Article / 10 November 2017 at 13:58 GMT

WCU: Commodities gains led by strong energy sector

Head of Commodity Strategy / Saxo Bank
  • Bloomberg Energy Index hit 10-month high with oil up on geopolitical risks
  • Crude oil market is overbought, but geopolitical worries drive prices
  • As winter looms, natural gas broke out of a trading range that prevailed since June
  • Uranium prices jumped when the world's biggest producer announced output cuts
  • WASDE report hit corn and soybeans
  • A year after Trump's election, gold has settled into a diminishing range
  • A break above $1,290/oz for gold would clear path back towards October high
Riyadh, Saudi Arabia
 Riyadh, Saudi Arabia. The ongoing purge of the Saudi leadership has sparked 
geopolitical worries that are boosting oil prices. Photo: Shutterstock

By Ole Hansen

The Bloomberg Energy Index reached a 10-month high, with the sector continuing to attract attention and demand. The approach of winter saw natural gas break out of its months-long price range, while crude oil traded higher for a fifth consecutive week, with increased geopolitical risks being the main driver of the latest gains. 

The geopolitical risk premium in oil, which began rising after Iraqi forces retook the Northern Iraqi city of Kirkuk from the Kurdish Regional Government (KRG) on October 16, increased further after arrests and charges of corruption against prominent princes, ministers and business people in Saudi Arabia. Tensions between Shiite-led Iran and Sunni-led Saudi Arabia added an additional lawyer of uncertainty. 

One week performances

Natural gas, which has been supported by rising demand and weaker-than-expected stock injections, broke out of the price range that had prevailed since June. The cost of uranium meanwhile jumped after Cameco (CCO:xtse), the world's biggest producer, announced that it would cut production temporarily due to weak prices. The reduction could reduce global output by 10% and led to a 16% jump in the Global X Uranium ETF (URA:arcx), which, up until the announcement, had lost 90% of its value since the Fukushima disaster in 2011. 

The monthly World Agriculture Supply Demand Estimates (WASDE) from the US Department of Agriculture hit both corn and soybeans. The December CBOT corn future hit a fresh contract low as stocks surge to a 30-year high. Soybeans also traded sharply lower on bigger-than-expected yields and production, while wheat recovered to finish close to unchanged. Cotton initially dropped on a record high US yield, but managed to stabilise as the USDA made an overall cut to global stocks. 

Gold and – to a certain extent – silver both continue to struggle to gain any momentum, either up or down. This week marked the one-year anniversary of Donald Trump's election to the White House. Since then gold has increasingly settled into a range, pivoting around $1,250/oz, with lower highs and higher lows telling a story of a metal in need of a spark.

Oil stays elevated with focus on Saudi Arabia

A combination of supply disruptions, strong demand growth, falling global inventories and increased geopolitical risks have led to surging investment demand for crude oil, not least Brent. Due to liquidity constraints further out the curve, speculative demand tends to be concentrated at the front of the curve, thereby giving a potential false sense of the market being tighter than it is. 

Heightened geopolitical risks – including those related to Saudi Arabia's purge of its leadership –have created a perfect tailwind for oil bulls already long a record 530 million barrels of Brent as such risks sideline potential short-sellers in danger of being caught if worries about supply disruptions turn real. 

The 2017 Opec World Oil Outlook (WOO) was released this past week. From 2016 to 2022 world consumption is expected to rise by a healthy 6.9 million barrels/day to 102.3 million b/d. The challenge for Opec, however, is that 5 million b/d of this growth could be delivered by non-Opec producers. Those producers include US shale oil plays, which Opec now says will grow considerably faster than previously expected over the next four years. The revised outlook illustrates Opec's current dilemma: with supply curbs also helping its rivals, demand for the group's crude will remain little changed until shale oil output peaks after 2025.

The weekly US crude oil production estimate hit an all-time high of 9.62 million b/d, thereby breaking the previous record from June 2015, just before the oil price crash sent US oil output spiraling down to about 8.4 million b/d. China's October import of crude oil dropped to a 13-month low on a combination of a holiday-shortened month and independent refineries having used up their annual import quota. 

Rising geopolitical risks have benefited Brent crude more than WTI, with its premium expanded once again. The US Energy Information Administration expectS the wide WTI/Brent margin to remain around $6 until the second quarter of 2018 before declining to $4/b. Rising shale oil production has increased transportation constraints from Cushing, Oklahoma – the storage hub for WTI crude oil futures – to the US Gulf Coast.

Apart from potential supply risks, the focus over the coming weeks will turn to the November 30 Opec meeting in Vienna, and not least the debate about whether the cartel already at this meeting will announce an extension of the deal to curb production beyond next March. 

Brent crude spent the week consolidating after the latest surge. The market remains overbought, but it should not prevent it from moving higher if the geopolitical risk escalates further. The elevated fund long is unlikely to created any downside pressure unless the price drops back below $60/b. 

Brent Crude oil, first month cont.
Source: Saxo Bank

Gold trades close to unchanged after one year with Trump

One year on from the US presidential election, we find gold increasingly stuck in a sideways trading pattern, pivoting around $1,250/oz, with lower highs and higher lows telling a story of a metal in need of a spark.

Key drivers for gold, such as the value of the US dollar, real interest rates and the Fed funds rate, have propelled gold in opposite directions during the past year. Gold-supportive dollar weakness has been offset by the rise in real yields and the Fed funds rate.

Initial gold weakness after the November 2016 election was driven by euphoria surrounding the economic and fiscal impact of promised infrastructure spending and tax reforms. As 2017 arrived and Trump's popularity and ability to pass growth-friendly policies faded, attention swung to geopolitical risks. This occurred not least because of the renewed threat from North Korea, which was not helped by "two confrontational, nationalistic and militaristic leaders playing chicken with each other" (as Ray Dalio at Bridgewater put it). 

The price gyrations have created a difficult environment for traders, including hedge funds as they got caught out on several occasions. Not least after the election when a near-record long had to be reduced and then again at the beginning of the year when gold rallied strongly on a combination of reduced rate hike expectations and geopolitical concerns.

After seven weeks of selling, funds held a long of 167,000 lots in the week that ended October 31, down by just 10,000 lots during the past year, but somewhat above the three-year average of 110,000 lots. Investment demand for exchange-traded products backed by bullion has been even steadier, with total holdings down by only 2%. 

Looking ahead, gold will continue to take its cue from developments across other markets, not least the dollar and interest rates. Geopolitical risks related to North Korea have faded during Trump's four-nation visit to Asia, while at home the Republicans' proposed tax reform may struggle to garner the majorities needed, not least in the Senate.

The latest news on the tax reform potentially struggling has seen gold move higher this past week, but for now the move has been lacklustre to say the least, and it highlights gold's current predicament. Underlying demand from investors seeking protection has so far been sufficient to dampen the negative impact of fund selling, but, with no clear direction at this stage, traders should probably adapt a relative short investment horizon.

Nevertheless, having survived the latest selloff without making a lower low, gold is likely to attract some renewed attention on a break back above $1,290/oz which could clear a path back towards the October high at $1,306/oz. 

Sport Gold
Source: Saxo Bank

— Edited by John Acher 

Ole Hansen is head of commodity strategy at Saxo Bank

matsuri matsuri
what was the reason fro Friday 1% gold drop? out of the blue...
Ole Hansen Ole Hansen
Gold remains stuck and the lack of upside momentum carried the risk of long liquidation below $1280/oz. Without much news to support the move this was what occurred on Friday when a 4m oz selling spree took it back to mid-range.
carlosdemarch carlosdemarch
great report Ole! keep it up


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. 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 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 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 or as a result of the use of the 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. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. 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 ourtrading 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 Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail