Article / 29 June 2018 at 13:34 GMT

WCU: Dollar is new safe haven while oil jumps on supply threats

Head of Commodity Strategy / Saxo Bank
By Ole Hansen

Commodities have become increasingly challenged as we enter the second half of 2018. Following a strong start to the year we have seen multiple headwinds begin to emerge during the past quarter. Above all we find a real threat to global growth and subsequent demand for many key raw materials from the rising probability of a trade war between the US and many of its key trading partners, most importantly China.  

Trade wars tend to be a losing strategy as raised tariffs results in lower trading volumes and growth while increasing the cost to consumers around the world.

The current robustness of the US economy compared with the rest of the world has led to a divergence in monetary policy between the Federal Reserve and other major central banks. This has resulted in a stronger dollar, which is piling additional pressure on indebted EM economies having to fight harder and pay a higher price for funding as global dollar liquidity becomes tighter.
Emerging market growth drives demand growth for many key commodities from industrial metals to energy, hence the importance of current developments.

One of the exceptions has been crude oil, which despite recent efforts from Opec and Russia remains bid amid the rising threat to short-term and long-term supplies from a range of producers including Venezuela, Libya, Canada and not least, Iran.  

The surging dollar, both against EM and DM currencies, has resulted in gold surrendering its safe haven status, at least for now, to the greenback and US treasuries. Industrial metals have come under pressure from mounting challenges to the Chinese economic outlook from a combination of trade war and slowing credit growth.

The rally across key agriculture products at the beginning of the year became unstuck as traders took fright from trade war tensions which have put US exports of corn to Mexico and not least soybeans to China at risk. This development has together with the adverse impact of a stronger dollar and improved US growing conditions triggered a spectacular collapse in fund positions across the three major row crops of corn, wheat and soybeans.

During the past week both industrial and precious metals as well as agricultural commodities have continued lower as trade war concerns and negative price momentum continued to attract fresh short-selling.

WTI crude oil, meanwhile, spiked higher to reach levels last seen in 2014. Brent and WTI both received a boost when Washington turned up the pressure on Iran after demanding that all allies should reduce their imports of Iranian oil to zero after November. In addition, WTI crude was supported by the biggest stockpile drop in almost two years, rampant refinery demand and news that a one-month outage at a Canadian oil-sands producer could further reduce stockpiles at Cushing over the coming weeks.
The weekly petroleum status report from the EIA provided a smorgasbord of bullish news for oil. Crude oil stocks dropped by almost 10 million barrels on combination of record exports and record refinery demand. The accelerating stock draw at Cushing, Oklahoma, the delivery hub for WTI crude oil futures supported a strong rise in the prompt spread on tighter supply concerns while almost halving the discount to Brent crude oil.

 At the center of attention over the coming months will be supply and potentially the lack of it. Despite the fact that the world’s three largest producers – Russia, Saudi Arabia and the US – are all taking aim at producing 11 million barrels/day each, several producers are struggling and could see its production slide further.  

US sanctions against Iran after November 1 are expected to sharply reduce that country’s exports as customers around the world seek alternative suppliers for fear of US retaliation. Venezuela continues to see its oil industry collapse while recent fighting in Libya has once again highlighted the risk to its 1 million barrels/day production, currently down by 300,000 barrels/day.
Higher fuel costs, trade wars and a slowdown in global growth may eventually halt the oil market rally as attention turns to lower demand growth. When this shift will happen and how high oil can rally before it occurs is anyone’s guess. Not least considering the elevated level of political interference currently impacting the oil market.

A recent Reuters survey of 35 economists and analysts forecasts that Brent crude will average $74/b during the second half of 2018, somewhat lower than current spot price of $79/b. From a charting perspective Brent crude oil looks likely to breach $80/b again before finding resistance ahead of $82/b.

Gold’s performance turned sharply lower during June as the yellow metal struggled to find a defence against the stronger dollar and Fed chair Jerome Powell’s hawkish stance on continued normalisation of US rates. Nine months of gains were reversed after traders grew increasingly frustrated following gold’s inability on multiple occasions to break key resistance above $1,360/oz.
Investors seeking a safe haven against a whole host of macroeconomic, financial and geopolitical risks have instead been turning to the dollar and US treasuries for protection. With this bid missing and the dollar moving higher, gold has been acting just like another risky asset in recent weeks. As the technical outlook deteriorated funds stepped up their short-selling of gold with the net-long dropping to a 2½-year low on June 19.

Longer-term investors who often express their bullish gold view through exchange-traded products cut their total holdings by 44 tons, the most since last July.

Central bank divergence is supporting a stronger dollar through a widening yield gap to other major currencies. Trade tensions and the risk of a slowdown has seen the Chinese yuan weaken by a 3.3% during June. The below chart shows a strong correlation between the yuan and gold and until the currency stabilises the upside to gold looks limited.

Gold and semi-precious metals are currently looking for support and from a longer-term perspective the area just below $1,240/oz is likely to be the next key battleground as per the chart below. Silver, meanwhile, has maintained a relatively stable ratio to gold, an indication that most of the weak longs have been cut by now.  

Given the strength of the June sell-off gold needs to retrace back above $1,270/oz and potentially even $1,286 before recently established shorts begin to exit and fresh buyers return from sitting on the fence.

Rising inflation risks from trade wars and signs that several major economies are heading for a slowdown are good enough reasons for us to refrain from turning bearish on gold at this stage. While the short-term technical outlook is challenged and could lead to further losses, we see renewed upside risk once the dollar rally pauses and/or data begins to support our above mentioned view on inflation and growth.

matsuri matsuri
there is only one person (not group or country) responsible for high oil prices - it is Trump with his stance on Iran and trade. and what "rising demand" is everybody talking? if oil keeps these or higher levels there will be only falling demand as countries such as China or India were dependent on cheap oil. Chinese teapots due to rise of oil price were not making any profit and some will shut to avoid losses China can buy oil in yuans - however they make yuan cheaper, while India cannot buy in their own currency so it will be harmed much more than China. Only these 2 countries and the slowdown of their economies can lead to fall in demand for oil that will affect significantly the prices in medium to longer run. Despite recent fall in rig count in USA the current and higher levels will attract the oil companies to increase production and they can react quickly.


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