By Ole Hansen
(Head of Commodity Strategy, Saxo Bank)
Growth-dependent commodities such as energy and industrial metals found support from improved US economic data which also helped global stock markets continue their positive performance. The strength was particularly apparent in the US where the Dow Jones Industrial Index reached a new record high, further adding to the fear of overheated stock markets which continue to be driven by the wall of money being pumped out by several central banks.
The focus on improved economic data increased the uncertainty as to when the US Federal Reserve eventually would begin to scaling back its stimulus measures. This, combined with the continued rise in stocks and bond yields, put precious metals under some continued selling pressure with gold heading for its sharpest weekly drop in more than two months.
The energy sector was the best performing sector as demand for gasoline and crude oil in the US began showing signs of improving. This helped WTI crude to recover from a near five-month low while also receiving a pull from Brent crude which moved back up to the $110/barrel area which coincides with the average price for the past three years. Supporting Brent crude is the continued supply disruption in Libya, combined with other supply concerns related to Nigeria and Iraq. The negotiations between Iran and a group of other countries has so far not yielded any breakthrough and any expectations of Iranian oil flooding the global market seems very premature at this stage.
Soft commodities also received a boost, especially Robusta coffee which jumped by more than six percent as adverse weather in Vietnam, the world’s largest grower of this bean variety which is primarily used in instant coffee, has been hampering the ongoing harvest. The price has been getting an extra boost from hedge funds covering a short position which at November 12 stood at an almost two year high. Sugar dropped for a fifth week in a row as the US Department of Agriculture saw record inventories during the 2013/14 season. Cocoa has got the opposite problem as forecasts of a shortage during the current season has resulted in it being one of the best performing commodities year-to-date and during the week it reached the highest level in two years.
Copper rout halted
The improved economic data in the US but also in Europe and elsewhere helped stopped the recent rout in copper leading it to the first weekly gain in four weeks. Stockpiles of copper held in and monitored by the two major exchanges in London and Shanghai have been declining more or less non-stop since early September. According to Bloomberg copper stocks in London Metal Exchange warehouses are down by 35 percent since reaching the year’s high in June and 64 percent of the metal held is waiting to be delivered which points towards continued demand. Hedge funds turned net-short in HG Copper as of November 12 and the technical break back above $3.2/pound would have triggered short-covering.
Gold, which together with silver has been one of the biggest casualties of the changing macroeconomic environment this year, ran into some additional selling this week and in the process reached the lowest level since early July and is now just five percent away from the low point at $1,180/oz which was reached on June 30. With momentum and the current trend pointing towards lower prices hedge funds and investors in exchange traded products have been net-sellers during November. Especially the net-long position in gold futures on COMEX in New York was almost halved during the first couple of weeks of November.
Technically, gold has found some support below $1,240 which may trigger some covering of short positions after an almost ten percent sell-off over the past five weeks. I would still not look at entering long positions unless we manage to climb back above $1,272/oz and preferably $1,300/oz which is something i consider unlikely near-term as a correction may not take it much higher than $1,265/oz.
WTI Crude oil futures for delivery in January returned to winning form after four consecutive weeks of losses. Refinery demand for Crude oil has begun to pick up and rising prices for products should help maintaining this demand.
The rise, however, was outdone by that of Brent crude which manage to climb back above $110/barrel en route to the October high at $112/barrel. The rally in Brent crude let to a further breakdown in the correlation to WTI Crude with the premium rising to $15.5/barrel, the highest level in eight months.
While the US market is dealing with rising inventories of non-exportable crude oil, several supply disruptions and geopolitical incidents continue to apply upside pressure to the price of Brent crude for spot delivery. This can be seen in a widening of the time spreads between spot and deferred crude. For example, the premium of spot crude over the delivery for April has moved from flat to a backwardation of $1.53/barrel in just two weeks while the oversupply of WTI Crude means that this is trading at a contango of $-0.33/barrel for the same period.
Technically, WTI Crude is currently stuck in a range between $ 93/barrel and $ 96/barrel but the continued pull from rising Brent Crude prices and the improved demand outlook may trigger a move higher. Such a break could signal a move towards the first key Fibonacci level at $98.8/barrel being the 38.2 percent retracement of the August to November sell-off. The Peninsula
