WCU: Commodity rally pauses - a short-term blip? WCU: Commodity rally pauses - a short-term blip? WCU: Commodity rally pauses - a short-term blip?

WCU: Commodity rally pauses - a short-term blip?

Ole Hansen

Head of Commodity Strategy

Summary:  The commodity sector traded lower for a second week and, following the April surge, the market was increasingly at risk of a correction. The setback was led by the oil sector which traded lower in anticipation of increased supplies from Iran, given progress on lifting sanctions. Industrial metals suffered losses after the Chinese cabinet weighed in against rising commodity prices by announcing efforts to curb commodity inflation, while a mixed picture began to emerge within the agriculture sector.

A replay of my latest commodities webinar is now available with focus on the latest developments driving markets. Also a closer look at what may lie ahead for gold, silver, copper, crude oil, natural gas and the agriculture sector.

The commodity sector traded lower for a second week and, following the April surge, the market was increasingly at risk of a correction. The setback was led by the oil sector which traded lower in anticipation of increased supplies from Iran, given progress on lifting sanctions. Industrial metals suffered losses after the Chinese cabinet weighed in against rising commodity prices by announcing efforts to curb commodity inflation. The agriculture sector traded mixed with wheat and soybeans tumbling on improved U.S. weather while coffee jumped on Brazil drought worries.

Overall, the Bloomberg Commodity Index traded lower by 1.1%, thereby supporting a drop in U.S. inflation expectations, with ten-year breakeven yields taking a 10 basis point tumble to 2.45%. These developments quickly reversed a post-FOMC minute dollar rally with the EUR/USD reaching the highest level since January. In addition to these developments, the risk adversity spreading from Wednesday’s cryptocurrency collapse also impacted the commodity sector with gold being the noticeable exception after seeing a rush of buying from investors finding the excessive volatility in Bitcoin and other cryptos too hard to stomach.

The overall outlook for higher commodity prices has not changed and while the energy sector may pause while the Iranian news is being digested and virus outbreaks are dealt with, the industrial and precious metal sectors are for different fundamental reasons likely to remain well supported.

Emerging buying fatigue from speculators has already started to show up before the latest weakness. According to data from the weekly Commitments of Traders report covering the week to May 11 when new highs were seen in “hot” commodities such as copper and corn, hedge funds opted to reduce exposure instead of adding additional length into rallies. So far however, the reductions were limited but still highlight a sector that may enter a period of consolidation. 

Highflying industrial metals traded lower with HG copper taking a well earned rest following its recent almost vertical ascent. While the underlying fundamental outlook remains very strong, especially for copper given the focus on the need for “green” metals to decarbonize the world, some investors took profits while others worried about threats by top consumer China to curb surging commodity prices. This comes after comments during the week that authorities would strengthen its management of commodity supply and demand to curb “unreasonable” increases in prices.

Having more than doubled in price since the 2020 through copper can “afford” a 15% correction without breaking the year-long uptrend. We see a correction of this magnitude as unachievable with short term support focusing on an area between $4.30 and $4.37, representing an additional 6% downside from here.

Source: Saxo Group

Crude oil tried to stabilize on Friday following its biggest weekly loss since March on news of a potential revival of the Iran nuclear deal. Before this, Brent crude oil had reached, but once again failed to breach, $70 with the lack of synchronized global recovery in demand limiting Brent crude’s ability to trade higher for now. Despite a strong recovery in fuel demand across the U.S. and Europe, continued Covid outbreaks in Asia will continue to impact the short-term outlook and not least the recovery in jet fuel demand, which looks set be very slow with restrictions and lack of interest flying intercontinental not going away anytime soon.

Oil has also been caught up in a broader commodities correction after China warned that it could introduce measures to cool spiking prices of raw materials. Brent’s prompt spread has weakened to show the lowest backwardation this year, an indication market tightness is easing. With Iran potentially coming back and OPEC+ already adding barrels, Brent is likely to remain stuck in a $65 to $70 range, with the short-term risk skewed to the downside until the mentioned demand picture improves.

    Source: Saxo Group

    Gold’s six-week rally continued and, apart from renewed momentum following the move above the 200-day moving average, now support at $1845 and the downtrend from the August high. One of the most important developments for gold has been stable U.S. Treasury yields and a weaker dollar, as well as very high crypto volatility denting the novice sector’s store-of-value credentials. Something that was highlighted by comments from JPMorgan saying that big investors have started to switch out of bitcoin and into traditional gold investments as inflation fears heat up.

    Silver has, since its early April low, outperformed gold and at several junctures during the recent rally helped gold to push through key resistance levels. However, after seeing the gold-silver ratio fall from above 70 ounces of silver to one ounce of gold in early April to a low of 65.50, the crypto collapse on Wednesday combined with profit taking among industrial metals, has seen the ratio move higher to around 67.5. This has highlighted gold’s newfound demand from investors seeking a haven against underlying market uncertainty and rising inflation pressures.

    For the gold rally to extend beyond current levels, U.S. economic data needs to continue the recent downward trajectory. While not reducing gold’s supportive inflation pressures, a corrective period of the U.S. data cycle should continue to hold down U.S. Treasury yields while adding downward pressure on the dollar.

    The key level to watch on a break above $1876 is $1922, the 61.8% retracement of the August to April correction. Support at $1845 (200-day ma) followed by $1818 (21-day ma).

    Source: Saxo Group

    It was a mixed week in agriculture commodities with soybeans trading down around 4% as bullish momentum eased with planting in the U.S. progressing at speed while wheat’s two-week decline of more than 11% has been the result of heavy rain in Kansas, the top growing state raising the prospect for record yields. Corn traded higher on tight supply with focus on Chinese buying, currently running at levels never seen before, and increased demand from the renewable fuel industry.

    Softs traded higher led by Arabica coffee which topped this week’s performance table, This after jumping 5% to near a four-year high. Ongoing drought in Brazil is hurting plants during a key stage in their development, and in addition, the 2020-21 drought has been so severe that it has limited the number of new nodes that trees have formed to carry the 2022 main on-season harvest. With these developments in mind going forward, we may see a change from the synchronized rally that has supported the agriculture sector in recent months to a more selective approach based on individual developments.


    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/legal/disclaimer/saxo-disclaimer)
    - Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)

    Boulevard Plaza, Tower 1, 30th floor, office 3002
    Downtown, P.O. Box 33641 Dubai, UAE

    Contact Saxo

    Select region


    Trade responsibly
    All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

    Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

    The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

    The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.