By Ole Hansen (Head of Commodity Strategy, Saxo Bank)
News from Washington that a temporary deal to avoid a technical default may be reached failed to trigger much of a reaction in commodity markets with the market having refused to even consider a failure. On that basis commodity traders were already expecting a resolution resulting in some additional pressure on precious metals. Copper moved to the lower end of its current range as long-term price projections were lowered while the energy sector was the best-performing sector for a second week led by natural gas and petrol.
Agriculture prices were mixed with the current momentum in cocoa and sugar ensuring another week of gains while key crops, apart from Paris wheat, continue to be sold as a large production is currently leaving the fields from the Black Sea through Europe to the US plains helping to ensure a coming season with plenty of supply.
The energy sector was mixed with colder-than-normal weather lending support to natural gas prices as increase demand from power plants helped trigger a healthy rally. Seasonally the month of October has shown higher prices over the past five years and this year looks no exception. Demand for gas will pick up as we head towards the US winter and inventories will begin their annual decline from December to February.
As usual the speed of this decline will help determine the price during this time. Near-term with several weeks of net injection still expected, further price advances will depend on weather, developments and demand from industry. We are looking for some resistance at the 200-day moving average on the November gas contract at $3.87 per therm.
Petrol delivered out of New York harbour was another strong performer with the price receiving support from declining refinery demand due to seasonal maintenance and reduced incentive to imports from Europe as the profit margin has dropped close to zero.
The declining demand from refineries helped trigger the relative weakness in WTI crude as weekly inventories jumped the most in a year. The International Energy Agency (IEA) in its monthly report sees non-Opec production rise by 1.7 million barrels per day (mbpd) the most since the 1970s next year. That will allow Opec to reduce its output from recent record levels.
Near-term, however, the IEA saw Opec’s September production drop below 30 million barrels for the first time in two years due to persistent supply disruptions in Iraq, Libya and Nigeria. Looking ahead to 2014 the risk of a move below $100/barrel on Brent crude has increased on the back of the EIA’s projections but much will still depend on political developments in North Africa and elsewhere.
These disruptions and fear of geopolitical events as highlighted by the brief detention and release of Libyan Prime Minister Ali Zeidan yesterday continue to support a risk premium in the price of oil so despite the outlook for supply growth easily meeting future demand growth, the price of Brent crude, the main beneficiary of the risk premium, has remained resilient, sticking like glue to a range around $110 per barrel. As a result of higher US inventories and continued supply disruptions elsewhere, the Brent crude premium over WTI crude rose to almost $10/barrel, the highest since June.
Precious metals were once again on the receiving end of investor selling this past week with the US political fight over the budget and the looming debt ceiling paring support. A couple of failed attempts to rekindle some upside support from the debacle in Washington quickly ran out of steam and with signs now that a temporary deal can be reached, support has eroded further raising the risk of a deeper correction. Beyond the current political debate, the focus will return to the speculation as to when the US Federal Reserve might start to reduce its asset purchase program. That could also see a return of higher bond yields which will be non-supportive for precious metals such as gold.
Physical demand out of Asia has been slowing while the reductions of holdings in Exchange Traded Products continue, albeit at a relatively slow pace. The options market is also clearly showing that the direction most feared at the moment is to the downside. The cost of buying downside protection has risen over the past week and costs considerably more than a similar bullish strategy.
Gold broke down and out of its tight range of $1,278-1,323/oz and this could now set up an initial move towards $1,233/oz.
The Peninsula
