By Ole Hansen
(Head of Commodity Strategy, Saxo Bank)
Many of the major financial markets went against current trends over the past week resulting in increased volatility and uncertainty about the near-term direction. Worries about an emerging market slowdown heightened risk aversion at a time of year where many investors are still looking for the right trading themes for 2014. This aversion caused the US dollar to weaken, not least driven by JPY buying as overextended short positions were scaled back. Falling emerging market stocks and currencies spread to some of the major stock markets with the S&P 500 falling for a second consecutive week. Bond markets received a boost from this with US 10-year government bond yields falling to a two-month low.
These developments played into the hands of gold investors with both the physical metal and gold mining stocks rallying while growth-dependent commodities such as industrial metals fell. Brent crude also struggled while the US energy sector was somewhat immune to these potential negative developments as the key focus was domestic US issues such as the increased pipeline capacity from the US Midwest to the Gulf of Mexico (WTI Crude positive) together with the very cold wind winter which lent support to heating oil (ULSD) and especially natural gas.
Natural Gas (NGG4) was the best performing commodity for a second week, jumping to almost $5 per term, a level which was tested but not broken during a couple of attempts back in 2010 and 2011. The colder than normal winter weather in the US has increased demand for gas to the extent that inventory levels have dropped to the lowest since 2005 for this particular time of year. Some 2,423 billion cubic feet are currently held in US underground caverns which is 12 percent below the five-year average. Every weekly draw from here until the end of the withdrawal season in late March could take inventory levels down to worrying levels and this has provided the strong support in recent weeks. Upside momentum remain firm but a sudden change in the weather carries the risk of triggering a significant amount of profit taking.
Brent crude oil (LCOH4) underperformed WTI crude oil which led to the arbitrage between the two global benchmarks dropping back below 10 dollars for the first time since early November. Increase supply from Libya and a potential slowdown in China hurt Brent crude while WTI crude got a boost from the news that TransCanada Corp had opened the southern leg of its Keystone XL pipeline which has a capacity of 300,000 barrels per day. This is expected to alleviate the supply glut at Cushing, Oklahoma, the delivery point for WTI crude oil futures contracts traded in New York. Just like natural gas, the demand for heating oil has also been lifted by the very low temperatures currently sweeping across the US eastern seaboard. Once temperatures return to normal, WTI crude oil is expected to weaken again amid ample supply from the continued increase in shale oil production. Resistance will increase as it approaches $100 with the trend line from the August high at 98.25 and the 200-day moving average at 99 both having the potential to halt the current rally.
Cocoa (CCH4) moved within reach of the highs seen last December after jumping the most in 16 months on Thursday. Improved economic activity in Europe, (the world’s largest consuming region of chocolate), together with an industry report pointing towards a significant deterioration in global stocks provided support. A leaked report from The International Cocoa Organization showed an annual drop of 17 percent in global stockpiles as of last September and current market expectations point towards a supply deficit in the next two years. This outlook has been underpinning cocoa prices since last summer and further upside potential exists considering the current price of $2,800 per ton is still some 25 percent below the latest peak in 2011.
High Grade Copper (HGH4) dropped for a fourth week in a row after manufacturing activity in China slowed for the first time in six months and regulators stepped up their scrutiny of potential credit risks within certain sectors. The fall was somewhat cushioned by a continued drop in inventories held at warehouses monitored by the London Metal Exchange. Stockpiles there have been falling 20 weeks in a row to the lowest level in a year while potential supply disruptions out of Indonesia also lent support. The price remain range-bound within a $3.15 per pound to 3.40 range, but the worries about demand from China, which consumes 40 percent of global supply, should keep the focus on the downside near-term.
Gold (XAUUSD) continued to rally and reached a two-month high following the longest weekly winning streak since September 2012. Gold’s credentials as an alternatively investment resurfaced, not least helped by the simultaneous drop in the US dollar, stocks and bond yields. The stock market weakness which led to buying of bonds had the most significant impact and as a result, the December high at $1268 per ounce was challenged which potentially now could see gold target its 200-day moving average currently at $1,318 per ounce. Total holdings in Exchange Traded Products (ETP) did not lend much support to the rally as it fell by 10 tons to the lowest level since 2009. As the rally was triggered by emerging risk aversion and worries about emerging market slowdown silver became a reluctant follower and it stayed within its established range and resistance at $20.64 was left unchallenged. THE PENINSULA
