Head of Commodity Strategy
Summary: Ahead of the historic jump in crude oil this Monday hedge funds experienced another troubling week with early buying, that was captured in this report, giving way to fresh selling on supply glut concerns.
Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.
Hedge funds turned net-buyers of commodities for the first time in eight weeks as the trade war de-escalation helped drive a significant amount of speculative buying in energy and copper futures. Gold, the safe-haven metal, suffered its biggest week of selling since April while the platinum net-long jumped to a 17-month high. The biggest change was in natural gas where a late US heat wave drove the price up resulting in bearish bets being cut in half.
Agriculture commodities saw another week of broad-based selling before the sector recorded its best weekly performance in three months. The end of week gains was led by soybeans, cotton and hogs on news that China was back in the market buying from the U.S. New record shorts were recorded in sugar and both cattle contracts. .
The trade war truce and the appointment of Prince ABS as Energy Minister in Saudi Arabia saw the combined WTI and Brent crude oil net-long jump by 85k lots, the most since August 2018. Later in the week the oil market reversed lower after monthly oil market reports warned about an emerging supply glut due to a continued slowdown in demand growth.
The market was therefore very ill prepared for the events over the weekend with the attacks on the world’s biggest oil processing plant in Khurais and Abqaiq in Saudi Arabia temporarily knocking out 5% of world supply. Following the initial short-covering surge the market has now adopted a wait and see approach while we wait for the answers to several questions.
Most importantly an assessment from Aramco to shed some light on short and potential long term damages. From an oil security perspective the market is also waiting to see how this latest escalation will impact the already fraught relation between Iran and Saudi Arabia.
The U.S. and IEA are both monitoring the situation and stand ready to order the release of Strategic Petroleum Reserves if necessary. A supply driven oil market rally at a time when the world, led by China, Germany and the the US is heading towards an economic slowdown is very bad cocktail. As the price rally so does the risk of recession. While most oil producers ideally would like to see higher oil prices to balance their budgets this is not a sustainable way to achieve it.
The Monday morning opening price spike in WTI and Brent crude oil managed to exceed market expectations with Brent posting its biggest ever intraday jump to more than $71/b. The $12 spike which occurred in seconds after the opening was driven by leveraged short positions being closed. Since then Brent has returned to $65/b with several analysts, including Rystad saying that the price spike is likely to be short-lived due to ample availability of Saudi Arabian crude oil from storage, estimated to be enough to cover 26 days of exports.
Despite another round of Chinese economic data this Monday being below expectations the short term driver for oil is likely to be the raised geopolitical threat to supplies. Something that should see Brent crude oil's recent range around $60/b being lifted to around $65/b. However any signs of stability returning to the Middle East should see crude oil trade lower with the IEA's warning from last week about an emerging 2020 supply glut keeping tabs on the market.
Gold, the safe haven metal, suffered its biggest week of selling since April after the trade war pendulum swung back to positive thereby driving demand for equities and selling of bonds. The key level of support at $1485/oz has now been challenged on several occasions but so far holding with recent buyers in no hurry to exit the market amid continued growth and geopolitical concerns. The net-long in silver was reduced by an insignificant 3% despite the steep price drop that followed the rally up to $19.65/oz.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
