Yields keeping a lid on commodities; Oil maxed out

Yields keeping a lid on commodities; Oil maxed out

Ole Hansen

Head of Commodity Strategy

Summary:  The month-long commodity rally continues to be challenged by elevated bond market volatility driving a renewed rise in US bond yields and a stronger dollar. Pockets of strength seen in carbon emissions, platinum and gasoline while iron scraped the bottom as China stepped up its pollution focus. Gold sang to the tune of US real yields and crude oil showed signs of hitting a temporary top while waiting for a sustained demand pickup. Grain markets kept one eye on US and South American weather developments and a renewed outbreak of African swine fewer in China.


The month-long commodity rally continues to be challenged by elevated bond market volatility driving a renewed rise in US bond yields which in turn is causing risk aversity and a stronger dollar. These developments left the Bloomberg Commodity Index near unchanged and close to a 2-1/2-year high, and combined with a record long position held by funds, the sector is currently, despite strong underlying fundamentals, still at risk of entering a period of consolidation.

Metals of most colors saw their price action ebb and flow in line with dollar and bond yield developments. US stimulus supported copper despite signs of easing tightness, especially in the Chinese market where exchange-monitored stock levels have started their seasonal increase, albeit from a price supportive multi-year low. Platinum rose after report from the World Platinum Investment Council said 2020 produced the largest deficit on record, with third consecutive annual deficit expected in 2021. 

Iron ore suffered a weekly loss after the Chinese Government initiated a pollution crackdown on steel mills in the steelmaking hub of Tangshan, one of most polluted cities in China. For steel, the government has already pledged to rein in capacity as the country embarks on its planned journey to carbon neutrality by 2060.

Staying with emissions, the cost of EU carbon allowances, the world’s biggest cap-and-trade program, rose by 7% to reach a record high at €42.6/tons. Apart from the relentless rise in crude oil, the latest part of the 31% year-to-date rally was driven by gas outages in Norway raising demand from power generators for more polluting alternatives which in turn requires more carbon allowances.

Grains & oilseeds: In China, a resurgence in African swine fever has sent local corn prices down to the lowest level this year and if not contained, the price weakness may spread to overseas markets, most noticeably to Chicago grain and oilseed futures. The combination of this, and less tightness being projected by the US Government in corn and soybeans, helped send the Bloomberg Grains Index lower on the week. While the losses, led by corn, were relatively small, a potential slowdown from China could leave the sector vulnerable to demand downgrades and with that the risk of selling from funds holding an elevated exposure in both corn and soybean futures. The weakness in wheat prices were primarily weather-related after beneficial rains fell on the US Plains.

With US grain prices having recently touched multi-year highs and the UN FAO Global Food Price index rising at the fastest pace since 2014, the market will soon turn its attention to the Northern Hemisphere planting and growing season. What allocation US farmers chose to use between corn, wheat and soybeans could become a major catalyst for price action over the coming months. With that in mind, grain traders will look towards the March 31 Prospective Planting Report from the US Department of Agriculture for guidance.

Gold (XAUUSD) and silver (XAGUSD) remained under pressure as the direction continued to be dictated by developments in the dollar and bond market where yields rose again in response to the passing of the $1.9 trillion stimulus package. While the deal will support growth, it will also stoke inflation risks but following a weak US CPI reading earlier in the week, such risk is not yet being reflected in the numbers.

We maintain a positive outlook given our belief inflation will eventually overshoot current market expectations. Until such time, however, a continued rise in 10-year bond yields towards the next big target at 2% from the current 1.6% could see the downside being challenged again. For now, gold remains caught in a downtrend with key support being an important area between $1670 and $1690 while potential buyers are in no rush to enter longs before it manages to regain $1765/oz, the level below which helped trigger the latest weakness.

Source: Saxo Group

Crude oil traded close to unchanged on the week as the market struggled for direction. Earlier in the week, a failed attack on a Saudi oil installation drove Brent crude above $70/b but the 7% correction that followed could reflect a market that potentially may have gotten close to its current potential. Despite being supported by the US stimulus Bill and signs of a fuel consumption rebound around the world, the market is still waiting to see a sustainable pickup in global fuel demand that can justify current oil prices. 

The weekly EIA inventory report showed another large draw in gasoline stocks amid rising demand from motorists. Refinery disruptions during the Texas freeze a couple of weeks ago helped trigger a two-week jump in US crude oil stocks by 35.3 million barrels, while gasoline and distillate stocks have slumped by more than 40 million barrels. With the summer driving season and reduced lockdowns on the horizon, refineries will have a busy few months ahead and gasoline prices are likely to remain elevated during this time.

Somewhat offsetting the still positive sentiment was the renewed push for a higher yields and dollar together with OPEC striking a cautionary tone in its Monthly Oil Market Report. In their latest report for March they downgraded the outlook for demand for its crude over the next six months amid a weaker demand outlook and stronger non-OPEC supply growth. A development that calls for an extended period of production discipline and restraint from the OPEC+ group of producers. On March 17, the International Energy Agency will release its Oil Market Report.

    Source: Saxo Group

    Recently I was invited onto the MACROVoices podcast series to discuss various aspects of the current commodity market rally. I enjoyed my 50 minute discussion with host Erik Townsend, and I hope you will as well.

    www.macrovoices.com

    Quarterly Outlook

    01 /

    • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

      Quarterly Outlook

      Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

      Althea Spinozzi

      Head of Fixed Income Strategy

    • Equity Outlook: Will lower rates lift all boats in equities?

      Quarterly Outlook

      Equity Outlook: Will lower rates lift all boats in equities?

      Peter Garnry

      Chief Investment Strategist

      After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
    • FX Outlook: USD in limbo amid political and policy jitters

      Quarterly Outlook

      FX Outlook: USD in limbo amid political and policy jitters

      Charu Chanana

      Chief Investment Strategist

      As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
    • Macro Outlook: The US rate cut cycle has begun

      Quarterly Outlook

      Macro Outlook: The US rate cut cycle has begun

      Peter Garnry

      Chief Investment Strategist

      The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
    • Commodity Outlook: Gold and silver continue to shine bright

      Quarterly Outlook

      Commodity Outlook: Gold and silver continue to shine bright

      Ole Hansen

      Head of Commodity Strategy

    • FX: Risk-on currencies to surge against havens

      Quarterly Outlook

      FX: Risk-on currencies to surge against havens

      Charu Chanana

      Chief Investment Strategist

      Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
    • Equities: Are we blowing bubbles again

      Quarterly Outlook

      Equities: Are we blowing bubbles again

      Peter Garnry

      Chief Investment Strategist

      Explore key trends and opportunities in European equities and electrification theme as market dynami...
    • Macro: Sandcastle economics

      Quarterly Outlook

      Macro: Sandcastle economics

      Peter Garnry

      Chief Investment Strategist

      Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
    • Bonds: What to do until inflation stabilises

      Quarterly Outlook

      Bonds: What to do until inflation stabilises

      Althea Spinozzi

      Head of Fixed Income Strategy

      Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
    • Commodities: Energy and grains in focus as metals pause

      Quarterly Outlook

      Commodities: Energy and grains in focus as metals pause

      Ole Hansen

      Head of Commodity Strategy

      Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

    Disclaimer

    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. This content is not intended to and does not change or expand on the execution-only service. 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)


    Business Hills Park – Building 4,
    4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

    Contact Saxo

    Select region

    UAE
    UAE

    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.