A strong recovery especially during the early parts of July helped the major commodity indices record their first profitable month since March. Over the past week however a great deal of divergence has emerged between some of the individual sectors, especially between energy and precious metals with crude oil rallying and gold falling.
Better than expected economic data from the world’s two biggest consumers of oil: China and USA set the tone for energy markets this week. Not least helped by continued worries about supply disruptions with port strikes in Libya removing more than one million barrels per day from the market. WTI crude oil has been the main beneficiary of these events, not least helped by a strong demand from US refineries due to high gasoline consumption during the current US driving season.
Stronger than expected manufacturing data in both countries and also in Europe helped send equities, the dollar and bond yields higher. This combination of movements was more than what precious metals could cope with and after a couple of weeks of consolidation renewed downside price pressure emerged with silver, almost as usual, taking the lead in the fall.
Negative momentum has been seen across most of the agriculture sector during July as previous years’ worries about supply shortages fade. Optimal growing conditions across the Northern Hemisphere have raised expectations for a bumper harvest of key crops like corn, soybeans and wheat over the coming months.
Crude oil rallies as both supply and demand side issues support
The prices of both Brent and especially WTI crude staged strong recoveries this week as both resumed the rally which for the American produced WTI light sweet crude variety has been going on since April. The rally which picked up speed in early July when USD 99 and later USD 100 per barrel level was broken was driven by a sharp reduction in domestic crude inventories, especially around Cushing, the delivery hub for WTI crude traded in New York. This reduction, some 15 percent, to 42 million barrels, has been the sign the market has been looking for in order for the price to re-connect with global prices primarily determined by that of Brent crude. Improved pipeline and rail infrastructure is now beginning to remove the previous bottleneck that had been built up in the region due to the incredible rise in unconventional production methods, such as shale oil extraction.
The sharp recovery this week, following a late July correction, was driven by supporting fundamentals on rising demand expectations following improved economic data from US, China and Europe while at the same time supply issues emerged, especially in Libya, where barrels were being removed from the market. Almost 80 percent, amounting to more than one million barrels per day, of Libya’s oil exports risk being stopped due to strike actions at key ports. At the same time other geo-political hot spots in places like Iraq, Sudan and Nigeria risk removing additional barrels from the market which will help keep a floor under the price of oil.
US refinery demand will peak within the next couple of months which will be followed by a turn towards producing products other than gasoline. Until such time, news about further reductions at Cushing should help keep the price of WTI crude relatively well supported both absolute but also relative to Brent Crude. The spread between the two crude oils recently reached parity for the first time in three years and while the focus remains on inventory reductions this will remain tight until things eventually settle down at a price which reflects the cost of transporting oil from within the US to coast line refineries.
WTI Crude oil is currently stuck between 103 and 109.30 USD per barrel. A break below could confirm a double top in the market which would target a correction potentially as low as 97. A new high would signal a move initially to 110.55, the 2012 peak followed by the 2011 peak at 114.83 witnessed during the Libyan war in March 2011.
Gold back on the defensive as recent support fade
Precious metals posted a positive return in July with gold rising for the first time since March and silver since January. However, following a period of range-bound trading, the failure to break important technical resistance resulted in some renewed weakness this week, not least driven by the triple combination of rising stocks, bonds and dollar. These movements are all non-friendly towards holding gold at the moment and as a result the yellow metal moved below the 1,300 level in search of support before bouncing on a weaker than expected US jobs report. Support is currently at 1,265 followed by 1,245 a break through which could signal a return to the June low at $1,180 per ounce.
Continued strong physical demand and a slowdown in the selling of Exchange Traded Products has been lending some support while hedge funds have more than doubled their net-long positions, albeit from a record low level. It is however clear at the moment that, while bond yields and equities continue to rise, precious metals will move further away from the top of investment managers’ shopping lists. A trigger such as a surprise slowdown in the US and/or China or resumption of euro area problems or geo-political events seems to be needed before support can be firmly re-established. All is however not lost which Friday’s surprise weaker US jobless report also showed and as long as gold can manage to stay above 1,245 the current move lower is nothing but a correction following a strong July.
Natural Gas lower as milder weather persists
The negative momentum currently engulfing US natural gas was further aided Thursday by a bigger than expected increase in inventories. It comes at a time where the market has been under pressure due to lower demand from power generators as temperatures.The Peninsula
