- Harvey devastation echoes through energy market
- Washington doubts, North Korea support gold prices
- European, Asian refineries 'scrambling to ship products stateside'
Energy markets are still digesting Hurricane Harvey's
massive impact on US refining. Photo: Shutterstock
By Ole Hansen
Commodities traded higher during the past week with all sectors, not least energy and metals, rising strongly in response to multiple events. The biggest of them all has been the catastrophic impact of Hurricane Harvey across the Texas Gulf Coast. The combination of its path, duration, and massive rainfall caused untold misery to millions of people, especially in Houston, the US' fourth-largest city.
To put the massive and destructive rainfall into perspective, a meteorologist
with the Harris County Flood Control District calculated that the county, which covers the main part of Houston, received nearly one trillion gallons of water in four days.
That's roughly the same amount of water it takes Niagara Falls, and the gorge, about 15 days to process.
Being a major global hub for refinery and production activity the shutdown of the Texas energy industry caused a ripple across the global energy market. Refineries accounting for one-quarter of US capacity were shut down, imports and exports of both oil and products almost came to a halt as ports closed. On top of this, major pipelines supplying diesel and gasoline to the important product hub in New York had to close as flows from some of the US' biggest Gulf Coast refineries were halted.
As a result gasoline and product prices spiked higher while crude oil traded lower due to the collapse in demand.
Precious metals received a boost as gold finally managed to break resistance at $1,300/oz. thereby producing the best monthly performance since January. Support, apart from the technical buying triggered by the break higher, has come from doubts over US debt ceiling and tax reforms as well as continued geopolitical tensions.
Support also came from the dollar which reached a 2-1/2 year low against a basket of 10 leading global currencies before attempting a tentative recovery.
Industrial metals continued their month-long rally with nickel, zinc, and aluminum all showing double digits return during August. The combination of China's clean air policies removing supply from polluting smelters, robust Chinese economic data, and falling inventories at warehouses monitored by the major futures exchanges have all helped to provide support.
A record level of hedge fund bets on higher prices in HG Copper currently poses the biggest risk of a setback should data or events turn less favourable.
The grain sector turned higher for the first time in five weeks with short covering emerging ahead of month end and a long weekend in the US due to its September Labor day holiday. The coming week should see focus begin turning to the September 12 update from the US government on supply and demand.
Given the across the board beat on expectations in last months World Supply and Demand Estimates, or WASDE, report, which help send the sector sharply lower, the market may start to look for some price-supportive down revisions on production and yields.
The main story and one that is currently being felt across the globe in terms of higher prices at the pump stems from the multiple disruptions to energy flows on the Texan coastline. Much has already been written and said about the impact to refinery production, import and exports as well the vital supply lines carrying crude oil to and refined products away from the region.
While the now-expired September RBOB gasoline futures contract surged by almost one-third in just four days, crude oil traded lower in response to the dramatic loss of demand. The recovery phase could take weeks as refineries first of all need to see workers return. (many of whom have probably lost their homes and means of transportation). The storm may have ruined up to one million vehicles
along the Texas Gulf Coast. Secondly, the damage (if any) has to be assessed and repaired and finally ports and pipelines need to reopen.
During this time we are going to see global prices of refined products stay supported. Trying to profit from the shortfall in the US, European and Asian refineries are already scrambling to ship products stateside and that is putting upward pressure on prices in those regions as well.
This at a time of year where the end to the peak demand season normally leads to lower prices. Pockets of gasoline shortage in the US have already been seen with the national average price at the pump reaching $2.52/gallon, a two-year high.
RBOB gasoline future and WTI crude oil:
Source: Saxo Bank
Elsewhere the EIA
downgraded its monthly crude oil production estimate for June to 9.1 million barrels/day, some 241,000 b/d below what the weekly estimates showed. Rising compliance and falling Opec output in August also received limited attention with the current focus rightfully on the havoc created by Harvey.
The rapid rise in Libyan production helped trigger the May to June selloff. During the past week however more than 300,000 barrels/day or close to one-third of Libya's production has been shut down due to renewed troubles. The impact, let alone the focus from the market, has been very limited due to the much bigger drop in demand.
On Friday both oil and gasoline traded lower. Probably due to raised hopes that the long weekend could bring some good news on port and refinery openings.
Gold finally managed to break the $1,200/oz to $1,300/oz range that had prevailed since February. The rally above $1,300/oz was triggered by continued dollar weakness, both against the EUR and more importantly against the JPY on news that North Korea had lobbed a missile over Japan.
Later in the week the weak dollar support faded but gold nevertheless managed to maintain its foothold.
While both the Japanese yen and US real yields have traded steady in recent weeks, gold has continued its ascent. Some of this outperformance – which has also been seen against silver, its precious metal sister – has been driven by North Korean worries, concerns over President Trump, and the stock market wobble.
Safe haven-supportive. Photo: Shutterstock
Trump increasingly cuts a more isolated figure with no ability to enact policy at home and disliked and untrusted abroad. His irrationality, which often results in inflammatory and ill-considered tweets, can still move markets and this uncertainty has increasingly been adding support to gold.
This support has been visible through the actions of hedge funds who during the past five weeks continued to add length while reducing short positions. In the week to August 22 they increased their net-long gold position to 196,000 lots which is 31% below the record 287,000 lots from July 2016.
The complete capitulation of the gross-short position to just 13,200 lots has seen the long-to-short ratio jump to 16, the highest level seen since December 2012.
Such relatively extreme positioning in favour of the long side could become an issue should the current breakout fail and gold revert back below support, but for now it is mostly an indication of the strong belief in higher prices. Signs of that were seen today when a weak US jobs report failed to lift gold further while the dollar actually strengthen and bonds dropped.
We maintain our long held end-of-year target at $1,325/oz for now but with the risk skewed to the upside. Upside targets are the post-US election and post-Brexit highs of $1,337 and $1,375/oz respectively. The latter represents the 38.2% retracement of the 2011-to-2015 selloff and was where the 2016 rally ran out of steam.
— Edited by Michael McKenna
Ole Hansen is head of commodity strategy at Saxo Bank