- Canadian pipeline disruption sends WTI crude to a two-year high
- Copper is being supported by a mining strikes in Peru and Chile
- Gold gets a boost from a dovish FOMC and a stronger yen
- Opec meeting on November 30 to determine the direction of oil
By Ole Hansen
A pipeline disruption is sending WTI crude oil to a two-year high, strike action in South America is supporting copper, a dovish FOMC and a stronger yen are supporting gold and a mild beginning to the US winter is sending natural gas lower. These are some of the key commodities driver currently ahead of the important Opec meeting on November 30.
US supply disruption supporting oil ahead of key Opec meeting
WTI crude oil reached a two-year high after TransCanada cut deliveries through its Keystone pipeline from Alberta in Canada to the US. This followed a company announcement that deliveries on the 590,000 barrels per day line could be cut by 85% through the end of November following a recent 5,000 barrel oil spill in Dakota.
This development supported the front of the WTI crude oil curve with the prompt spread returning to backwardation as it increased stock draws at Cushing, the Oklahoma delivery hub for WTI crude oil while narrowing the discount to Brent crude oil to $5/b.
Brent crude oil, meanwhile, was a reluctant follower with the focus increasingly moving to Vienna and Opec's 173rd ordinary meeting on November 30. Optimism that a deal will be reached to extend production curbs beyond next March has together with the latest supply disruptions and geopolitical concerns been supporting crude oil's October to November extension.
But Opec has been left with little room for error, not least given near record long oil bets which could easily turn from sweet to sour should they fail to deliver a strong message of support for the up until now successful efforts in bringing down the global overhang of supply,
Much, however, hinges on Russia as a deal without the full support of the biggest non-Opec producer would struggle to maintain the impact achieved so far. Bloomberg reported on Friday that Opec and Russia have crafted the outline of a deal to extend production cuts towards the end of 2018. Details however had yet to be hammered out but having been successful up until now in bringing down global stocks, Opec is keen on playing it safe and give the market what it wants, i.e. an extension that runs to the end of 2018.
Extending the cuts by this timeframe should also reduce the need for Opec to deliver any detailed plan about an exit strategy. It will, however, become a major headache in 2018 should demand growth fail to live up to expectations and/or non-Opec production growth surprises.
WTI crude oil testing resistance at the 200-week moving average at $58.40
Source: Saxo Bank
We maintain the view that Brent above and WTI just below $60/b may prove to be unsustainable in the short term. The biggest upside risk is no doubt a real and prolonged supply disruption from a major producer, especially considering how a few hundred thousand barrels more or less can change the perception of the price direction.
The downside risk to oil will in the short term be determined by whether funds begin scaling back what on November 14 was a combined bullish oil bet of close to 1 billion barrels. Such a move could send the price sharply lower in search for the new, albeit higher, floor.
Traders patience being tested as gold remains range-bound
Dovish minutes from the latest Federal Open Market Committee meeting together with a stronger Japanese yen helped trigger a fresh but so far unsuccessful attempt for gold to break higher. During the past two months the price has been averaging close to $1280/oz with support remaining firm despite several high volume selloff attempts and reductions in bullish hedge funds bets.
While Fed funds expectations for December 2018 has moved higher, ten-year real rates have traded within a relatively tight range. This goes to show that gold is more responsive to events further out on the US yield curve. The continued buying of longer maturities has resulted in the two-year versus ten-year yield spread collapsing to just 60bps, the lowest level since 2007, currently indicates a market more worried about recession than inflation.
At the November 1 FOMC meeting most Fed policymakers still expected to raise interest rates at the December 13 meeting. It was, however, the concerns expressed about the current lack of inflation which attracted some attention as it raised the uncertainty about the timing or potential delay of future rate rises.
The investor behaviour which we track through the speculative positions held by money managers or hedge funds and total holdings in exchange traded products are at present showing a great deal of resilience. The September selloff triggered long liquidation by funds and some fresh selling but since then the appetite for shorting the market has been very subdued with the gross-short currently sitting at a three-month low.
Total holdings in exchange-traded products backed by gold, meanwhile, are holding steady close to a one-year high. In August, Ray Dalio, the head of Bridgewater, recommended that investors consider placing 5% to 10% of their assets in gold, citing political and economic risks. The Q3 filings of ownership showed that he followed up on his recommendation by accumulating 3.3 million shares in the SPDR Gold Shares ETF (GLD) while tripling his holdings in the iShares Gold Trust (IAU).
This move highlights one of the reasons why gold has proven to be quite resilient this year despite better performances being achieved in stocks and some bond markets. The combination of record stock markets, the risk of the bond bubble bursting and geopolitical risk indicators which have increased since Trump took office, means that investors continue to seek diversification and tail-end risk hedging.
Gold for now looks caught between less favourable macro indicators on one hand and a world where political risks have been rising. Into this confusion gold has so far managed to find support and we maintain the view that the risk reward remains skewed towards higher prices. Patience, however, is needed with the market at present lacking a spark to break it out of its current range where support has been established between $1270 and $1260 while a break above $1305 is needed to attract renewed momentum buying.
Source: Saxo Bank
Industrial metals traded higher with the Bloomberg Industrial Metal index showing the first weekly gain in three. Copper received some fundamental support from renewed supply disruptions related to mining strikes in both Peru and Chile. The softer dollar following the release the dovish FOMC minutes also provided some support but the biggest one-week slump in LME stockpiles since 2005 was more down to arbitrage opportunity between exchanges than actual demand.