WCU: Crude oil shielded from bond and stock market rout WCU: Crude oil shielded from bond and stock market rout WCU: Crude oil shielded from bond and stock market rout

WCU: Crude oil shielded from bond and stock market rout

Ole Hansen

Head of Commodity Strategy

Summary:  Turmoil and roller coaster markets have become the new normal in stocks and bonds while commodities continue their ascent. The Bloomberg Commodity Spot Index trades up more than 11% following seven consecutive weeks of gains as it continues to reach fresh record highs. The gains have been driven by a continued rally in energy with US natural gas up 40% while crude oil, one of the most important inputs for the global economy, trades higher by close to 25%.

Turmoil and roller coaster markets have become the new normal in stocks and bonds while commodities continue their ascent. The Bloomberg Commodity Spot Index, which tracks the front month performance of 24 major futures contracts, trades up more than 11% following seven consecutive weeks of gains as it continues to reach fresh record highs. The gains, as clearly shown below, have been driven by a continued rally in energy with US natural gas up 40% while crude oil, one of the most important inputs for the global economy, trades higher by close to 25%.

The past week continued to produce whipsaw action in the stock market, thereby showing us that this market is out of balance and can go anywhere in the short term. We believe the downside risk remains the greatest, not least considering the change in tone at central banks around the world. Most recently at the ECB which has finally caved into the rising threat of inflation leading to a capitulation on its former resolute dovish stance and accepting the need to bring forward rate hikes.

European bond yields spiked on the news and with the US losing its yield advantage it helped open the floodgates to short euro covering, thereby supporting the longest run of dollar losses since April. A weaker dollar is generally commodity positive while supporting Emerging Market growth which is more commodity intensive than Developed Market growth.

World food prices rebounded in January according to the UN FAO’s food price index, which tracks a basket of 95 globally traded food commodities. The index moved closer to the record high from 2011, a year when surging prices of cereals and rising cost of living in general helped trigger the Arab Spring. However, taking the base effect into consideration, the year-on-year rise slowed to 19.5% from the 40% recorded last May.

Higher food prices during the past year have been driven by a combination of a post-pandemic economic recovery raising demand, a troubled weather year, and the prospect for another season’s production being interrupted by La Ninã developments, Covid outbreaks challenging supply chains, labour shortages and more recently, rising production costs via surging fertilizer prices and rising cost of fuels, such as diesel.

Vegetable oils led by soybeans and palm oil have topped the table this year with support coming from strong demand for plant-based fuels as crude oil continues to rally. Palm oil futures traded in Malaysia hit a record this past week on concerns over tight supply after top grower Indonesia announced export curbs to control domestic prices. Soybeans were supported by continued downgrades to Brazilian crop estimates due to adverse weather while political unrest in Argentina, the world’s largest exporter of soybean products, also helped create nervous trading.

Staying with export curbs, Russia announced a two-month ban on ammonium nitrate exports to ensure a successful domestic sowing season with ample supply. The price of ammonium nitrate has seen a four-fold increase during the past year amid surging natural gas, commonly used as feedstock to produce two nitrogen-based fertilizers – ammonia and urea. With Russia being one of the world’s largest exporters, the impact will be felt not only in Europe but also in Ukraine, a major producer of high-quality wheat, corn, and edible oils.

Crude oil: As mentioned, the energy sector continues to lead the broad rally in commodities with crude oil’s current unstoppable rally extending into a seventh week. Both WTI and Brent reached new cycle highs above $90 with rising front-month spreads signaling increased tightness. The combination of tight supply, inflation, the weaker dollar and the current turmoil in stocks and bonds are likely to have driven increased demand from paper investors, with asset managers and speculators at large funds seeking a haven to help weather the storm currently blowing across their traditional investment portfolios.

In addition, support continues to be provided by geopolitical tensions, freezing weather in Texas which has hit some supply, and the latest weekly EIA stock report showing another drop in US crude inventories with production now down some 300k barrels per day since December. Fundamental data pointing to a fast-tightening market was supported this week after OPEC+ agreed to proceed with another 400k barrels per day increase while at the same time failing to address the growing gap between quotas and what is being produced.

The oil bears – if there is anyone left – may view this as a sign that OPEC+ stick to their belief oil markets will be ample supplied once we get through the peak winter-related demand. The oil bulls meanwhile have read the lack of action as a sign that no action can currently be taken with just a few producers being able to ramp up production. Any unilateral decision by countries like Saudi Arabia and the UAE to temporarily ramp up production may end up leaving a wafer-thin level of spare capacity and with that a risk of spiking prices into an unforeseen supply disruption.

Global oil demand is not expected to peak anytime soon and that will add further pressure to available spare capacity, which is already being reduced monthly, thereby raising the risk of even higher prices. This supports our long-term bullish view on the oil market as it will be facing years of under investment with oil majors diverging some of their already-reduced capital expenditures towards low-carbon energy production. No doubt both WTI and Brent increasingly need to consolidate their strong gains but as long the 21-day moving average is not broken, the potential for further upside gains remain.

Source: Saxo Group

Gold stabilized following the late FOMC-driven January tumble and during the week it settled into a range around $1800 with bids continuing to emerge on any weakness below. Silver meanwhile held above key support at $22 but has so far been struggling to find the momentum that supported a strong period of outperformance at the start of January. Weighing on the market were rising bond yields after the European Central Bank and the Bank of England joined the Federal Reserve in expressing a more hawkish view on interest rates to combat inflation. Inadvertently, the hawkish signals from Europe helped send the euro sharply higher against the dollar, with the greenback heading for its biggest weekly drop since November 2020. The biggest challenged came on Friday after a much stronger than expected US report helped send bond yields sharply higher while the dollar managed to claw back some of its earlier losses.

Apart from robust demand from central banks, we maintain a patient but long-term bullish outlook for precious metals:

  • Gold’s credentials as an inflation hedge as well as a defensive asset is likely to attract renewed attention with rising stock and bond market volatility amid a market adjusting to a rising interest rate environment. The start of an FOMC rate hike cycle, with this one penciled in for March 16, has in the past often signaled a low in the price of gold.
  • Gold has been exhibiting some immunity towards rising real yields with investors instead focusing on hedging their portfolios against the risk of slowing growth and with that falling stock market valuations. During the past month, institutional investors, many of which cut their exposures in 2021, have started to return with total holdings in ETF’s backed by bullion jumping to a four-month high.
  • With some of the worlds most tracked commodity indexes holding between 5% and 15% of their exposure in gold, any demand for these, as seen recently, will automatically generate additional demand for gold.

The short-term technical outlook remains neutral with firm support established down towards $1780 while a break above $1825 is needed to attract renewed buying momentum towards $1854 and ultimately the November high at $1877.

Source: Saxo Group

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 is not intended to and does not change or expand on this. 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-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged foreign exchange trading); Type 4 Regulated Activity (Advising on securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.