WCU: Commodities relieved by weak dollar but Opec haunts oil
By Ole Hansen, Head of Commodity Strategy, Saxo Bank
Commodities with the exception of energy traded higher this week not least due to a welcome
boost from a weaker dollar. The Opec meeting in Vienna created a nervous backdrop for
oil while gold traders remained transfixed on the potential negative impact of a near certain
December US rate hike.
The European Central Bank Thursday seriously wrong-footed markets after it failed to deliver
the significant easing measures that traders and investors had priced in. Investors fled bonds
and stocks while the euro jumped the most since 2009 as overextended bearish bets were
reduced.
The resulting weaker dollar helped provide a general boost to commodities following a tough
week in which Brent crude touched a 6.5-year low on Opec inaction and oversupply and gold a
5.5-year low on US rate hike worries. Industrial metals rose for a second week with the tailwind
from a weaker dollar being supported by news that Chinese smelters were prepared to cut
production.
While a basket of global food commodity prices collected by the UN Food and Agriculture
Organization fell in November, thereby reversing half the rise the previous month, it was a strong
week for grains and soft commodities. Corn and soybeans rose as the dollar fell thereby
improving the appeal of US produced crops on the global export market.
Energy and livestock were the week's fallers
Sugar remains one of the most popular long bets among speculators and this week gave them
little cause to worry with the price holding onto recent gains on the back of a revision lower of the
production outlook in Brazil. During the week of November 24, money managers raised bullish
bets by 17% to 176,000 futures lots, the highest since November 2013.
Iron ore delivered at the ports in China dropped to a record low as winter has taken its toll on
demand from smelters. This at a time where the big three global producers are keeping up
production while focusing on retaining or growing market shares at the expense of weaker
producers.
Sugar's doing rather nicely and a fillip from Brazil won't have harmed that
A fully priced in US rate hike and extensive short position adding support to Gold
Gold has suffered greatly during the past six weeks as the Federal Open Market Committee
began paving the way for a December-16 rate hike. This helped trigger the latest dollar rally
which ran out of steam this week when Mario Draghi kept his stimulus bazooka under wraps. The
dollar selloff created a perfect excuse for money managers holding a record short position to
scale back.
US Federal Reserve chief Janet Yellen bolstered the case for a December rate hike on
Wednesday, noting that improvements across the labour market since October had further
boosted the inflation outlook. Not acting now could inadvertently lead to a future recession as the
Fed could be forced to tighten more rapidly later to avoid "significantly overshooting" its goals.
Yellen's comments helped send precious metals lower but after reaching the lowest since
February 2010 gold recovered ahead of the weekend. Liquidation of dollar longs and a now fully
priced in US rate hike attracted short covering from money managers holding a record short
futures position.
Several layers of resistance could prevent gold from making it back to key resistance at $1100
but one thing we learned - once again - this past week is the ever present risk of a sharp reversal
ones a trade become too crowded in one direction.
Source: SaxoTraderGO
Oversupply remains the overriding theme in oil markets
Brent crude hit the lowest level since the 2009 financial crisis while US inventories rose, despite
a ramp up in refinery, confounding expectations by rising for a tenth consecutive week. This
counter-seasonal rise took US crude inventories some 123 million barrels above the five-year
average and it attracted renewed talks about tightening crude oil storage capacity relative to the
current oversupply.
One indicator which points towards increased demand for alternative storage can be seen in the
cost of hiring supertankers. Floating storage which became a major theme during the early parts
of 2009 seems to making a comeback. Although the economics are nowhere near as favourable
as they were back then the cost of hiring supertankers have nevertheless reached the highest
level since 2008.
Opec stands its ground
Opec long awaited meeting came and went with the cartel raising its production target thereby
legitimising its current above target production levels. The market took the news badly but the
initial selloff was cushioned by the knowledge that speculative shorts are already at record
levels.
The conclusion is clear that Opec mean what they say about production cuts can only be carried
out with the co-operation of non-Opec members. With Russia having said that cuts where not an
option at this stage the attention automatically turns back to the high cost producers in the US for
the so far illusive cut in production.
The 12 Opec members have collectively seen a spectacular slump in revenues this year
compared with the previous four years of $100/barrel plus oil prices. Revenues are expected to
hit the $500 billion mark in 2016 compared with the record $1,200bn back in 2012. This was a
year where heightened worries about geopolitical supply disruptions and the introduction of
Iranian sanctions led to elevated prices throughout the year.
Fast forward and the lifting of Iranian sanctions and with the expected rise in exports into an
already oversupplied market will create a challenging few months. A development that Opec with
its statement following the meeting failed properly to address.
Brent crude closed at a new multi-year low this week with negative fundamentals battling it out
against an overextended speculative short position.
Source: SaxoTraderGO
Crude oil has, despite the overall negative fundamental outlook, managed to settle into a range.
Strong production from non-Opec members such as Russia combined with resilient production in
the US and the above-target production from Opec have all conspired to create a negative price
environment.
But as a result of this, we have continued to see money managers increase bearish oil bets. Last
week they hit a new record and with that we are also seeing an increase risk of a quick sharp
bursts of short covering similar to one seen in August when the price of oil spiked by 25% in just
three days.