Head of Commodity Strategy, Saxo Bank Group
Summary: This week saw the Bloomberg Commodity Index trade higher for the first time in four weeks, with the gains led by agricultural commodities. Crude oil, meanwhile, remains caught between tensions in the Middle East and rising US inventories.
The metals sector saw gold trade higher to challenge key resistance while strike threats to supply saw palladium surge higher to record its biggest weekly gain in almost year.
The BCOM Agriculture Index, which reached a record low less than five weeks ago, has since rallied by more than 22% to a six-month high. The +5% return this week was primarily driven by the three key crops of corn, wheat and soybeans. Months of rains and floods delayed or even cancelled planting across US growing areas and these developments drove one of the most spectacular short-covering rallies on record.
The monthly supply and demand report from the US Department of Agriculture confirmed the impact this past week with corn leading the charge higher following a larger-than-expected downgrade to production and stocks. Adding insult to injury renewed forecasts for rain next week across the Midwest has further dampened hopes that unplanted fields can be sown in time.
The failure to build a geopolitical risk premium following the tanker attacks in the Gulf of Oman could indicate that the market is either sceptical of the narrative with regards to who did it, or that demand worries simply weigh too heavily at this stage.
The monthly oil market reports from the Energy Information Administration, Opec and the International Energy Agency all showed another downgrade to world oil demand while non-Opec supply growth was kept stable at almost one million barrels/day above demand. The IEA said that non-Opec supply would, barring any geopolitical shock, “swamp” the market in 2020, thereby leaving no room for Opec to reclaim lost market share.
Keeping both this and the Iranian tensions in mind, the upcoming Opec and Opec+ meetings, scheduled but not yet confirmed for late June, are likely to be challenging. Saudi efforts to keep Russia on board with production cuts beyond the second half, led alone 2020 could easily become an issue.
The short-term outlook continues to look challenging with a break below the recent lows likely to cause another downside extension in the region of $5/b. However, while longs are being reduced, we are unlikely to see any significant increase in new short positions as long the Middle East situation remains as fluid as now.
Several failed attempts since 2014 to break higher have frustrated traders and investors alike. However, the combination of Middle East and Hong Kong tensions, as well as rate cut expectations and recession fears have given the metal some renewed tailwinds. Further support has come from the hedge fund industry, which have been buying record amounts of gold during the past couple of weeks.
From the chart below it is clear to see the technical hurdles gold still faces.
Given the outlook for the wider markets, we believe that it eventually will break higher. From a purely technical perspective, a break could see it set sail towards the next target of $1,480/oz.
The biggest short-term risks are the potential for the US Federal Open Market Committee proving unwilling to meet the market’s expectations for aggressive rate cuts and/or a surprise trade deal announcement when Trump and Xi meet at the G20 in Osaka June 28-29. In addition while hedge funds have supported the recent rally, any price reversal at this stage could trigger a significant amount of long liquidation from recently established longs.
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