Hot metals lead the way as agri and energy lose out

Ole Hansen – With year-end fast approaching the Bloomberg Commodity index traded close to unchanged on the week and just like the year-to-date performance it was the metals sector led by industrial metals which offset losses in energy and agriculture. The energy sector was lower with crude oil trading close to unchanged while natural gas continued to suffer with bulls struggling to hold onto positions as they have been left waiting for colder weather to arrive in the US. A major but temporary pipeline closure took out a major chunk of supply from the North Sea. It helped drive Brent crude oil to a fresh two year high before end of year profit taking knocked it lower. Adding to the weakness were monthly reports from major oil organisations all raising forecast for non-Opec production in 2018.
Gold received a boost from another dovish US rate hike, the last under Janet Yellen’s tenure. Just like the previous four US rate hikes in this cycle gold had been struggling ahead of the announcement. US tax deal wobbles, a weaker dollar (against the Japanese yen) have raised the prospect of history repeating itself with another post-hike price recovery.

Gold has been caught within a wide $1200 to $1350 range for some time now. We expect this rangebound trading behaviour to continue into 2018 with the risk in our opinion being skewed to the upside. Growth concerns combined with the risk of rising inflation could swing the pendulum back in favour. Geo-risks both political and military remains elevated into 2018 and with that in mind investors are likely to maintain and potentially increase demand for safe-haven or tail-end risk protection via precious metals.
Before Janet Yellen’s final and once again dovish rate hike, gold had found support at $1240/oz, the 50 per cent retracement of the December 2016 to September rally. Looking ahead resistance above at $1260/oz and more importantly at $1267/oz needs to give way before short-covering and additional longs can take it higher.
Supply disruptions in Northern Iraq in October, Canada in November and now the North Sea have all together with robust demand and supported by the Opec+ deal to extend production cuts been supporting oil prices this quarter. Brent crude oil surged above $65/b to reach the highest since June 2015 following news that the Fortis Pipeline System, which handles more than a quarter of the North Sea production, had been shut due to the discovery of a fracture in the pipeline.
The rally, however, quickly faded as profit taking emerged with Christmas and New Year fast approaching. Funds holding a combined long in WTI and Brent crude oil of close to one billion barrels could be tempted to scale back positions in order to avoid the potential negative impact of adverse movements during what is normally a low liquidity time of the year.
The weekly US status report showed the continued drop in crude oil stocks being partly offset by rising gasoline and product stocks. Production reached a fresh record as US shale oil producers continue to benefit from the rally seen these past six months. Heading into 2018 the big unknown remains the potential growth in US shale production.
Monthly oil market reports from the three major oil organisations all maintained a steady outlook for global demand growth at close to 1.5 million b/d while all raising non-Opec supply to almost equal the increase in demand.
This development, if confirmed over the coming months, could see Opec and its non-Opec friends’ efforts to balance the market being pushed further out towards 2019. And with that the increased uncertainty about whether the group will manage to stick together for as long as this is needed.
Brent crude oil has settled into a relatively tight 4 dollar range with the failed spike above $65/b highlighting end-of-year profit taking. In order for the trickle of long-liquidation turning into a flood the price need to break below the psychological $60/b level.
This will be my final weekly update before year-end so let me finish by taking a look at what happened in the commodities space during 2017. It’s safe to say that 2017 turned out to be another bumpy year for commodities. Following a return to profit for the first time in six years in 2016, the Bloomberg Commodity Index is once again on track to record a small annual loss. All sectors apart from industrial and precious metals yielded a negative return, not least the agriculture sector which slumped to a nine-year low.
As can be seen from the tables above, the year belonged to industrial metals, not least aluminium, copper, and zinc, with precious metals being the only other group managing a positive performance.
High-flying palladium, currently up by 50 per cent, is not included in the index due to its limited liquidity.
The agriculture sector slumped to a nine-year low with livestock the only sub-sector managing a positive performance. Soft commodities with the exception of cotton were sold amid ample supply while key crops suffered under the weight of stock following another bin-busting year of crop production.
The important US crop market has not experienced any real weather threats to supplies since 2012 and during this time farmers have continuing to squeeze more yield out of every acre.
The energy sector witnessed a recovery in crude oil with Brent crude outperforming WTI due to the spread widening but also due to Brent’s earlier return to backwardation. Natural gas remained under pressure from its notorious bearish curve structure and the delayed arrival of winter demand in the US. On a five-year basis, natural gas is the worst performing commodity with a loss of 72 per cent.
(Ole Hansen is Head of Commodity Strategy at Saxo Bank)