Article / 18 August 2017 at 13:37 GMT

WCU: Gold shines, oil finding support

Head of Commodity Strategy / Saxo Bank
  • The stock market recovery did not last for long with Trump unleashing uncertainty 
  • Gold found support amid US political turmoil and dovish central bank minutes
  • Increased volatility takes poses a challenge for market participants
  • Crude led by Brent managed to find support as inventories decreased
  • gold mine
Digging for gold could become more profitable due 
to political turmoil. Photo: Shutterstock
By Ole Hansen

The recovery in US and global stocks following the early August scare on North Korea proved short-lived with multiple uncertainties dragging key indices lower on Thursday. The political frictions between US president Donald Trump and congress continue to escalate with his administration looking increasingly dysfunctional and isolated.

Abandoning the Business Advisory Councils in response to an exodus of key executives meant a major setback for Trump's business friendly policies. Facing increased risk of US policy paralysis the market is showing accelerated signs of nervousness. 

The S&P 500 dropped 1.5% on Thursday and the fact that words like "tumble" and "collapse" were used to describe such a relative small move shows how unprepared the market has become to deal with heightened volatility and market weakness. 

Commodities traded lower. For a second consecutive week it was gains among industrial and precious metals which prevented the asset class from suffering deeper losses. Gold set up another challenge at key resistance after minutes from both the Federal Reserve and European Central Bank suggested their monetary policies would remain supportive. 

Zinc led the charge among industrial metals. It reached a ten-year high as stockpiles of the metal, used to galvanise steel, slumped to the lowest since 2008 at warehouses monitored by exchanges in Shanghai and London. 

Copper benefited from these developments but struggled to break resistance due to the mentioned raised level of global uncertainty.

One week performance

The grains sector continued to suffer steep losses with CBOT wheat for December delivery reaching a contract low on ample supplies. Not least from Russia where a record production continues to be revised higher.

WTI and Brent crude oil both found support after surrendering close to half of the June-to-August rally. The latest weakness came following the weekly U.S. government status report on stocks and production. A seventh consecutive draw in crude stocks and another counter seasonal decline in total U.S. stocks of oil and products received less attention than a weekly jump in crude oil production of 79,000 barrels per day to 9.5 million bpd, not far from the record 9.6 million bpd in June 2015. 

EIA data
During the latest rally, the forward curve flattened again. This occurred as producers once again stepped up their hedging activities once the Calendar-18 contract in WTI crude oil made it back above $50/barrel. According to a recent Reuters report, which analysed financial statements for the second quarter, US shale producers need a WTI price around $50/b to break even. On that basis, the upside potential above $50/b on WTI remains limited as Opec will struggle to clear the global glut any time soon as rising prices having the potential of increasing US shale oil production further. 

The return to backwardation in the Brent crude oil prompt spread — first futures month trading higher than the next — has helped push Brent's premium over WTI back up to levels last seen in December 2015. 

Investors prefer backwardation as it provides a positive roll carry on long positions. This was seen in the Commitments of Traders report for the week to August 8 where funds raised bullish bets on Brent by 58,255 lots, while WTI was cut by 2,253 lots.

Crude oil drivers
The current backwardation in Brent, which some view as being temporary, has been driven by lower North Sea production and strong refinery margins together with increased flow of European and West African crude oil towards Asia. An ongoing large premium to WTI could result in increased export demand for WTI crude. This would help limit the impact on US inventories from the seasonal slowdown in refinery demand which is due to begin within a few weeks following the end of the driving season.

The third bull cycle since March remains alive. But it has been challenged this past week. Brent has shown the best relative performance finding support at the psychological $50/b level. As long as Brent stays above $48/b, we maintain the view that this current weakness is only an attempt to find the lower end of a range which offers resistance ahead of $55/b.

Brent crude oil (front month cont.)
Brent Crude oil, first month cont.
Source: Saxo Bank 

Gold and silver made a swift recovery from the weakness that followed the easing in tensions on the Korean peninsular. The release of relative dovish minutes from both the Federal Reserve and European Central Bank together with renewed stock market weakness and increased US political friction saw gold reached a new high for the year after breaking the double top at $1295/oz from April and June.

Safe haven and diversification demand, not least if stock market weakness continue, is likely to keep selling appetite muted. Gold's best friend, the Japanese yen however has yet to break higher with the market focusing on USDJPY at 108.80 as a key level below which gold supportive yen strength could be seen. 

Gold drivers
While North Korean worries come and go it increasingly looks like Donald Trump will be a consistent source of support given the unpredictability of his presidency. This as political frictions between the White House and Congress continues to rumble and President Trump's administration looks increasingly dysfunctional and isolated.

Gold once again is testing the double top, but needs support from a stronger yen, weaker stocks and stable to lower yields to progress towards the next target. That is the November post-US election high at $1,337/oz followed by the 2016 peak at $1,375/oz.

Spot gold
Spot Gold
Source: Saxo Bank

— Edited by Clemens Bomsdorf

Ole Hansen is head of commodity strategy at Saxo Bank

18 August
carlosdemarch carlosdemarch
super great report Ole!


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