By Ole Hansen
Head of Commodity Strategy / Saxo Bank
- Commodities markets have seen big swings during the past month
- Farm commodities under pressure from supply overhang and speculative selling
- Precious metals surged around Easter on spike in geopolitical concerns
- Gold is back testing key resistance, but could be in for short-term correction
- Surprise jump in US gasoline stocks rattled oil-market bulls
Big commodity swings have been witnessed during the past month, not least in the farm sector where bloated global stocks and the prospect of another bumper year — weather permitting — have led to heavy selling by hedge funds across both soft commodities and grains. The latter have been hit particularly hard with a net short now seen in all of the key crops.
Industrial metals are on track for a second monthly decline, with copper hitting the lowest point since January 4. Rising stockpiles of iron ore and doubt about steel demand in China helped trigger the latest rout. China's steps to deepen structural reforms in 2017 could mean less credit and potentially lower growth. As a result, we have seen the gold/copper ratio moving higher, with traders focusing more on protection than growth at this stage.
Hedge funds have a cut what was a record bet on rising commodities during the past months. The main driver has been selling of agriculture commodities where a net-short is seen for the first time in 13 months.
Precious metals surged around Easter on heightened geopolitical concerns combined with a stronger Japanese yen and lower bond yields. These developments saw gold reach — but once again fail to break — the downtrend from 2011. Ahead of the French presidential election, gold remained bid, but lack of any surprise could see it exposed to a short-term correction within its current uptrend.
A surprise weekly rise in US gasoline stocks was all it took to rattle the bullish oil sentiment. After rallying by more than 10% from March to April, oil has now retraced more than half as it turned out the rally was primarily driven by short-covering and an emerging geo-risk premium — now deflated again.
In sum, big moves have occurred across the commodity space this past month, with agricultural commodities out of favour, the iron ore slump hurting industrial metals, gold rallying only to hit firm resistance at $1,292/oz, while oil gyrated within its established range.
Crude oil remains range-bound after tumbling the most in six weeks following the latest weekly Petroleum Status Report from the US Energy Information Administration. Before this correction, a three-week surge had seen the price rally by more than 10% and again run out of steam once it hit the now well-known band of resistance for WTI between $54/barrel and $55/b.
The EIA report showed a surprise rise in gasoline inventories, a continued rise in oil production, while imports from key Opec producers rose to a six-week high. The fact that it fell so much on one weekly report shows that the perceived bullishness remains fragile and that the likely near-term direction remains sideways.
Gasoline inventories tend to decline into early May, but unseasonably strong and near record US refinery demand, currently running at 17 million b/d, some 10% above the five-year average, has led to strong output of gasoline.
With this elevated level of gasoline production occurring well ahead of the demand season, the risk is growing that it will end up in storage tanks. Moving surplus from crude to gasoline does not reduce the supply glut, and that is one of the reasons the market reacted so forcefully to this news.
Near record demand for crude oil from US refineries only triggered a small reduction in crude oil inventories, while gasoline rose. Imports from key Opec members rose, which is sending the wrong signal to the market given the cartel's best and currently successful attempts to cut production.
The March slump was primarily driven by a record bullish bet becoming increasingly stale and eventually unprofitable. This took place as the market sensed an emerging stalemate between Opec-Nopec cutting efforts on one side and rising US production on the other.
During the rout that followed, longs were cut, while new short positions were added. By the time the market stabilised, the combined net long in Brent and WTI crude oil had been cut by 177 million barrels to 642 million (chart below). While the gross long only saw a modest 38-million-barrel reduction, it was the 139-million-barrel addition of new short positions that eventually helped trigger the recovery.
The strong rally until Easter was sparked by short-covering from traders worried about being short as geopolitical tensions rose following the US missile attack on Syria and renewed focus on the troubled Korean peninsula.
Key Opec members have shown willingness to extend production cuts into the second half of this year, but compliance from its members and from non-Opec producers, should they decide to join, may not be as strong as the compliance currently seen. An extension has been fully priced in, and with the overhang of OECD stock only seeing a slow reduction, the upside potential remains limited for now.
On the other hand, renewed verbal intervention and a potential flare-up in geopolitical tensions is also likely to have reduced appetite for selling the market at this stage. On that basis, we see the market continuing to settle into a wide range.
A downside extension could come from funds holding a relatively stable gross-long position. What could change their minds and turn sellers could be weaker-than-expected demand growth, cheating by the group cutting production or failure to extend the current deal with all on board combined with US production growth, which at the current pace could exceed 10 million b/d by year-end.
WTI crude is likely to remain range-bound between the two bands of support and resistance.
Gold rallied strongly during the Easter period on heightened global political tensions, French election jitters and softer US economic data. The trendline from the 2011 high, which was rejected five times last year, is back in contention. But with some of those drivers fading, we may see gold consolidate before making another upside attempt.
A weak US job report on April 7, the bombing of the al-Shayrat airfield in Syria with 59 US Tomahawk cruise missiles and raised tensions on the Korean peninsular together with renewed uncertainty ahead of the first round of the French election on April 23 have all helped provide support to gold.
Two of the current key drivers for gold, US real yields and the Japanese yen, have both provided support during this time. Lower US real rates have been triggered by softer US economic data which have led to fading US rate-hike expectations, while the stronger JPY has been driven by safe-haven demand and short-covering.
US treasury secretary Steven Mnuchin said on Thursday that sweeping tax reform would be done by year-end. The Bank of Japan's governor meanwhile does not see its ultra-accommodative monetary policy ending any time soon. Both of these statements failed to hurt gold despite seeing bond yields tick higher and the yen lower.
The trendline (blue line below) from the 2011 peak was tested and rejected on several occasions last year, and, after the latest run-up in prices, this line has once again become the key battleground between bears and bulls. Above this area of resistance gold could initially target $1,315/oz ahead of our end-of-year target at $1,325/oz.
The first round of the French presidential election on April 23 is a very close race. However, unless we see a clear trend towards a market-unfriendly outcome, such as the far-right candidate Marine Le Pen winning, gold may be setting up for a short-term correction.
Silver has been showing signs of weakness this past week as the price struggle following the accumulation of a record long by hedge funds. Adding this to the above risk of a correction we are focusing on the mid-$1,250s, which represents the 38.2% retracement of the latest March-to-April rally and the 200-day moving average.