Commodity weekly: Best month in over a year Commodity weekly: Best month in over a year Commodity weekly: Best month in over a year

Commodity weekly: Best month in over a year

Ole Hansen

Head of Commodity Strategy

Summary:  Halfway through the month, and the commodity sector continues its strong June performance with the Bloomberg Commodity Total Return index trading up 6.8% to a seven-week high, and currently on track for its best performance in 15 months. The index has seen gains so far this month across all sectors, led by a 13% jump in grains, followed by energy and industrial metals. In this, our weekly update we take a closer a look at recent developments driving this strong performance and ponder whether the market has turned a corner following year-long correction

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Halfway through the month, and the commodity sector continues its strong June performance with the Bloomberg Commodity Total Return index trading up 6.8% to a seven-week high, and currently on track for its best performance in 15 months. The index – which tracks the performance of key commodities across energy, metals and agriculture, with roughly one-third in each – has seen gains so far this month across all sectors, led by a 13% jump in grains, followed by a 8% rally in energy and 7% in industrial metals.

Despite rising recession concerns in the US driving some commodity supportive dollar weakness, we are seeing increased speculation that the Chinese government may step up its support for the economy and some signs that demand is holding up. Elsewhere, hot and dry weather is raising concerns across the agriculture sector, as well as raising demand for natural gas from power generators towards cooling. Despite continued demand worries, the energy sector is holding up – supported by Saudi Arabia’s unilateral production cut and the prospect for a tightening supply and demand outlook into the second half. Finally, a data-dependent precious metals market trades mixed as the market questions the FOMC’s ability to continue hiking rates before recession worries become the key focus.

From the recent price performance across the different sectors, we could be seeing the first signs of markets bottoming out, with current price levels already pricing in some of the worst-case growth scenarios. The potential for additional gains from here, however, will primarily depend on whether China can deliver additional stimulus, thereby supporting demand for key commodities from crude oil to copper and iron ore. Weather developments in the coming weeks across the Northern Hemisphere and their impact on crops will also be key.

As mentioned, the commodity sector has received some general support from the weaker dollar, where weakness has been broad – except against the Japanese yen after the Bank of Japan stuck with its super easy policy, thereby cementing its outlier status among global central banks where the prevailing trend is towards higher rates. This follows a hawkish rate hike from the ECB this week, which gave the euro a boost, while the FOMC left rates unchanged – saying they could raise them further in the coming months unless the economic data tells them not to. The Australian dollar, meanwhile, has been leading gains against the US dollar after the Royal Bank of Australia surprised the market for a second time with its hawkish stance, and in anticipation of a stimulus-led pickup in demand for raw materials from China.

Short sellers wrong footed by extreme volatility in the EU gas market.

Natural gas prices in Europe shot higher during a week of extreme volatility driven by multiple supply concerns, some of which are of a temporary nature. This included maintenance work at some major Norwegian facilities, and an Asian heatwave raising competition for LNG at a time where maintenance at some US LNG exports terminals has reduced shipments. After hitting a cycle low on June 1 at €23/MWh ($7.4/MMBtu), the market has been rising strongly and, on Thursday, it briefly surged higher to reach €50/MWh ($16/MMBtu) following an announcement from the Dutch government that it would permanently close one of Europe’s largest gas fields in less than four months - in other words, ahead of next winter when supply concerns will be the most elevated. Following the spike, the price slumped back to €35/MWh – an indication the move was as much driven by short sellers getting squeezed. All these developments have slowed down, but not put in doubt, the belief storage sites will be filled ahead of next winter.

Source: Saxo

Key crops on the move amid rising weather concerns

The grains sector continues to surge higher amid concerns of the potentially damaging impact of drought in key production regions across the Northern Hemisphere. After months of price weakness, the grain and soybean sectors are trading up around 13% this month, according to the Bloomberg Grains Index. These gains are being led by soybeans (+16%), as soybean oil jumps 30%, while corn and CBOT wheat are higher by 12% and 14%. Weekly data indicates US soybean crops in areas struck by drought rising by 12% to 51%, while corn has risen by 12% to 57%. These developments, unless soon arrested by rainfalls, will stress the crop and raise concerns about the eventual production result.

This is occurring at a time when markets are on high alert for the potential impact of a returning El Niño, the National Oceanic and Atmospheric Administration (NOAA) having recently announced the arrival of the climatic condition. Having formed a month or two earlier than most El Niños, the head of NOAA’s El Niño/La Niña forecast office said it would give it room to grow, raising the risk of a strong event to 56% and a 25% chance it reaches supersized levels. El Niño strongly tilts Australia towards drier and warmer conditions with northern countries in South America — Brazil, Colombia, and Venezuela — likely to be drier and Southeast Argentina and parts of Chile likely to be wetter. India and Indonesia also tend to be dry through August in El Niños.

Graphic from recent Bloomberg article titled “Return of El Niño Threatens new levels of economic destruction”

Gold buyers doubt FOMC rate hike projections

Gold prices touched a three-month low after the US Federal Reserve kept rates unchanged but went onto project two more rate hikes before the end of the year. Fed chair Powell referred to the July meeting as “live” for a rate-hike discussion and went on to say that the FOMC will make its decisions meeting-by-meeting. So far, however, the market is questioning the hawkish talk by pricing in less than one hike during the stated timeframe – with the risk of a recession forcing a change in focus and direction. An inverted yield curve typically signals an impending and often gold-supportive economic recession and, in the week following FOMC meeting, the 2yr – 10yr US yield spread has inverted by 94 basis points, the most since the March banking crisis.  

The further delay of peak rates combined with a stock market on a tear – reducing the need for alternative investments such as gold – has resulted in total holdings in ETFs backed by bullion declining continuously for the past 13 trading sessions. During this time, investors have cut holdings by 18 tons to 2913 tons, but overall, the total remains up 57 tons from the three-year low reached in March just before the banking crisis triggered surging demand for bullion.

Gold managed to climb back to unchanged on the week with the lack of selling interest below $1935 giving traders enough confidence that the FOMC projection of two more rate hikes may not come to fruition amid the above-mentioned recession focus. In addition, the dollar sliding to a four-week low provided an additional layer of support. Gold is currently trading back above its 21-day moving average, and it may signal fresh upside momentum, confirmed with a break above $1984, a recent high. 

Copper breaks higher amid stimulus boosts

Copper prices traded higher for a third week with the rally seeing an acceleration after breaking through an area of resistance around $3.82/lb. The recent rally has been supported by stimulus speculation and reports showing a weekly decline in stocks monitored by the three major exchanges in New York, London and Shanghai to 265,000 tons, not least in China where a six-week decline has reduced stock levels to a six-month low.

Additional Chinese stimulus or not, we view this month-long drift lower as a correction given the green transformation theme in the coming years will continue to provide a strong tailwind for copper, the best electrical-conducting metal for the green transformation -including batteries, electrical traction motors, renewable power generation, energy storage and grid upgrades. Producers will face challenges in the years ahead with lower ore grades, rising production costs and a pre-pandemic lack of investment appetite as the ESG focus reduced the available investment pool provided by banks and funds.

Major mergers and acquisition activity across the mining industry these past few months highlights how miners are trying to position themselves for a decade of strong demand amid the growing focus on the green transformation. Copper is increasingly considered a highly-prized asset that mining companies want to include in their product line. A recent example being First Quantum Minerals Ltd., one of just a handful of pure-play copper miners, who recently rebuffed an informal takeover approach from Barrick Gold Corp, the world’s second-largest producer of precious metals. Earlier this year, BHP also offered a 49% premium to acquire OZ Minerals Ltd, a producer of gold and copper.

Having climbed back above the 200-day moving average, last at $3.815/lb, the attention now turns to consolidation as resistance at $3.95 is unlikely to be broken until the market receives more news about the Chinese stimulus and its potential impact on markets.

Source: Saxo

Crude oil rangebound with opposite pulls from Chinese stimulus and recession risks

Crude oil continues to trade sideways near a cycle low within a seven-dollar wide range between $71.50 and $78.50, as traders continued to gauge the impact of Saudi Arabia’s decision to go it alone to support prices at the recent OPEC+ meeting, and the prospect for Chinese stimulus offsetting recession worries elsewhere.

During the week, the International Energy Agency (IEA) joined OPEC in delivering an upbeat assessment of the short-term demand outlook. In their monthly ‘Oil Market Reports’ for June both OPEC and the IEA raised their outlook for 2023 global demand – with the IEA increasing this by 0.2 million barrels a day to 2.4 million barrels a day bringing total consumption to a record 102.3 million barrels a day. Both forecasters are looking for some emerging tightness in the coming months amid OPEC+ production cuts, but with almost half this year’s demand growth expected to occur during the coming quarter, some room for disappointment exists, potentially preventing prices from going higher in the short term.

At the same time, OPEC’s focus on supply management will likely enforce the view of a soft floor under the market, currently around $72 in Brent, while an upside break seems equally unlikely as long as the focus remains on a weakening economic outlook. From a technical standpoint, the $80 area in Brent will likely offer a great deal of resistance and funds positioned for additional weakness are unlikely to change their negative price view until we see the return of an 8-handle.

Source: Saxo

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