Commodity weekly: Industrial metals gain strength during a week of crude oil weakness

Overall, these latest Chinese stimulus measures potentially underpinning demand in the world’s second largest economy, combined with the beginning of a US rate-cutting cycle, reducing the risk of a recession, and revised US data showing the economy bounced back from the pandemic stronger than initially expected, all supported a third weekly rise in the Bloomberg Commodity Total Return Index.

However, the index, which tracks a basket of 24 major commodities split almost evenly between energy, metals, and agriculture, saw its overall gains for the week (1.7%) and the month (4.1%) hampered by renewed weakness in the energy sector where crude oil and the fuel products sold off again as the prospect of stabilising demand was offset by worries about rising supply, especially from Libya and not least Saudi Arabia.

Rising risk of gold buying fatigue

It's been nearly a year since gold began its impressive rally on October 10, driven by heightened geopolitical tensions after Hamas attacked Israel, pushing prices up by almost 50%. The rally has been supported by several key factors: fiscal profligacy, Federal Reserve rate cuts, geopolitical risks, central bank efforts to "de-dollarize," and gold's appeal as a safe haven. Strong demand through derivatives, like futures and options, has also contributed, creating a FOMO (fear of missing out) environment among traders and investors.

Silver, often seen as the cheaper and more volatile counterpart to gold, hit a 12-year high, driven by gold's rise and a boost in industrial metals from China's stimulus measures. However, after failing to hold above $32.50, stop-loss selling was triggered, highlighting silver's more erratic nature compared to gold.

After a series of record highs spurred by a large US rate cut, prices are now showing signs of stabilizing, with buying fatigue emerging. A 4-6% price correction could occur without hurting the overall bullish sentiment, as most supportive factors remain intact.

Physical demand is slowing as investors hesitate to buy at record prices, but short-term momentum traders continue to drive futures demand. A potential rally stall may come from China, where stimulus measures have lifted the stock market, potentially reducing gold’s appeal as a safe-haven investment.

A correction from current levels near USD 2,670 could take gold lower by around 4.5% towards USD 2,547, or in the worst case, to the 50-dollar-wide band around USD 2,500.

Crude prices drop again as Saudi and Libya supply concerns grow

Crude oil's failed attempt to join the China stimulus-led rally seen in other commodities this past week signals a shift in focus from improved demand to concerns over additional supply from Libya and possibly Saudi Arabia. Price declines accelerated after a Financial Times report suggested Saudi Arabia might abandon its price-targeting strategy and increase output—a major shift from OPEC+’s previous efforts to cut production and support prices.

Since November 2020, OPEC+, led by Saudi Arabia, has repeatedly cut output to maintain price stability, but the strategy has faltered due to sluggish demand, especially from China, the world's largest importer. In response, OPEC+ postponed the rollback of 2.2 million barrels per day of voluntary cuts until December, with Saudi Arabia bearing the brunt of these cuts. Meanwhile, the kingdom's market share and revenue have slumped amid rising non-OPEC+ production and slowing demand.

The FT article may be denied, but Saudi Arabia's frustration with non-compliant members like Iran, Kazakhstan, Russia, and the UAE is evident. They could be signaling a willingness to increase production unless cheating stops.

With Brent crude failing to break above $75 earlier in the week, the market outlook remains short-term bearish. A sustained drop below $70 could push prices toward $65, while a move above $75 is needed to trigger fresh speculative buying, with some traders currently holding net short positions.

China gives copper a fresh boost

Just like iron ore, the highflyer of the week in response to China’s latest stimulus pledge, copper built on its newfound support, driven in part by falling stockpiles at warehouses monitored by the three major futures exchanges in London, Shanghai, and New York. Despite edging a bit lower towards the end of a busy week, the red metal was nevertheless on track to record its biggest weekly advance since May. Especially the vow from Beijing’s officials to support its struggling real estate sector helped bolster an already long-term bullish demand outlook amid rising demand toward the energy transition and increased need for power to run AI data centers.

From a technical perspective, both the High Grade and LME futures contracts have retraced more than half of the deep losses seen between May and early August, when a counter-seasonal rise in stocks triggered major risk reductions from large speculators in the futures market. At this point, prices have probably rallied as much as they can without further signs of improvement in the physical market, and with that in mind, the short-term outlook points to a period of trading within an approximate 40-cent-wide range around USD 4.50 per pound.

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