Oil has hit a 15-month high on the back of optimism over the Opec deal which needs to be sorted out by November 30. But, with a record long position building across the combined benchmarks, a disappointment could leave some exposed. Full report to come within the hour....
Article / 01 July 2016 at 13:30 GMT

WCU: Commodities bask in six-year quarter high

Head of Commodity Strategy / Saxo Bank
  • Commodities rally in wake of historic June 23 Brexit vote
  • Bullish bets on commodities hit a two-year high
  • Precious metals bolstered on safe-haven flight
  • Silver in particular flying as ratio to gold still above historic average
  • Conditions still look set for a gold push on $1,400/oz
  • Grain sector bucks trend as production growth hurts price
  • Corn hits a nine-year low on US crop expansion
 The conditions for a gold run to $1,400/oz could be in place. Photo: iStock

By Ole Hansen

All commodity sectors, apart from grains, are back in demand following the Brexit vote on June 23. Record low bond yields on the back of raised speculation about renewed central bank action supported metals of all colors. Sugar and coffee found support in Brazil while oil settled down after the initial squeeze and natural gas surged on improved fundamentals. 

The Bloomberg commodity index advanced by 13% during the second quarter with raw materials outperforming stocks, bonds and the dollar. This was the best quarter since 2010 and it highlights the renewed appetite for commodities following a few years of oversupply and weaker prices. The rebalancing, especially in oil, is well underway while investors seek metals as a safe port against market turmoil and rising inflation fear. 

Hedge funds were heavy buyers of commodities during the quarter with bullish bets reaching a two-year high. The net-longs in WTI & Brent crude oil, gold, soybeans, corn and sugar accounting for 78% of the total. 

Bullish bets hit two-year high

Speculative positioning in Commodities
The following table shows market developments across the different sectors. Sterling remains weak on the back of political chaos and raised uncertainty. The strong initial demand for dollars against euros and Japanese yen safe-haven demand has begun to fade while stock markets have recovered, not least in the UK where exporters have surged higher. 

Bond yields continue to collapse with investors chasing whatever yield they can find.In the US, the yield on 30-year bonds have hit a record low while the entire Swiss government curve out to 2064 has dipped below zero.

The chance of a US rate hike before next March is now rated at less than 10%. 

Brexit market impact

Commodities, particularly metals have reacted strongly to these developments. Investor demand for gold through exchange-traded products have risen by close to 50 tons since the vote. Open interest in COMEX gold futures have hit a six-year high as buying continues despite a big surge in demand from hedge funds ahead of the vote. 

One week sector performance
Soft commodities found support from Brazil where the real rose to a one-year high and weather conditions continue to raise concerns about available supply of both sugar and coffee. 

Grain markets went into a flux from the latest update on US sowing and stocks. Wheat hit a nine-year low while corn tumbled after US farmers planted more of the two crops than expected. Corn has lost 19% during the past two weeks as a the outlook for a big crop has sent hedge funds scrambling to get out after being strong buyers during the early parts of June when a heatwave gave support.

Soybeans went the other way as planting despite being at a record fell short of analysts' expectations.

One week performances
Natural gas has rallied by 20% during the past month and the second quarter rally has been the strongest since 2000. Increased demand due to hot weather combined with various supply disruptions have triggered lower than expected weekly injections into storage. 

Total inventories for this time of year remain the highest in at least ten years and this raises the question of whether it is too early for the market to be challenging $3/therm. An above-expectation pickup in weekly injections could still trigger an uncomfortably high stock level close to capacity come October. 

NatGas data
Gold spent the week consolidating following the latest surge higher. This helped trigger a search by investors for relative value among other metals. They found that in silver which remains relatively cheap compared with long-term averages and platinum where the discount to gold had hit a record $350/oz.

Despite the already elevated demand and positioning in precious metals, the overall picture remains supportive. Slowing growth, the potential for an even easier monetary policy and record-low bond yields have all helped create strong and ongoing demand from real money investors.

Positive gold momentum also continues to attract hedge funds and CTAs through futures. These investors are more responsive to adverse movements but having seen support hold at $1,305/oz, these traders have so far seen no reason to ease up on what is already a record long position. 

Silver breaking higher while the gold/silver ratio breaks lower pointing towards additional silver outperformance.
Silver and ratio
As long the three mentioned drivers continue to play out we should see support for the sector continue to play out and this should help propel gold towards $1,400/oz during the coming weeks and months.

The gold/silver ratio measuring the number of ounces of silver to buy one ounce of gold hit a post-2008 crisis high at 83.5 back in March. Since then an improved demand outlook has seen the ratio sell off to 69, the lowest since 2014. With the longer-term average for this ratio being 60, silver could continue to outperform.

Gold is currently targeting $1,366/oz, the technical extension of the May to June rally. $1,400/oz will be the next hurdle. Support is at $1,305/oz with a break below $1,290/oz required to trigger some nervous long liquidation.

Gold is shaping up for a push on $1,400/oz
Spot Gold with extension levels
Source: SaxoTraderGO

Crude oil is receiving limited attention this week as we expect the rangebound nature to be extended during the coming weeks. The contango, which reflects an oversupplied market, has been rising again which demonstrates that the market is making room for returning barrels from Nigeria and Canada. 

Inventories and production in the US continue to decline but against this, we are seeing rising inventories of gasoline which has led to weak refinery margins. This will be a concern as we approach August when gasoline demand slows as the driving season comes to an end. 

Concerns about the impact on demand growth from Brexit and weaker global growth should also help limit the upside during the third quarter. In the short-term, WTI crude has settled into a $45.80-50.00/barrel range and Brent into a $46.50-51.50/b range.

Rangebound oil looks limited to the upside 
WTI crude oil, first month cont.
 Source: SaxoTraderGO

— Edited by Martin O'Rourke

Ole Hansen is head of commodities strategy at Saxo Bank
02 July
KaranKK KaranKK
Hi Ole, Thanks for this excellent article. In next week, with more drivers out on roads in US and the Norwegian workers strike, won't the higher inventory drawdown and less supply, push the oil prices higher.
Yesterday oil prices moved from 47$ to 49$.Is the market positioning for oil price target > $50 ?
If not, what do you anticipate in the next week ?
03 July
bparkes19 bparkes19
That's a bull flag on the oil chart. Usually resolves to the upside. Oil inventories have been building slower than the normally do on a seasonality basis...See Confluence Investment Management for a great chart that normalizes inventory builds from the beginning of the year. Its slower than history. Saudi is also seeing inventory drawdowns as demand is expanding and to maintain exports they are drawing down inventories. That cant be bullish, right.


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