The livestock sector was the star performer with the price of lean hogs in Chicago surging by more than 10% in response to strong buying from China, the world’s largest consumer. An outbreak of African swine fever has reduced China’s breeding herd by 15% during the past year, forcing the country to become an active importer.
Gains across the agriculture sector were driven by short-covering, especially in grains which once again emerged as the most-shorted commodity sector after weeks of selling. The combined net-short in soybeans, corn and wheat jumped 50% in the latest COT update to reach a 13-month high – the highest for this time of year since 2016.
Monthly reports from the three major forecasters of Opec, the Energy Information Administration and the International Energy Agency all kept global demand growth outlooks close to unchanged for a fifth consecutive month. With demand seemingly not yet seeing any impact from weaker global growth, the market was instead left to focus on the price-supportive cut in production from the Opec+ group of producers. In addition, a 1.6 million barrel/day involuntary production decline from Venezuela and Iran during the past year has provided an additional layer of support.
The six-month waiver that the US granted to buyers of Iranian oil back in November is approaching its expiry and it has raised some questions about what will happen next. Together with Kuwait and the United Arab Emirates, Saudi Arabia raised production by 0.8 million b/d into November in the belief that US sanctions would sharply reduce Iran’s export ability. Instead, they were wrong-footed by the US waivers and embarked on an aggressive cutting exercise to arrest the price slump; this resulted in 1.3 million b/d being removed from the market up until February.
Brent crude oil stumbled on Friday on the approach to a band of resistance between $68/barrel and $70/b; this could indicate the oil market rally is ready for another pause. In WTI, a similar level of resistance is found at the key psychological $60/b area.
With dollar longs once again getting squeezed, gold found what turned out to be a weak bid this past week. After reaching $1,311/oz, it quickly dropped almost $20 before moving back above $1,300/oz. While we still see further upside to gold, the short-term outlook will be challenged in the belief that many investors primarily turn to gold for insurance when other assets, such as stocks, are challenged.
On this basis, we conclude that a stable to lower dollar and renewed stock market weakness is required for the rally to resume in earnest.
The short-term technical outlook is being challenged by the emerging bear flag on the daily chart. A break below $1,295/oz would increase the risk of a technical move towards $1,245/oz, the 200-day moving average. The market reaction to such a break would give us a clearer signal as to whether underlying physical demand will be strong enough to support gold prices and prevent such a setback.
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