WEEKLY COMMODITIES UPDATE -
By Ole S Hansen -
Financial and commodity markets stabilised at the end of a week which was spent waiting for the EU summit. After many failed attempts the expectations were so low that when EU leaders announced some new measures the market breathed a sigh of relief and rallied accordingly. Whether this will turn into another 48 hours relief rally just like those that has gone before remains to be seen, with doubts still lingering especially with some of the measures facing hurdles in national parliaments.
Commodity markets moved higher with the broad based DJ-UBS commodity index rising by X.X per cent with most of the gains stemming from the agriculture sector (+5.6 per cent) and energy (+1.5 per cent) not least due to a strong rally in natural gas. The exceptional hot and dry weather in the US continues and this supports the price of crops and natural gas as the demand for cooling has triggered increased demand from power generators. Precious group metals palladium and platinum both fell to the lowest price this year as the outlook for these industrial metals is being adversely impacted by slowing economic activity.
The dramatic rally in corn, wheat and soybeans during the last month has helped drive the DJ-UBS grains index up by 14 per cent year to date thereby outperforming all other sectors. As crop conditions continued to deteriorate the price of corn rose by one-quarter as the perfectly laid out plan with record acreage and expectations of a record crop began to look unachievable. Weather forecasters in the US who holds the key to almost 90 per cent of the market performances during this period of the planting season may help to halt the rally as rain is expected to fall in parts of the US Midwest next week thereby improving the prospects for crops.
Silver on knife-edge
Silver has been on a downward path since reaching nearly $50 back in April 2011. Since this time several attempts to the upside have failed and been followed by subsequent retracements back to the 26.00 to 26.50 range which have provided solid support on several occasions during the past 18 months. Silver tends to track gold quite closely but as the global economic activity have slowed down so has the industrial demand for silver which in turn have seen it underperform gold to the extent that the price relation between the two metals have returned to its five year average at 58 ounce of silver to one ounce of gold.
In the near term speculation about additional stimulus being provided by central banks and continued investment demand holds the key to silvers performance given the uncertain economic outlook, strong mine production and the risk of a stronger dollar which tends to have an adverse impact on prices. Investment demand through Exchange Traded Products (ETP) have proved to be resilient despite the lacklustre price performance with investors currently holding 575 million ounces compared with a record of 599 million in April 2011. Speculative investors, primarily hedge funds, have for now moved onto other investments as they currently hold one of the smallest net-long positions in eight years.
Will gold add a twelfth consecutive year of positive price performance? With half of the year gone some work needs to be done in H2 in order to achieve this as it is currently up by less than one per cent following the worst quarterly loss in eight years. We still see gold recover and have a go at the 1800 level later this year but just like silver is toying with critical support, so is gold just below in the low 1500s. A clean out of weak longs cannot be ruled out before the market reasserts itself but for now we do not have many expectations for a break out of the 1525 to 1650 range that has prevailed during the past two trouble months for commodities in general.
Oil prices stabilised this week but while trading mostly sideways Brent crude did better than WTI, which at one point dropped to an eight-month low, as several factors primarily supported the first resulting in the premium over WTI widening to $13.6 from a recent low of $11. A strike among oil workers in Norway over pensions has reduced output by almost a quarter of a million barrels per day. Elsewhere tensions between Turkey (Nato) and Syria are brewing while the sanctions against Iran are due to begin this weekend.
A report called “Oil: The Next Revolution” from the Harvard Kennedy School’s Belfer Center for Science and International affairs has received a lot of attention given its dramatic conclusion that world oil supply capacity will be growing much faster than consumption growth which potentially could lead to a glut of overproduction and a steep dip in oil prices. By 2020 they estimate additional production could reach 17.6 million barrels per day compared with current capacity of 93 mbd.
In order to achieve such production levels the price of oil has to stay above $70 per barrel in order to maintain profitability from new sources such as oil from shale-rock formations, oil sands and deep water extraction. Most of the production growth will come from Iraq, the US, Canada and Brazil with the US especially standing out as could become the second largest producer after Saudi Arabia and produce half of its own needs by the end of this decade.
These projections together with a continued rise in the world’s proven reserves, which according to BP is enough to last another 54 years the discussions about peak oil could be replaced by peak demand as continued technological improvements and the move towards alternative energy could result in the demand growth among emerging economies being potentially more than off-set by a reduction in OECD demand.
(The author is Head of Commodity Strategy at Saxo Bank)