By John J Hardy
(Head of FX Strategy, Saxo Bank)
Commodities were broadly unchanged on the week, with the Dow Jones-UBS Commodity Index registering a nearly perfect unchanged reading for the week (as of our late Friday morning price change capture.) There was plenty of movement among the products, however, as the recently strong Arabica coffee market corrected lower despite the ongoing worry about weather in Brazil and crop disease in Central America and long term fears of an el Niño’s effect on weather in Central and South America. Elsewhere, US Corn recovered sharply from last week’s dip on planting delays and wheat is setting new highs for the year in anticipation of tonight’s crop report, which will give a clearer view of the damage to the winter crop. Interestingly, trading in energy markets was rather quiet despite Putin’s blinking in the confrontation over Ukraine.
Trading in crude oil markets was rather moribund worldwide despite huge open interest and notable developments in Ukraine, as Putin shows signs of blinking, and even after a senior White House official announced late in the week that the White House is examining the longstanding ban on the export of crude oil. The question of exporting US crude has become a pressing issue as surging US shale production has created a massive glut of US inventories, particularly in the Gulf of Mexico region. Shale oil is going into inventories rather than simply triggering a fall in imports because of the mismatch of the shale oil’s quality with the region’s refining capacity, which is optimized for heavier, sourer grades that are imported.
The medium-term bearish case for oil is readily evident if the US is able to start exporting, though one wonders how quickly the US political system can move on this issue. The US has increased oil production by almost 1 million bbl/day over the last 12 months, most of it in shale oil, and could be headed for similar gains this year, though a US inability to export crude could mean that production gains are not realized if there is simply nowhere to put the oil. The implications are for a further widening of the spread in Brent/WTI pricing in the months ahead in favour of Brent, while believers in eventual US exports might consider looking for an unwinding in the still very steep contango in the US WTI curve (at about 9 dollars at present).
The news out of Libya, meanwhile, was not encouraging, as the latest attempt to appoint a new leader for the country faces opposition from the rebels in control of export terminals and there is no sign yet that the oil is set to flow. Elsewhere, US natural gas corrected sharply lower in the wake of the weekly US storage report, even as this was largely in line with expectations for a modest build. The chart for spot gas looks bearish, with a move toward 4.00 dollars possibly in the cards if the inventory builds proceed apace.
Gold and silver simply can’t choose a direction lately. Both gold and silver have bounced promisingly from range support levels on a number of occasions in recent weeks, but none of these bounces has yielded to sustainable gains. This week, the latest bounce from support also failed to blossom into a bigger rally, despite the ECB’s Draghi apparently setting up a June ECB move with dovish rhetoric at this week’s meeting. The USD finally snapped back to the strong side in the wake of that ECB meeting and may also have contributed to the sell-off later in the week. The range supports at just below 19.00 in silver and the 1270/80 area in gold remain the key focus from here on whether precious metals can take stand. Both of those levels are just below the metals’ 200-day moving averages as the open interest in gold is near multi-year lows and speculators have backed off relatively large positions they had built by mid-March in US gold futures.
US Soybean prices were more or less unchanged on the week despite stronger than expected Chinese import demand and as Brazil announced that their crop, that is now almost fully harvested, will be exceed the previous estimate by nearly half a million tonnes. Wheat prices pushed to marginal new highs for the year as the market anticipates the season’s first crop report today (Friday, May 9) and on fears that the harshest winter weather in modern memory has inflicted major damage. Planting conditions in Australia, meanwhile, reportedly improved, with widespread rain in Western Australia. Corn remained near the highs of the cycle and the forward curve is flat, suggesting that the market believes the planting season will eventually pick up despite recent delays.
In livestock, the pressure seems to be coming out of the live cattle contract as we rolled to the cheaper June contract, and the feeder cattle rally saw the price action a bit more sideways in the most liquid August contract after we set new price records last Friday. US hog prices, meanwhile, were weaker, and the forward curve remains in steep contango (beyond the July and August contracts), as the market assumes the supply shortages caused by recent disease outbreaks will be overcome on the other side of the summer.
The Peninsula
