Head of Commodity Strategy
Key points
The commodities sector traded higher for a fourth week last week, and so far this week has started with gains, primarily supported by the energy sector, where the risk of an Israeli retaliation attack on Iran continues to lift prices, with Brent honing in on the important USD 80 level. In the process, this supports a bid across the fuel sector, where especially the distillate contracts have received a bid from wrong-footed short sellers who, up until recently, focused on sluggish demand. However, China stimulus, the Middle East escalation, and robust US economic data have forced a rethink.
The Invesco Bloomberg Commodity UCITS ETF, shown below, is one of several ETFs tracking the performance of 24 major futures markets included in the Bloomberg Commodities Total Return Index, spread almost evenly across energy, metals, and agriculture sectors. Following the massive run-up between the COVID days in 2020 and the Russian invasion of Ukraine, the index retraced around half those gains before trading sideways for almost two years.
During the mentioned four-week period, the BCOM TR Index has risen by 9.3%, with not a single commodity trading down during this period. Note that several commodities in the table did not contribute to the mentioned gain, as they are not included in the index. The most relevant being iron ore, which jumped 18.4%, EU gas, platinum, Paris milling wheat, and cocoa. While weather worries were a constant throughout the month, supporting a strong short-covering rebound across the grains sector and a big jump in sugar, it was three major events that helped set the overall positive tone:
In addition, a fourth development can be mentioned after US economic data in recent weeks continued to surprise to the upside, culminating on Friday when a strong US jobs report forced traders to rethink and lower the pace and depth of future US rate cuts, while driving short- and long-term yields higher. This development supports growth-dependent commodities while creating some short-term headwinds for the precious metal sector, not least gold, which, besides geopolitical support, increasingly has been showing signs of buying fatigue as physical traders balk at the prospect of buying near record highs.
One month ago, crude oil prices were struggling to hold above key support levels amid a sluggish demand outlook and the prospect of rising production, with OPEC+ focusing on slowly bringing back production that the group voluntarily had held back from the market in order to support higher and stable prices. A few weeks after briefly dipping below USD 70, Brent crude is back to challenge USD 80, with activity in the options market showing increased demand for hedging the risk of further gains amid worries about a minor or, in the worst case, major supply disruption from the Middle East.
The first part of the rally has undoubtedly been driven by wrong-footed short sellers after hedge funds, as recently as 10 September, held the first-ever recorded net short position in Brent crude futures. Since then, the weekly COT reports have pointed to increased buying activity, which undoubtedly culminated last week.
It is extremely challenging to predict the full impact of an Israeli counterstrike on Iran, aside from the likelihood of short-term price increases. Below, we outline four potential scenarios – out of many - that could emerge following such an event, with some possibly leading to downward pressure on prices:
Recent commodity articles:
7 Oct 2024: COT: Broad buying momentum persists, led by Brent, copper and grains
2 Oct 2024: Q3 2024 Commodity Outlook: Gold and silver continue to shine bright
30 Sept 2024: COT: Fed and PBOC trigger largest weeklyl surge in commodities demand in a decade
27 Sept 2024: Commodity weekly: Industrial metals gain strength during a week of crude weakness
26 Sept 2024: Crude prices drop again as Saudi and Libya supply concerns grow
24 Sept 2024: Fed and PBOC add momentum to commodities market rebound
23 Sept 2024: COT: Dollar short reduced; Investment metals see strong demand ahead of FOMC
20 Sept 2024: Commodity weekly: Commodities boosted by bumper rate cut
20 Sept 2024 Video: Gold or silver, which metal will perform the best
17 Sept 2024: With gold reaching new heights, silver shows potential
16 Sept 2024: COT: Record short Brent and gas oil positions add upside risks to energy
11 Sept 2024: Crude slumps amid technical selling and recession fears
10 Sept 2024: US Election: will gold win in all scenarios
9 Sept 2024: COT: Crude long cut to 12-year low; Dollar short more than doubling
5 Sept 2024: Can gold overcome the 'September curse'?
4 Sept 2024: Wheat rises on European crop worries
3 Sept 2024: Chinese economic woes drag down crude oil and copper
2 Sept 2024: COT: Commodities see broad demand as the USD slumps to a net short
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)