Ole Hansen –
Astrong week for energy and metals helped give the Bloomberg Commodity Index its best week in six.
Renewed dollar weakness provided some overall support while the re-balancing process and worries about new US sanctions on Iran supported oil.
A dovish Fed and weak inflation data supported gold while industrial metals surged higher as Beijing continued its efforts to curb supply in order to reduce pollution ahead of the Chinese Communist Party Congress and the coming winter.
Geopolitical risks also continued to play its part in adding support, both to oil and precious metals, with President Trump picking a fight with anyone from lawmakers on Capitol Hill, the media, his own staff and North Korea.
Most immediate however was the mentioned prospect of Trump in a speech on Friday potentially refusing to certify Iran’s compliance with the nuclear deal.
Beijing sees one of the most important events of the year next week — the 19th Party Congress, which starts on Wednesday.
This is the forum in which the leaders of the communist party are appointed and the economic priorities of the future are outlined.
Beijing’s ambitious plan to bring the pollution problem in the big cities under control may see China become a leader in battery technology, electric motors as well as pollution control itself.
Ambitious future targets for electrical vehicle production have, together with production curbs, supported the recent rally among industrial commodities, not least copper (electrical wiring), nickel (batteries) and aluminium (lighter cars). Fluctuations in the value of the Chinese yuan also tend to impact the performance as seen against HG copper below.
The grain sector was flat with soybeans hitting a 2½ month high after the US government monthly supply and demand report lowered yield and production estimates.
Similar data for corn and wheat were less supportive but both managed to recover from at or near contract lows.
This came as hedge funds stepped in, covering short positions in the belief that prices have gone far enough at this stage.
Hedge funds’ positioning in the week to October 3 showed a net-short in wheat and corn and a net-long in soybeans.
Positioning in all three crops, however, remained below the longer-term average given the abundance of supply.
However, despite seeing a new contract low the corn net-short at 143,201 lots was only 69 per cent of the one-year peak, a potential indication of fading selling appetite.
A weaker dollar and lower bond yields have once again came to gold’s rescue.
After hitting and holding a key technical support level the previous week it even managed to create a bullish hammer formation on the weekly chart.
President Trump’s disapproval rating is once again on the rise as he continues to pick fights with lawmakers on Capitol Hill while raising the stakes with regards to both North Korea (military) and Iran (sanctions). Following the release of surprisingly dovish minutes from the September Federal Open Market Committee meeting and weaker-than-expected inflation data, gold climbed further to trade above $1,300/oz.
The Fed put out a rather sober inflation outlook as they tried to find answers to why a tight labour market had yet to stoke any pressure on prices.
The conclusion from those minutes is that the Fed is not in any hurry to up its measured pace of rate hikes.
The market has currently assigned a 73 per cent chance of the next hike being announced on December 13.
Paper investments through exchange-traded funds have remained robust throughout the recent correction.
Hedge funds, however, have reduced bullish futures bets by 30 per cent during the past three weeks, thereby reducing the risk of additional market pressure from long liquidation.
Having found support at $1,260/oz gold has since recovered, but in order for this to be more than a weak correction within a downtrend we now need to see support being established above $1,298/oz.
Crude oil recovered strongly this past week in response to upbeat comments from Opec about the successful reduction in the global supply glut, a drop in US stockpiles and near-record Chinese imports.
Some short-lived weakness was seen following the release of the International Energy Agency’s monthly Oil Market Report.
It was the news about strong Q2 demand in its previous report which helped trigger the rally to near $60/b on Brent crude oil last month but this time around the report was somewhat less optimistic.
The IEA now sees a risk of the global inventory decline coming to a halt in 2018 in response to strong non-Opec production growth.
These assumptions leave limited or no room for Opec, Russia, and other members to adjust lower the current production cap agreement once it expires next March.
The IEA sees non-Opec production rising by 1.5 million b/d in 2018, slightly more than its global demand growth forecast of 1.4 million b/d.
The weekly US inventory report, however, managed to re-establish support while near record China imports of crude oil last month combined with geopolitical risks related to Iran’s nuclear deal led to a weekly gain.
The near four-month uptrend in crude oil since June was never challenged during the recent correction (chart above). During the past week the market has managed to recover more than 61.8 per cent of the early October correction and it points to another test of resistance during the coming weeks.
Hedge funds have been rewarded for being resilient throughout the mentioned correction with bullish bets on crude oil and products seeing only small reductions during that time.
[Ole Hansen is head of commodity strategy at Saxo Bank]