Commodities trading was mixed during this past week, with strength across the energy sector being offset by weakness in agriculture – especially the soft sector which dropped to a one-year low led by continued weakness in coffee and cotton. The industrial metal index showed a small gain, with focus on developments in China following the end of the 20th National Congress of the Chinese Communist Party, and the dollar – which traded softer on the week.
Meanwhile, precious metals found some support following a change in sentiment across bonds and the dollar on speculation that we may approach peak hawkishness from the US Federal Reserve.
The latest recovery in gold followed increased speculation that the Fed is preparing to downshift in pace of rate hikes by early next year. The idea being that the FOMC’s willingness to offer time to assess the economic impact of the rapid pace of rate hikes and quantitative tightening already seen. However, some of the initial gains faded towards the end of the week after the dollar showed renewed strength especially against the euro after the ECB surprised to the dovish side, as well as the Japanese yen after the Bank of Japan maintained its yield cap and the government announced massive fiscal stimulus. With the Bank of Japan not allowing government bond yields to adjust, this risks adding to the yen’s weakness as long as other major central banks are not in easing mode.
Crude oil supported by tight fuel supply outlook.
Crude oil remains on track for a second week of gains but for now without challenging resistance indicating a market still struggling for direction with no overriding theme being strong enough to set the agenda. Strength this week has been driven by a continued developing tightness in the fuel product market, US exports of crude and fuels setting a weekly record, the weaker dollar as well as strong buying from China as refineries there plan to boost fuel exports through the end of the year
While crude oil has been mostly rangebound since July, the fuel product market has continued to tighten as supplies in Europe and the US have become increasingly scarce, thereby driving up refinery margins for gasoline and distillate products such as diesel, heating oil and jet fuel. The focus in terms of tightness remains the northern hemisphere product market where low stocks of diesel and heating oil continues to raise concerns. The market has been uprooted by the war in Ukraine and sanctions against Russia, a major supplier of refined products to Europe. In addition, the high cost for gas has supported increased switching activity from gas to other fuels, especially diesel and heating oil.
This tight market situation was recently made worse by the Opec+ decision to cut production from next month. While the continued release of US (light sweet) crude from its strategic reserves will support production of gasoline, the Opec+ production cuts will primarily be provided by Saudi Arabia, Kuwait and the UAE – all producers of the medium/heavy crude which yields the highest amount of distillate.
As long as the product market remains this tight, the risk of seeing lower crude oil prices -despite the current worry about recession - seems to be low so we maintain our forecast for a price range in Brent for this quarter between $85 and $100, with the tightening product market increasingly skewing the risk to the upside. (The writer is Head of Commodity Strategy, Saxo Bank)
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