WCU: Gas markets lead broad commodity strength in 2022 WCU: Gas markets lead broad commodity strength in 2022 WCU: Gas markets lead broad commodity strength in 2022

WCU: Gas markets lead broad commodity strength in 2022

Ole Hansen

Head of Commodity Strategy

Summary:  Commodities extended their strong start to the year this week and once again the energy sector was the main focus with tighter-than-expected supply driving crude oil higher while extreme roller-coaster rides best describe what unfolded in the natural gas market, both in the US and especially in Europe. Gold traded steady with easing yields and a weaker dollar supporting a surprisingly robust start to the year. The industrial metals sector jumped to a three-month high driven by rapidly declining inventories, supply disruptions and the prospect for Chinese stimulus


Recent commodity market updates:
Tighter than expected market conditions support crude oil
Industrial metals off to a strong start on China stimulus signs
Gold and silver may spring a 2022 surprise



Commodities extended their strong start to the year this week with the broad Bloomberg Commodity index trading up 4.1% so far this month while the energy-heavy SP GSCI has notched up gains in the region of 5%. The energy sector has been the main focus so far this year with tighter-than-expected supply driving crude oil higher by close to 10% while extreme roller-coaster rides best describe what is unfolding in the natural gas market, both in the US and especially in Europe.

On the macroeconomic front the commodity sector received some additional tailwind from a weaker dollar and softer bond yields after data showed US consumer prices reached a forty-year high at 7% in December, in line with expectations. China, in contrast, saw its CPI cool, and together with weak lending data it raised the prospect for the Chinese government speeding up the pace of some of the 102 major projects outlined in its 2021-25 development plan. Many of the areas pinpointed will required industrial metals in some sort as they focus on energy security, affordable housing, infrastructure developments and logistics.

The industrial metals sector jumped to a three-month high on the prospect of rapidly declining inventories, supply disruptions and the mentioned prospect for Chinese stimulus raising the potential for a renewed upside push. Nickel led from the front after reaching a decade high on worries Indonesia, the world’s biggest shipper, will introduce export taxes on raw nickel exports to focus on expanding more profitable refining activities at home. The move by Indonesia, together with solid demand towards the production of electrical-vehicles batteries, may trigger a large supply deficit in 2022.

Following months of sideways trading, copper showed signs of breaking higher with the move above the $4.47-50 area of resistance-turned-support being driven by the prospect for rising demand towards electrification, tight supplies and signs China is stepping up its policy response to support a slowing economy, thereby off-setting recent macro risks, especially those stemming from China’s beleaguered property sector.

The agriculture sector has seen a mixed start to the year with tight supply markets such as coffee, cotton and soybeans trading higher while weakness in wheat has continued this month. Gathering pace after the USDA raised its forecast for world inventories, and after the International Grains Council forecast record world production in the upcoming 2022-23 season. Adverse weather developments in Brazil continues to negatively impact supplies of coffee and most recently also soybeans, although some beneficial rains are now expected in the growing areas

Another roller-coaster week unfolded in global gas markets. The US natural gas first month futures contract jumped 14% on Wednesday to a six-week high, in response to frigid freezing weather before collapsing by 12% the following day on the prospect for weather turning milder and after the weekly stock draw was in line with expectations. Adding to this was the recent surge in LNG shipments to Europe and the once-insulated US market has become much more exposed to international developments, all of which supported the biggest weekly rise since November.

Meanwhile in Europe, the energy crisis rumbles on and despite an armada of LNG ships delivering increased supplies, prices remain at punitively and, for some, unaffordable prices. The mentioned arrival of LNG shipments and so far mild January weather has reduced the risk of blackouts and gas storage running empty, but uncertainties regarding the Nord Stream 2 pipeline and Russia’s intentions in Ukraine continue to trigger sudden spikes and high volatility. On Thursday, the Dutch TTF benchmark gas future briefly traded below €70/MWh in response to the mentioned mild weather and strong overseas LNG supplies, before suffering a sharp reversal higher back above €90/MWh after Russia-US talks failed to ease fears of military action in Ukraine, a crossing point for around one-third of Russian gas to Europe.

Crude oil continues its month-long rally and while the early January jump was driven by temporary worries about supply disruptions in Libya and Kazakhstan, a bigger and more worrying development has become apparent during this time. Besides the surging Omicron variant having a much smaller negative impact on global consumption, it is the emerging sign that several countries within the OPEC+ group are struggling to raise production to the agreed levels that has supported prices this month.

For several months now we have seen overcompliance from the group as the 400,000 barrels per day of monthly increases was not met, especially due to problems in Nigeria and Angola. However, in their latest production survey for December, SP Global Platts found that 14 out of the 18 members, including Russia, fell short of their targets. According to Platts, the 18 members in December produced 37.72 million barrels a day, some 1.1 million barrels below their combined quota.

The rising gap between OPEC+ crude oil quotas and actual production has already been felt in the market with front month futures prices in both WTI and Brent having rallied stronger than later-expiring contracts. The spread or so-called backwardation between the first and the second Brent futures contract has risen from a low point at 20 cents a barrel in early December, when Omicron worries sparked a sharp correction, to 70 cents a barrel currently.

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. The timing of the next move up hinges on Brent’s short-term ability to close above $85.50/b, the 61.8% retracement of the 2012 to 2020 selloff, followed up by a break above the double top at $86.75. First though, the chart below increasingly points to the need for a period of consolidation or perhaps even a correction. But with firm fundamentals in play only a bigger than expected omicron development and stronger production can send the price sharply lower.

Source: Saxo Group

Gold traded higher thereby almost reversing the losses seen during the first few days of the month, when surging US bond yields triggered some weakness. Gold’s ability to withstand the 0.3% jump in US ten-year real yields at the start of the year has surprised some, but not us, given our focus on gold’s relative cheapness to real yields that had been rising since last July. Having seen that misalignment disappear, gold then received additional support this week from a weaker dollar, not only against the JPY as risk sentiment rolled over, but also against the big EURUSD pair which managed to break free of sub-1.1400 resistance after US CPI jumped to the highest in decades.

Several hawkish comments from Fed members, led by Fed Vice Chair nominee Lael Brainard who said she was open to a March rate move, had limited impact on gold, the most interest and dollar sensitive of all commodities. It highlights our view that the gold market has by now fully priced in a succession of US rate hikes starting this March, and with the bond market being torn between a Fed-driven increase in bond yields against the rising risk of a bond-friendly economic slowdown, we see a much more balanced risk-reward situation emerging in gold.

Silver’s recent outperformance faded in response to some end-of-week profit taking among the industrial metals. For silver to shine and move higher towards the $23.90 resistance area, it first needs to break above $23.41, the 50% retracement of the November to December selloff. Gold meanwhile has once again established some support in the $1800 area ahead of key support at $1777. A break above the $1830-35 area could see it target $1850 ahead of the November peak at $1877.

Source: Saxo Group

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

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.