Commodity Weekly: Volatile start to 2020 Commodity Weekly: Volatile start to 2020 Commodity Weekly: Volatile start to 2020

Commodity Weekly: Volatile start to 2020

Ole Hansen

Head of Commodity Strategy

Summary:  Commodities in general traded lower following an explosive beginning to 2020. Crude oil and gold pumped and dumped as Middle East tensions ebbed and flowed. Natural gas and coffee both looked for support while the emerging climate theme was strengthened by another rise in the price of global food commodities.


The first full week of trading turned out to be much more volatile than normal as geopolitical tensions ebbed and flowed. The year had barely begun before the US assassination of General Soleimani near Baghdad airport triggered fears of an imminent escalation of the conflict between the U.S. and Iran.

Crude oil and gold both spiked before crashing after both sides stepped back from further military action. Brent crude oil traded within a 10% range before finishing 5% lower to record its first weekly loss in six. WTI finished even lower following a bearish U.S. inventory report which saw stocks rise in both crude oil and products.

Gold, the safe-haven metal, spiked above $1600/oz for the first time since 2013 only to be slapped straight back to unchanged on the week. From a technical perspective this development left a signal on the weekly chart which for some could be interpreted as a key reversal. While it is clear that gold needs more than geopolitical uncertainty to continue moving higher in 2020, we see the fundamental outlook providing enough support to offset any short-term technical weakness.

Source: Bloomberg, Saxo Bank

Global commodities could, as the first few weeks highlight, face a potentially volatile 2020 given the combination of ongoing geopolitical tensions, climate change and inflationary pressures. While global growth and resulting demand for key cyclical commodities remains stable, we see the supply side facing several challenges due to social unrest and climate change.

Climate change will be the key focus in our Q1 Outlook due to be published on January 23. For commodities, we see these challenges manifest themselves through increased weather volatility leading to intense droughts, floods, heatwaves and wildfires leading to an increase in the rate of soil loss and land degradation.

Led by vegetable oils, meat and dairy global food prices have shown a steady rise during the past year. The UN FAO’s World Food Price Index which tracks 73 food commodities across five major groups, has risen 12.5% during the past year to reach a five-year high.

U.S. priced natural gas recovered after reaching $2.08/therm, a record low for this time of year and due to unusually mild weather hurting demand at a time of strong production. It nevertheless managed to stay supported despite the smallest weekly storage draw in 11 years. It is not too late for a late winter scare to support the price, especially considering the combination of the mentioned low price level and speculators holding a record short position.

Arabica coffee also showed signs of finding support after retracing half of its dramatic 55% rally witnessed between October and December last year. The rally back then has led to a sudden,  surprise jump in exchange-certified stockpiles thereby removing the support which led to the strong rally. The outlook for 2020 remains supportive with a global deficit expected to underpin the price. But for now, the market is once again under pressure from short-sellers who, due to the forward price curve structure, can pick up a 1-year carry on holding a short futures position of more than 10%.

Crude oil’s month long rally came to an abrupt end this week. The slump that followed US-Iran spike above $70/b on Brent crude oil, the global benchmark, was in our opinion driven by several factors. In the run up to the November U.S. election the appetite for another costly and most likely non-winnable Middle East war seems low. Not least considering the potential damage it would inflict on Trump voters through higher gasoline prices and falling stock markets.

Source: Saxo Bank

Saudi Arabia and its GCC friends have and will undoubtedly continue to apply a lot of pressure on the U.S. in order to avoid an escalation which would hurt economic growth and sentiment across the region. Not least the UAE, which is currently preparing to host Expo Dubai 2020 from October to April next year. It is expected to attract more than 25 million visitors from over 192 countries.

Crude oil is currently being held down by rising non-OPEC production led by the U.S and a potential disruption to supply could be mitigated by the release of strategic reserves held by the U.S., China, Saudi Arabia and IEA member countries.

Most of the Middle Eastern oil travels east not west with China being the biggest buyer. Iran, hit by sanctions, receives most of its oil revenue from China and any obstruction or risk to the safe passage from the Arabian Gulf would hurt them as well.

Finally, speculative buying of Brent and WTI crude oil since the OPEC+ meeting on December 6 reached 213 million barrels in the week to December 31. The sharp sell-off, once tensions eased, probably got exaggerated by the need from those holding loss making positions to reduce. 

Having surrendered half the October-to-January gains, crude oil is likely to settle into a range with Brent crude oil, given the risk of another flareup, likely to find support between $64/b and $62/b. During Q4 we focused on a $60/b to $65/b range but following the agreement and adaption of further OPEC+ reductions, we raised that range by three dollars.

Providing the geopolitical stage stays quiet, the short-term market direction is likely to be determined by the weekly U.S. stock reports, economic leading indicators, U.S. – China trade news and monthly oil market reports from EIA, OPEC and IEA, with the next all due between January 14 and 16. 

After racing higher this past week, and almost reaching our 2020 target at $1625/oz in three days, gold may now spend most of the first quarter consolidating. From a technical perspective preferably above $1510/oz and no lower than $1450/oz, before eventually moving higher later in the year. The short-term consolidation risks also takes into consideration the near record level of long hedge fund positions, which in the short-term could act as a drag on the price through long liquidation.

Geopolitical events such as the early January US-Iran standoff has supported gold but only for relatively short period of time. Apart from the underlying support from money managers using gold as a portfolio insurance the yellow metal need support from some of our 2020 expectations in order to climb further. They are: Federal Reserve cutting rates by more than expected, rising inflation concerns through higher input costs from energy and food, continued central bank buying (de-dollarization), a weaker dollar and not least multiple event risks culminating in the November US Presidential election. 

Source: Saxo Bank

Disclaimer

The Saxo 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 is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, 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 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 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 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 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 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/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.