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By Ole Hansen
11th November, 2015
Ole Hansen– Head of Commodity Strategy / Saxo Bank
Commodities returned to the 13-year low from August following a robust US job report Friday which left the path to a December rate hike wide open.
The speculation surrounding the comb
o of a near-certain US interest rate hike and additional quantitative measures from the European Central Bank in December sent the dollar higher and the prospect of an end-of-year rally for the greenback rose.
These developments combined with continued oversupply of key commodities at a time where global growth and demand is being called into question continue to apply pressure to both growth and investment dependent commodities.
The only sector showing gains during the past month are soft commodities which has been driven higher by sugar. The rally in sugar, palm oil and dairy triggered the biggest jump in the cost of global food commodities since September 2010.
Precious metals were hurt badly by the stronger dollar and renewed prospect of a US rate hike in December and investors spent the week bailing out of recently established longs in futures and exchange-traded funds.
Copper hit a one-month low after declining factory orders in Germany raised concerns about demand from this the world’s third biggest copper consumer after China and the US.
Crude oil focusing on US data
The weekly inventory report from the US Energy Information Administration once again supplied a market-moving set of data. After rallying strongly following the previous report, crude oil gave back some of these gains and both WTI and Brent crude oil remain increasingly stuck within established ranges. The prospect of an even stronger dollar following the US job report provided some additional selling pressure ahead of the weekend.
What caused the initial weakness this week was the production data which showed an increase of 48,000 barrels to 9.16 million barrels. US production peaked at 9.6 million barrels/day back in June but remain unchanged on the year while the number of rigs have fallen by 60%.
Additional robust production in the North Sea along with Opec’s well-established policy of keeping production high in order to reduce supply from high cost producers is only slowly showing signs of being successful.
US crude oil production showing resilience despite continued cut in rigs
Integrated oil and gas companies during the latest earnings season have performed reasonably well due to their diversified profit streams from downstream activities such as refining and chemical businesses. But this has not shielded them from cutting cost even further so we continue to see a sector where jobs and investment plans are being cut.
These decisions will eventually help the sector and prices to recover. In the near-term, however, Opec’s production, courtesy of Iran, is expected to rise even further, so continuing to delay the re-balancing process.
US refiners are coming out of maintenance earlier than expected and it should help increase demand for crude oil. But with the northern hemisphere winter being a low demand season for gasoline it may only result in inventories of fuel rising further. Until we see supply from the wells being reduced, the upside potential for Brent and WTI crude remain limited.
Market-moving events during the coming week, apart from the usual US inventory report on Wednesday will the be the release of monthly reports from Opec on November 11 and the following day from the International Energy Agency. Traders will be looking for any change in expectation for demand growth and production levels going into 2016.
Gold on the edge following a brutal week
Gold and silver had one of their worst weeks in a year after the FOMC on October 28 increased the risk of a rate hike in December. Following a strong job report the path to a rate hike has been left wide open with the odds of a December rate hike rising to near 75%. Inflationary pressures also emerged in the report from hourly earnings rising 2.5% over the past 12 months, the most in more than six years.
Hedge funds who helped drive gold to $1192 less than a month ago where wrong footed by the hawkish tone from the FOMC and the past eight days have seen some brutal long liquidation. Both in futures but also in exchange-traded funds where the reduction during the past week has been one of the biggest during the past two years.
Balancing precariously close to the August low has sharply reduced our call for an end of year rally. We have argued before that the first rate hike could become a buying opportunity but with the market getting the latest move completely wrong the exercise of rebuilding confidence will take a long time.
The physical market will be watched closely over the coming week for signs of whether demand will pick up following the return to a multi-year low. The uncertainty of how to deal with the first rate hike in nine years will most likely keep commodities and precious metals especially under pressure ahead of FOMC meeting on December 16.
Global food prices jumped in October
The return of the El Nino weather phenomenon is changing conditions around the world.
While creating drier conditions in Southeast Asia and Australia, it also carries the risk of excessive rain in South America. The result of the current El Nino which is forecast to be be the worst in decades helped drive global food prices higher by 3.9% during October.
The UN Food & Agriculture Organisation tracks a basket of 73 food prices in five different categories.
The rise during October was the second in a row and the biggest since September 2010 but overall the index remain well below their equivalent level a year ago. However in a statement, the FAO said: “There is definitely more potential for higher prices in the coming months”.
Global supplies of grains remain ample with the global wheat stock expected to reach a new record during the 2015/16 season. However adverse weather led to a big jump in the price of sugar, palm oil and dairy. Sugar saw the biggest jump from a relative low base after excessive rain in Brazil and dryness in India and Thailand raised concerns about supply.
After hitting a multi-year low in September sugar has rallied strongly since. Bullish bets from hedge funds has jumped to a 16-month high and after hitting 15.50 cts/lb this past week some profit taking emerged.