The strong momentum seen across most commodities in recent months continued into the second week of January, albeit at a slowing pace. The main exception being the grain sector which spiked higher after a government report lowered supply while raising demand by more than expected.
Overall, however, the sector continues to focus on multiple tailwinds from tightening supply, a global market flushed with cash driving speculation across markets and increased demand for inflation hedges, and not least the prospect for a vaccine-led recovery in global demand as well as ongoing weather worries.
All of this during a time when the pandemic is still raging across many countries, especially in winter-hit regions across the northern hemisphere where the prospect for improvement — vaccine or not — is unlikely to occur until warmer weather arrives in March and April.
While the rally may pause until the vaccine rollout gathers momentum, the market will have to rely on continued investment demand being strong enough to keep markets supported during the coming months when the negative impact of lockdowns and reduced mobility will be the greatest. Absent from the list of supportive drivers this past week has been the dollar and bond yields which have both risen ahead of President-elect Joe Biden’s announcement of a $1.9 trillion COVID-19 relief package. It was rising yields and dollar short covering that helped drive the latest correction in gold and silver.
The plan received a muted response given the prospect for a dwindled down package due to the potential lack of support from key individual Democrat and independent Senators.
Grains: The six-month long bull market in crops received a fresh boost this week after the World Agriculture Supply and Demand (WASDE) report from the US Government lowered the outlook from already-reduced expectations. The combination of cuts to US corn and soybean production, and estimates for more exports helped support prices with both crops surging to fresh seven-year highs.
The US Department of Agriculture (USDA) pegged the 2020/21 domestic soybean ending stocks outlook at 140 million bushels, down 77 per cent from the 610 million bushels projected in August, and corn ending stocks at 1.552 billion bushels, the lowest since 2013 and down more than 50 per cent since the June projection.
The USDA also lowered its forecast for upcoming harvests in key export countries Brazil and Argentina.
In addition to this, we have seen wheat prices jump after Russia said its new wheat export tax that, together with export curbs, shall be introduced on February 15 will rise even further in efforts to cool domestic food prices.
This combination helped drive Chicago wheat prices to a fresh six-year high.The rally in agriculture commodities led by grains and oil seeds has to a certain extent occurred while the market focus has been elsewhere.
But the continued surge, which has seen the Bloomberg Agriculture Index rise by more than 40 per cent during the past six months, has started to bring back worries about the impact on economies and inflation.
Crude oil’s impressive rally since the first vaccine announcements in early November is showing signs of running out of a steam.
After reaching $57.5/b on the back of Saudi Arabia’s unilateral and surprising 1 million barrel/day production cuts in February and March, the attention has once again returned to the pandemic and its continued negative impact on mobility and with that, the demand for fuel products.
Somewhat offsetting this disruption has been the frigid cold weather situation in Asia which has seen the price for spot LNG cargoes temporarily surge off the chart, thereby boosting replacement demand for distillate products such as diesel.
Adding fuel to the latest run up in prices was the confirmation last week of Joe Biden as the next president. The prospect for an inflationary stimulus package to support the recovery has given the price of oil a non-quantifiable boost from investors and speculators seeking protection against reflation and with that the prospect for a weaker dollar.
[The writer is Head of Commodity Strategy at Saxo Bank]
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