Commodity Weekly: Week of carnage leaves no one safe

Ole Hansen

Head of Commodity Strategy

Summary:  The worst week on Wall Street since 2011 was replicated by an equally challenging week for commodities which left the Bloomberg Commodity Index down 6% on the week. Hardest hit was the energy sector with the crude oil market increasingly looking to OPEC and Russia for support. Gold struggled as deleveraging hurt the price despite overwhelming support from developments elsewhere.


The worst week on Wall Street since 2011 helped trigger an equally challenging week across commodities. The broad-based Bloomberg Commodity Index lost more than 6% with all components showing red. The accelerated weakness was sparked by the inevitable news that the China-born coronavirus had spread from Asia to the rest of the world. While the U.S. has yet to see any pickup in cases, the market was spooked by the apparent unpreparedness in Washington.

The increased risk of a global pandemic could still have a major negative economic impact. A drop in consumer confidence, behavior and spending may further negatively impact company earnings already under pressure from broken supply lines as China, the world’s production center of everything, struggles to get back to work.

The biggest casualty was the energy sector with crude oil and products collapsing in response to the biggest demand shock since the 2008-09 global financial crisis. Crude oil hurled towards the December 2018 low at $50/b on Brent and $42.4/b on WTI, and Brent crude oil has now slumped by more than 20% since the OPEC+ group decided to cut production on December 6. Faced with a rapidly falling outlook for 2020 demand growth and so far robust non-OPEC production, the group is increasingly under pressure to make further cuts.

OPEC and OPEC+ meet in Vienna on March 5 and 6 and baring any last minute cancellation, due to the virus threat, an additional production cut may be announced. Saudi Arabia has been pushing for deeper cuts with speculation focusing on a one million barrel/day cut. Russia has up until now been holding back, but with oil priced in Russian Ruble falling to an October 2017 low, we may see an increased interest from Moscow in striking a deal.

Brent crude oil has returned to a December 2018 low at $50/b. A major psychological level from where the market recovered strongly in early 2019. With non-OPEC production also potentially getting hurt by the recent price slump and rising credit spreads, we see the seeds to a recovery being sowed around these levels.

Source: Saxo Bank

The ongoing demand shock also helped drive renewed weakness in copper with the High Grade variety once again falling towards the critical support level at $2.48/lb. The combination of mining companies still adding supply and a prolonged slowdown in China, the world’s biggest consumer, is likely to leave an overhang of supply which may add further downside pressure to the price. A break of the mentioned level carries the risk, based on Fibonacci extension theory, that the price slump could be extended towards $2.38/lb or in the very worst case to $2.23/lb.

In my latest Commodity Weekly, I wrote about gold being in the midst of a perfect storm of positive price drivers with the stronger dollar being one of the few challenges. Fast forward a week and the picture has, despite renewed dollar weakness and a slump in global bond yields, become somewhat more challenging.

The biggest weekly sell-off in stocks since 2011 combined with a spike in volatility helped trigger deleveraging by hedge funds across most asset classes with the exception of secure government bonds. With the “paper” long in gold through ETF’s and futures already at a record, the yellow metal was also, despite the supportive outlook, left exposed to long liquidation.

Silver took a major hit and slumped to a two-month low close to $17/oz. With silver deriving half of its demand from industrial applications, the global growth worries left it exposed to selling. As a result, the gold-silver ratio, which expresses the value of one ounce of gold in ounces of silver, jumped to a near 30-year high at 95.5, a technical level from where some selling of the ratio emerged.

Gold’s weakness occurred despite overwhelmingly supportive developments in rates and yields. During the past week the expectations for future rate cuts by the FOMC rose with three 25 bp rate cuts now priced in for 2020, with the first expected at the March 18 meeting. Ten-year real yields slumped to -0.30% while the total amount of negative yielding debt rose to $14.2 trillion.

For a non-interest or dividend paying asset such as gold, the above-mentioned developments are all supportive. The fact the market struggled to react, amid the overriding need for funds to reduce exposure across markets, has left the metal open to a correction. Given the potential for stocks stabilizing the short term outlook may offer lower prices and better entry levels for those looking to gold as a longer term investment. Support, as per the chart below, is currently found towards $1600/oz ahead of $1550/oz, a level that represents the uptrend from the June 2019 low.

Source: Saxo Bank

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