WEEKLY COMMODITIES UPDATE -
By Ole S Hansen -
Commodity markets moved up a gear during the past week as strong performances were recorded across most sectors apart from industrial metals and livestock. Chinese and US economic data continued to improve, raising the prospects for the global economy and supporting increased demand for commodities. The S&P 500 index recorded additional gains while the dollar was unchanged against the euro but made additional gains against the Japanese yen, which hit a 2.5 year low — the main story in currency markets so far this January.
Strong gains were particularly seen in natural gas which has begun to recover from a milder-than-expected winter sell-off and received a further boost from a bigger-than-expected decline in US inventories which points towards robust demand. Platinum and palladium rallied on news that production of platinum in South Africa is going to be scaled back. This put the focus on dwindling supplies at a time of robust demand from the car industry, especially in the Far East and the US. In consequence, the price of platinum is back trading at parity to gold for the first time since March 2012.
The prices of key crops such as corn, wheat and soybeans have begun to move higher again following recent corrections. Prices are being supported by drought conditions in the US and Argentina plus a recent US government report which pointed towards further tightness in stocks during this current crop season. This raises the need for a bumper 2013/14 harvest so once again , weather developments across the key growing regions on the northern hemisphere will be watched closely as spring approaches.
The energy sector was generally stronger as the danger of geopolitical-led price spikes surfaced once again. The hostage crisis in Algeria received some attention as it raised concerns about the security of energy infrastructure in the country which produces around 1.4 million barrels per day. Brent crude oil moved back towards the higher end of its current range but did not find enough ammunition to challenge resistance, which is currently the January high at $113.30/barrel while support can be found at the 200-day moving average currently at $109.
Both Opec and the International Energy Agency (IEA) released their monthly reports this week. The IEA’s report warned about tightening oil markets due to increased Chinese demand and reduced Saudi Arabian supply. The western countries’ oil watchdog said it expected demand growth to rise by 930,000 barrels per day (bpd) in 2013, up from a previous estimate of 865,000 bpd. Opec, meanwhile, struck a more cautious note when saying that increased competition from non-Opec suppliers due to new production techniques could trigger reduced demand for the cartel’s oil. BP seems to have gone along with this assumption as its latest long-term energy outlook saw Opec’s spare capacity reaching six million bpd by 2015, the highest since the late 1980s. Increased spare capacity is one the most important factors when looking for price stability and following Saudi Arabia’s cut in December its spare capacity (defined as volume of production that can be brought on within 30 days and sustained for at least 90 days) has risen to the highest level since January 2011.
The outperformance of WTI crude oil prices over Brent crude which we have seen during the last month continues with the spread contracting before finding support at $15/barrel. This is the lowest level since last July and it comes after an October high of $24/barrel. The contraction was triggered by the continued improved outlook for the US economy combined with the long awaited expansion of the Seaway pipeline from Cushing, the delivery hub for NYMEX WTI crude, to refineries along the Mexican Gulf. The increased flow of crude oil to the Gulf will help reduce supply pressure on Cushing and at the same time make more of the oil that was previously landlocked available to the international market where prices are currently determined by that of Brent crude.
The spread has now reached support at $15/barrel and a break below would signal additional WTI crude outperformance as it moves closer to international levels. Forward prices on the two crude oils currently indicate that it will take another two years for the spread to halve from here.
Gold has managed to recover from its early January slump which was triggered by uncertainty about the duration of quantitative easing (QE) in the US. Having moved back close to $1,700/oz, a major test of the current strength and conviction among investors could be tested soon with $1,710/oz. offering plenty of technical resistance. A move higher through this level would help steady the market’s nerves, especially among leveraged investors such as hedge funds who have been scaling back net-long positions in recent weeks. Price action is, however, now very much driven by economic data from the US with improved data creating headwinds while weaker does the opposite.
Gold and silver together with the two PGM’s platinum and palladium should however continue to find support as QE is nowhere near its completion, forward inflation expectations stays near recent highs and physical demand from China especially should pick up as the economic outlook continues to improve. As the chart below shows the key support remains the 200-day moving average at $1,662/oz. while the main resistance area to look out for is $1,710/oz as mentioned due to trend-line and Fibonacci resistance converging on this level.
The investment demand for Exchange Traded Products (ETP) holding precious metals has remained robust throughout the recent correction with total holdings in gold falling by less than one per cent, according to Bloomberg, while silver has seen continued buying interest. Not least this week where the biggest silver exchange-traded fund (ETF), the iShares Silver Trust, saw its assets climb by 572 tonnes, the most in five years. This dramatic increase brought the total known holdings in such silver funds up to a new record of 19,687 tonnes, an increase of 770 tonnes so far this January. With global economic activity expected to improve silver’s double role as both a financial investment and an industrial metal could help explain this sudden increased interest for silver. Silver holdings through ETPs are only 7.5 greater than gold so it still represents a relatively small value considering gold’s price tag which is 53 times greater than silver. (The author is Head of Commodity Strategy at Saxo Bank)