Commodity weekly: Crude, fuels and uranium on top in mixed month for commodities Commodity weekly: Crude, fuels and uranium on top in mixed month for commodities Commodity weekly: Crude, fuels and uranium on top in mixed month for commodities

Commodity weekly: Crude, fuels and uranium on top in mixed month for commodities

Ole Hansen

Head of Commodity Strategy

Summary:  The Bloomberg Commodity Total Return Index returned close to 1% in September, during a month that showed a divide emerging between the energy sector, excluding natural gas, and industrial metals on one hand, and the grains and precious metal sectors on the other. September delivered two key announcements that ended up setting the tone across markets. The first was Saudi Arabia and Russia’s decision to extend unilateral production cuts until yearend, which helped send energy prices sharply higher. This was followed by a "higher-for-longer" message from the US Federal Reserve.

Global Market Quick Take: Europe

The Bloomberg Commodity Total Return Index returned close to 1% in September, during a month that showed a divide emerging between the energy sector, excluding natural gas, and industrial metals on one hand, and the grains and precious metal sectors on the other. September delivered two key announcements that ended up setting the tone across markets. The first was Saudi Arabia and Russia’s decision to extend unilateral production cuts until yearend, which helped send energy prices sharply higher. This was followed by a “higher-for-longer” message from the US Federal Reserve.

Surging crude oil prices amid a tight supply outlook raised fresh inflation concerns which helped accelerate an ongoing sell-off in US Treasuries where the yield on 10-year notes surged to the highest level since 2007. The dollar responded to rising Treasury yields and the prospect of rates staying higher for longer by rallying against most of its major peers, thereby exacerbating the impact of higher energy prices in local currencies. This resulted in a general loss of risk appetite driving down the S&P 500 and the MSCI World index by more than 4% while precious metals suffered amid the dual headwinds of rising yields and the stronger dollar.

Saxo's equity themes have nuclear power and commodities on top

While the stock indices traded lower around the world, the rising cost of energy supported pockets of strength across energy-related companies. Saxo’s commodities and nuclear power themes came out on top during a month that saw the bubble stocks, luxury and green transformation themes take a hit. This year has been a catastrophe for wind turbine manufacturers such as Siemens Energy and Vestas. On the development side, Orsted’s massive write-down on its US offshore wind farms and UK offshore wind auctions attracting zero bidders underscore the problem for green transformation technologies amid rising long-term bond yields and still elevated spot prices on industrial metals. Higher energy costs also make steel and concrete more expensive. As green transformation and renewable energy theme baskets have had a terrible year, another zero-carbon electricity source such as nuclear power is having a field day.

Links to Saxo’s equity theme baskets for commodities and nuclear power

Our nuclear power theme basket is the best-performing basket this month and, together with semiconductors, cyber security, mega caps and travel it has joined the +20% year-to-date performance club. With the fallout of wind turbines and the acknowledgement of the need for a clean and reliant baseload, nuclear power is fast becoming a critical option for governments among developed countries to expand clean electricity. Another driving force behind this has been steadily higher uranium prices which are a function of a squeeze in the physical uranium market as industry players scramble to deal with a potential ban on Russian nuclear fuel, or lower shipments due to lack of insurance cover – which would severely constrain the industry’s access to fuel. The uranium spot price (Ux U308) has surged to a 15-year high around $73.5 per pound, an increase of more than 50% over the past 12 months. Our nuclear power theme includes heavyweights like Cameco Corp in Canada and Kazakhstan’s National Atomic Company Kazatomprom, both trading up by more than 50% during the past year.

Apart from uranium, only the commodities equity theme has managed to stay in the black this month, and it's no surprise that the stellar performance has been driven by oil majors from Shell Plc and Exxon Mobil to Equinor, all benefitting from higher energy prices, during a month that has seen crude oil and product futures rally strongly.

US yield curve sends recession warning to markets

There has been a lot of talk recently about the US yield curve, the so-called bear-steepening move, and what this signals. Since early July, the US 2-10 yield curve spread has steepened from a very inverted level around -110 basis points to the current -50 basis points. The latest steepening has been driven by a faster increase in the 10-year yield while the 2-year yield held steady amid doubts about how much higher the FOMC will be able to raise rates without damaging the economy.

Bear steepening does not only raise red flags for stock market investors but also the wider economy. Rising long-dated yields have a large and rapid tightening effect on the real economy given the impact on private mortgage rates and corporate borrowing rates. In a situation where the economy is running hot, rising interest rates pose limited risks as rising yields are a normal reaction to robust growth. However, in the current situation where sticky inflation is driving long-end yields higher, it may pose a threat as the economic outlook looks increasingly challenged and could deteriorate faster.

Crude oil: Focus on Saudi Arabia following a week of heightened volatility.

Crude oil extended its month-long advance this past week with Brent moving closer to the psychological important 100-dollar level while WTI touched $95 per barrel after the EIA reported another drop in crude stocks at Cushing, the massive storage hub in Oklahoma used as the delivery point for WTI futures. The price action briefly turned disorderly after stockpiles fell closer to historic low levels, prompting concerns about the quality of the remaining oil and the potential for it to fall below minimum operating levels.

As opposed to April 2020 when WTI briefly hit a negative price of $40 per barrel on fears the pandemic-led collapse in demand would fill up Cushing, the opposite is now being felt due to months of strong refining and export demand. This has resulted in a widening of the premium buyers are prepared to pay for immediate delivery as opposed to later and, following the report, the prompt WTI spread raced to a $2.50 backwardation before easing back to a still elevated $2.1 per barrel.

It is often said the oil curve never lies, and the current steep backwardation is telling us that spot prices will remain high until something breaks, either through a buyers’ strike from a major consumer/importer or Saudi Arabia – arguing their mission to lower global stocks has been accomplished – announcing a surprise production increase. If neither of these scenarios occur, prices will remain elevated into 2024 when the recession cloud is likely to grow darker, not least in Europe and the US as signaled by the mentioned bear steepening of the yield curves.

Precious metals succumb to dollar and yield strength

The precious metal sector finally succumbed to the negative impact of sharply higher bond yields and the stronger dollar. However, the weakness seen this past week was interestingly led by gold, with silver and platinum both seeing their declines cushioned by a firmer industrial metal sector which, in turn, was supported by a weekly decline in aluminum, copper and not least zinc stocks monitored by the two major exchanges in London and Shanghai, and a stronger yuan ahead of the Golden Week Holiday in China.

The four-day gold sell-off that followed a break below the 200-day moving average, last at $1927, saw the yellow metal slump to a six-month low at $1858 with the next level of support not found until $1840. Looking at the recent rally in bond yields and the dollar, it is difficult to build a bullish case for gold if current developments were the only driver for the yellow metal. However, we do note that while the bear steepening of the US yield curve is weighing on some assets, the recessionary signal it is sending will, if sustained, eventually bring support back to gold.

In addition, demand for gold as a hedge against a soft-landing failure is unlikely to go away as the outlook for the US economic outlook in the months ahead looks increasingly challenged. With that in mind, we maintain a patiently bullish view on gold with the timing for a fresh push to the upside being very dependent on US economic data as we wait for the FOMC to turn its focus from rate hikes to cuts, and during this time, as seen during the past quarter, we are likely to see continued choppy trade action.

For now, the current cost of holding a gold position for 12 months is close to 6%, the bulk of that being the cost of borrowing dollars for one year. Until we see a clear trend towards lower rates and/or an upside break forcing a response, real money allocators will be looking for opportunities elsewhere. ETF investors, which include the above mentioned group of real money allocators, have been cutting holdings for the past four months, leaving the total down by 191 tons during this time to 2740 tons, a 3-1/2-year low.

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