Weekly Commodity Update
By Ole S. Hansen
(Head of Commodity Strategy, Saxo Bank)
Weakness across the commodity space resumed this week with the broad-based Bloomberg Commodity index falling by more than 1 percent. Multiple factors drove the weakness, not least the continued surge in the dollar, which gathered additional momentum following the intervention on rates and bonds from the European Central Bank on Thursday. The announcement by Mario Draghi that the ECB had cut rates to a record low, while pledging to buy hundreds of billions of bonds to support the Eurozone, triggered a major move in the dollar, with the euro falling to a near 14-month low against the greenback.
Given the dollar’s adverse relation to dollar-denominated commodities, the impact was felt across all sectors. A weaker-than-expected US job report on Friday failed to create much dollar selling, which goes to show the recent change in investor-perception of the dollar.
Cattle futures came top, with supply coming under pressure as the strong rally this year has failed to deter demand for beef among US consumers. December live cattle futures reached a new contract high after rising $10 in five trading sessions.
Following a mid-week slump petrol managed to recover and reached a three-week high. Support for petrol should help crude oil, so the price development for the product is being watched by energy traders as a guide to where crude oil may go.
Cocoa has come under some selling pressure during the past week and momentum has turned negative while the supporting trend-line from 2013 could be challenged soon. A month-long rally has run out of steam as good weather in Ivory Coast and Ghana has raised production estimates for the 2014-15 season. Worries about the Ebola outbreak reaching the area and the negative impact of an El Nino weather event have been downgraded which has helped trigger a turnaround in the price.
The energy sector lost almost 2 percent as natural gas slumped on a continued strong rise in inventories. The US driving season has ended and this normally signals the beginning of a seasonal rise in crude inventories as demand from refineries slow. Some raised volatility was seen following the news about a potential ceasefire in Ukraine as crude oil received a boost from traders concluding that it could potentially lead to a removal of sanctions against Russia. The sanctions are hurting economic activity on both sides and the removal could help support growth and demand for crude oil.
Healthy demand for beef among US consumers has helped the strong rally in cattle futures, which top the Bloomberg Commodity Index.
Following the dramatic sell-off in WTI and Brent crude oil, both have managed to stabilise and establish a range within which they have been trading for the past couple of weeks. From June 24 to August 26 the combined net-long of both crude oils held by speculative traders such as hedge funds fell from 610,000 contracts of futures and options (610m barrels) to 320,000 contracts, the lowest since last December.
With the selling pressure from long liquidation sharply reduced, the risk of further losses have fallen. For the week ahead we are looking for most of the activity to be contained within established ranges which are between 100 and 103.50 USD/oz on Brent crude and 92.50 and 96 USD/oz on WTI Crude.
The selling pressure on Brent crude has also slowed as the supply glut in the Atlantic basin has begun to ease as oil traders are repeating what became a multi-million-dollar trade during the 2008-09 recession. Then cheap spot crude was bought to be stored in tankers and at onshore facilities and sold at higher price in the future. This time the spread between the first and the second futures month in Brent recently reached 80 cents/barrel, enough for traders to step in and buy spot crude, which then has been moved to giant onshore facilities in South Africa. This location is important as oil can be shipped east and west depending on where the best price can be achieved. The dollar is popular at the moment, but the risk of correction has risen and any weakness may provide the energy and other sectors with some additional support.
The strong year-to-date performance among industrial metals continues. This week was no exception, with nickel and zinc doing the pulling, while copper was relatively stable after returning to the lower end of its current range. Supply worries continue to support nickel following news that the Philippines may join Indonesia in banning exports of unprocessed ore. Precious metals suffered with the continued rise of the dollar, while talks of a ceasefire in Ukraine reduced the geopolitical risk bid in the market. Gold reached a near 12-week low while silver has been getting close to the key area of support around 18.75 USD/oz. The widening policy differential between the US Federal Reserve and the ECB is posing an increasing challenge to precious metals, given the current and future impact this may have on the dollar. By how much it will support a continued rise of the dollar depends on inflation and growth developments within the eurozone over the coming months.
A somewhat weaker-than-expected US job report helped settle a few nerves.
The agriculture sector was mixed, with key grain markets remaining under pressure from what is expected to be a record harvest in the US.
THE PENINSULA
