By Ole Hansen
(Head of Commodity Strategy, Saxo Bank)
Commodities rose for a third successive week, thereby going against the stock market downtrend. Some of the key drivers were a weaker dollar, a dovish US Fed and geopolitical and weather-related concerns. Gains were seen across all sectors, not least industrial metals where nickel and aluminium were strong performers. The energy sector was led higher by gasoline and WTI crude while the agriculture sector received a strong boost from surging coffee prices.
The DJ-UBS commodity index, which will change its name to Bloomberg Commodity Index on July 1 following a deal between the two companies, rose by 1.4 percent and reached a one-year high.
Investor appetite for commodity exposure remains high and demand has picked up again following the March correction. This has primarily benefited energy and agriculture commodities. The total net-long commodity position held by hedge funds and money managers through futures and options in 24 US traded commodities has risen to a new record high of 2,164,000 contracts, representing a value of USD 131.4 billion. A net short position is currently only seen in copper while the exposure of agriculture commodities such as corn, wheat, live and feeder cattle have all reached the highest levels in at least 12 months.
Turning to the individual performances, it was generally a good week with only a handful showing a negative performance, especially cotton which came under pressure from signs of slowing export demand from the US, the world’s largest exporter. High prices in the US following the smallest crop in four years has seen international buyers switch to other producing regions such as India which is currently expecting record production this year. Extreme winter drought in the US may reduce the coming production even further and this may eventually lend renewed support to the price.
CBOT wheat dropped for a second week as an improved outlook for production outside the US helped mitigate some of the concerns related to the US winter crop which has struggled through the very cold and unusually dry winter. Some forecast for rain into next week may help conditions across the US wheat growing areas and this has left the price with limited upside at this stage.
Nickel led the industrial metal sector higher as it climbed for a tenth day on concerns that an iron ore export ban from Indonesia and worries about a disruption of Russian exports would limit global supplies. The metal, which is a key ingredient in the making of stainless steel, has performed strongly since January when the Indonesian government prohibited the export of unprocessed ores. The longer this ban remains in place the higher the risk of a global deficit emerging following years of surplus production. Nickel is a great momentum play as seen in the historical charts. It reached a high of $29,425/tonne before collapsing and reaching a low of $10,750/tonne last April. Following the recent break above 15,000 investment funds and consumers have been bidding it up and if the supply outlook continues to deteriorate a move back towards 18,900 cannot be ruled out.
Crude oil rose during the week as geopolitical concerns mitigated potential price-negative fundamental news. WTI crude got an additional boost from strong gasoline demand but the continued rise in domestic crude inventories, not least in storage facilities along the Mexican Gulf, may eventually pose a threat to the current relative price strength of WTI crude. The increased availability of non-exportable crude on the Gulf coast, the fact that only a limited number of vessels have permission to transport domestically-produced crude to other US ports as well as the continued rise in inventories, could eventually lead to lower prices especially considering the recently established flow of oil south from Cushing to the region.
Brent crude saw its premium over WTI narrow to 4 US dollars per barrel for the first time since last September on a combination of WTI-positive drivers but also rising headwinds in the global market place. Brent crude, being transported by sea, is the global benchmark and therefore more sensitive to changes in the global outlook for supply and demand. The potential for rising supplies from Libya together with slowing demand from Asia and China in particular has therefor impacted the price of Brent the most and left the it struggling to make it back up towards $110/barrel.
OPEC reduced its estimates for how much it needs to produce by 100,000 to 29.6 million barrels per day due to the continued increase in US and Canadian production. Meanwhile, in its monthly report, the International Energy Agency (IEA) left its forecast for global demand in 2014 unchanged at 92.7 million barrels per day.
US oil production is running at the highest level since 1988 which has helped stockpiles rise to a four-month high. The Energy Information Administration (EIA) also reported that the US is now meeting 87 percent of its energy needs, the highest level since 1989 as proven US reserves reach the highest level in 36 years, primarily driven by new technologies such as unlocking crude from shale formations.
Gold continued to recover from the 100-plus dollar sell-off seen during March and after moving back above $1,300/oz it made steady but not particularly convincing progress towards key levels of resistance. The minutes from the latest Federal Open Market Committee (FOMC) meeting turned out to be less hawkish than what Janet Yellen, the Fed chair, initially had led the market to believe, and this gave gold an initial boost. It was further supported by renewed dollar selling and a drop in US ten-year government bond yields back towards the lower end of their current 2.6 to 2.8 percent range. The Peninsula
