Crude oil tightness support prices
Crude oil has reestablished fresh upside momentum after the early August correction ran out of steam before damaging the technical setup, something that is important for technical focused traders who in recent month bought WTI and Brent futures amid the outlook for a tight supply following Saudi Arabia’s decision to cut production by 1 million barrels a day from July onwards. With Brent prices still trading below $90, the prospect for those barrels returning to market anytime soon looks slim and the impact is increasingly being felt across the world as commercial stock levels of crude and fuel products continue to drop.
In the short term production cuts, not only from Saudi Arabia, but also from Russia and others will help support tight market balances in the coming months, especially if China successfully manages to stabilize its growth outlook. These developments could see Brent challenge $90 soon, but it does not alter our view that rising spare capacity from OPEC producers, because of supply constraint, together with rising exports from countries like Iran and Venezuela who are not restrained by quotas, as well as ongoing demand concerns, may prevent prices from having a sustained move above that level.
Overall, the current market tightness remains in clear display through the elevated backwardation shown across the futures curve, an example being the six-month spread in Brent where traders are willing to pay $3.6 per barrel more for delivery in November compared with May next year. In WTI the similar six-month spread between December and June trades at $4.1 per barrel, the highest level since November.
Gold and silver rally on changed rate outlook
Precious and platinum group metals (PGM’s) ended August on a much firmer footing than where it started. Selling pressure at the start of the month, especially in gold amid the focus on high funding costs (see below) and the prospect of higher for longer short-term rates in the US, began to reverse after a chain reaction was triggered by China’s efforts to support its economy and its currency. Following a period of weakness, the PBoC (People s Bank of China) and state-owned banks stepped into to support the Chinese yuan, and subsequent strength gave a confidence boost to copper prices which then moved onto silver, and finally to gold.
Following swiftly on we saw weaker than expected economic data change the focus from another US rate hike to a hawkish pause followed by rate cuts around June next year. Indeed with precious metals and platinum group metals showing signs of stabilizing, the attention turned to speculators and the positions they hold across the different metal futures. Surging bond yields and a recovering dollar have, for the past couple of months, been the main drivers behind the weakness across the investment metal sector, and the negative momentum seen during this time has attracted selling interest from hedge funds and other leveraged traders in the futures market. The recent strength has therefore undoubtedly been driven by speculators covering short positions and for the recent recovery to continue, we need to see continued weakness in incoming economic data in order to confirm that a gold and silver supportive peak in rates and yields has been reached.
Saxo maintain a bullish view on gold and silver, and see a fresh record being reached in the coming months. Friday’s US job report did not to dampen expectations for a rate hike pause from the Federal Reserve and it supported a fresh attempt for gold to break higher through an area of resistance around $1950 while silver moved closer to a key area of resistance above $25.