Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
Commodity weekly: Copper takes over from gold; crude’s risk premium deflates
Ole Hansen
Head of Commodity Strategy
Key points
- Diesel weakness adds pressure on crude as risk premium deflates
- Industrial metals boosted by tight supply and sanctions
- Gold sees emerging profit taking despite its current exceptionalism
The Bloomberg Commodity Index (BCOM) traded flat for a second week, but still near a six-month high, with support primarily being provided by continued strength across the metal sector, both precious and increasingly also industrial metals. Offsetting these gains was a second week of selling across the energy sector as traders struggled to quantify the appropriate level of risk premium needed to reflect the current geopolitical risks.
The agriculture sector continues to see a strong divide between an ample supplied grains sector and a softs sector seeing record cocoa and recently also surging coffee prices amid fears of supply tightness driven by challenging growing conditions across the Southern Hemisphere from Vietnam and West Africa to Brazil. Even without cocoa, the BCOM Softs Total Return index trades at a ten-year high while the BCOM Grains index continues to struggle, trading near a three-year low amid ample supply carried over from last year and early signs of a promising start to the Northern Hemisphere growing season.
Industrial metals boosted by tight supply and sanctions
Copper and copper mining stocks continue to push higher with the futures prices in New York and London reaching levels last traded in June 2022. For the past two years, Dr. Copper aka the King of Green Metals has traded mostly sideways, navigating relatively unscathed through rough seas created by sharply higher funding costs as central banks around the world hiked interest rates to combat inflation, and not least a slowdown in China, the world’s top consumer of copper.
During the past couple of months, the metal has steadily climbed, buoyed by global growth and demand optimism, and material downgrades to 2024 mine supply increasingly tightening market conditions. Several mining companies have announced production downgrades due to factors like increased input costs, declining ore grades, rising regulatory expenses, and weather-related disruptions.
Furthermore, the ongoing green transformation and increased use of AI applications are augmenting demand from traditional sectors like housing and construction, and together with the green transformation, we maintain our long-standing bullish stance on copper, and with copper miners also exhibiting signs of resurgence, the possibility of a fresh record high in the second half of the year appears achievable.
Elsewhere, large orders to withdraw aluminium and nickel from LME warehouses as traders adjust to European, UK and US sanctions on Russian metals, helped support a strong with both metals trading sharply higher. LME’s position as the global trading hub for industrial metals is likely to lead to some short-term disruptions, just like we saw following a similar ban on Russian fuel exports after it was introduced more than a year ago. The temporary tightness until trade flows readjust could lead to higher prices in the short term, not least in Europe where the pool of non-sanction metal will shrink.
Another metal that caught the attention this past week was tin which surged higher amid fears of a short squeeze, following reports one trader was holding at least 40% of long positions on tin for May delivery. The thinly traded but versatile metal plays an essential role in various industries, ranging from consumer goods and electronics to industrial applications and renewable technologies. Furthermore, the growth of the global AI sector has added another layer of demand for a metal that is currently seeing supply disruptions from Indonesia and war-torn Myanmar, the world's top 1 and 3 producers.
Gold’s exceptionalism continues, but…
Gold’s weekly run of gains extended to a fifth week, as the yellow metal continues to surprise traders and analysts, having surged higher by more than 15% so far this year during a time where the dollar and bond yields have risen strongly while expectations for rate cuts in 2024 has slumped from more than six 25 bps cut at the start of the year to the current one or two. While some signs of temporary ceiling above USD 2400 have started to emerge, it is increasingly clear that normal reaction functions have been abandoned with gold and recently not least silver both rallying despite the mentioned headwinds from normal macro drivers such as the dollar and bond yields.
While gold, as mentioned has already returned more than 15% this year, thereby exceeding last year’s 13% gain, its continued ability to withstand the stronger dollar has seen even stronger year-to-date returns against most other currencies, examples being EUR (20%), AUD 22% and not least CHF and JPY, both up around 25%.
Some of the current drivers receiving a great deal of attention, are:
- Fear of missing an ongoing rally creates a strong buy-on-dip mentality, in the process reducing the risk of recently established longs being challenged.
- Geopolitical risks related to Russia/Ukraine and the Middle East still playing a supporting role
- Strong retail demand in China amid the desire to park money in a sector seen relatively immune to a struggling economy amid deepening property woes and the risk of the Yuan devaluation.
- Continued central bank demand amid geopolitical uncertainty and de-dollarization, and not least gold’s ability to offer a level of security and stability that other assets may not provide.
- Rising debt-to-GDP ratios among major economies, not least in US, raising some concerns about the quality of debt
- In addition, the focus is changing from the negative impact of lower rate cut expectations towards support from a reaccelerating inflation outlook
Two failed attempts to gain a foothold above USD 2400 may signal a short-term top followed by an overdue period of consolidation, or perhaps even a correction, the depth of which will depend on whether the price drops to levels that triggers long liquidation from speculators who have amassed a 17.9 million ounce (557 tons) net long position, the bulk of which has been bought below USD 2150 per ounce. Using Fibonacci retracement levels to determine the size of a potential correction we see a minimum +50-dollar correction to USD 2322, while a close above USD 2400 may fuel yet another upside extension.
Diesel weakness adds pressure on crude
The energy sector traded lower for a second week, with losses led by gasoline and not least diesel amid signs the global market is deteriorating. The fuel used to power heavy industry such as agriculture and mining, as well as cars and trucks, is witnessing slowing demand with futures timespreads in Europe, Asia and the US all slumping into a contango structure which normally is associated with an oversupplied market where spot prices trade below prices for future delivery.
Crude oil meanwhile continues to ebb and flow with the news flow from the Middle East where tit-for-tat strikes between Israel and Iran so far have left the impression both countries want to show strength without risking attacks that could provoke an all-out war. This past week, most of the near five-dollar range in Brent and WTI was primarily driven by traders struggling to quantify the appropriate level of risk premium needed to reflect a Middle East crisis that is very unlikely to lead to an actual supply disruption.
The combination of OPEC+ production restraint, geopolitical tensions adding a risk premium and global oil demand in 2024 expected to rise by around 1.5 million barrels a day, have all been supporting a month-long buildup in long positions held by hedge funds, potentially raising the short-term risks of a setback. The crude oil net long in WTI and Brent reached a seven-month high last week, not least driven by Brent, the contract most exposed to international developments, which has seen the net long held by money managers reach a 2-1/2-year high above 300 million barrels, a tripling since early December. Despite the warning signs from diesel, fuel products have also seen demand recently, leaving the total crude and fuel net long position at a two-year high at 728,000 contracts.
The Gas oil futures contract, operated by the ICE Futures Europe Exchange, is used by producers, consumers, and traders to hedge price fluctuations, or speculate on future price movements in distillates products from diesel and heating oil to jet fuel. Having been in a downtrend since the panic peaks in 2022 when Russia’s invasion of Ukraine saw demand surge amid skyrocketing gas prices, the price is close to testing trendline and the 200-week moving average.
Commodity articles:
17 April 2024: Copper rally extends to near two year high
16 April 2024: Crude oil's risk premium ebbs and flows
12 April 2024: Gold and silver surge at odds with other market developments
10 April 2024: Record breaking gold highlights silver and platinum's potential
5 April 2024: Commodity market sees broad gains, enjoying best week in nine months
4 April 2024: What's next as gold reaches USD 2,300
3 April 2024: Q2 Outlook: Is the correction over?
3 April 2024: Cocoa: A 50% farmgate price boost a step in the right direction
27 Mar 2024: Crude oil maintains support amidst array of bullish signals
26 Mch 2024: Gold's behaviour points to sustained demand
20 Mch 2024: Attacks on Russian refineries lift risk premium and crude prices
19 Mch 2024: How to add copper exposure to your portfolio
15 Mch 2024: Commodity weekly: Green shoots seen across key sectors
13 Mch 2024: Lack of catalyst pushes crude into tightening range
8 Mch 2024: Commodity weekly: Gold and silver steal the limelight
8 Mch 2024: Investing with options - Gold optionality
6 Mch 2024: How to add gold exposure to your portfolio
6 Mch 2024: Video: What happened to the gold prices?
1 Mch 2024: Grains dip, cocoa soars, gold and oil see rays of strength: February’s commodity mix
Previous "Commitment of Traders" articles
15 April 2024: COT: Hedge funds propel multiple commodities positions beyond one-year highs
8 April 2024: COT: Speculative interest in metals and energy gain momentum
2 Apr 2024: COT: Gold and crude longs maintained amid strong underlying support
25 Mch 2024: COT: Hedge funds zoom in on crude, copper and silver
18 Mch 2024: COT: Hedge funds buying expands from precious metals to copper and grains
11 Mch 2024: COT: Specs rush back into gold, elevated yen short in focus
4 Mch 2024: COT: Underinvested speculators fuel gold's latest surge
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