John J Hardy
Saxo Bank’s head of FX strategy John Hardy takes a closer look at trends and moves in today’s forex charts, including EURUSD, USDJPY, AUDUSD, and EURSEK.
Article / 15 December 2017 at 14:08 GMT

WCU: Hot metals lead the way as agri and energy lose out – #SaxoStrats

Head of Commodity Strategy / Saxo Bank
  • Crude oil barely changed; natural gas hurt by lack of cold weather
  • Gold boosted by another dovish US rate hike 
  • Potential growth in US shale production remains the big oil market unknown
  • Bloomberg Commodity Index headed for loss again after profitable 2016
 Crude oil got a lift from a cracked pipeline but then the profit-takers moved in. Pic: Shutterstock

By Ole Hansen

With year-end fast approaching the Bloomberg Commodity index traded close to unchanged on the week and just like the year-to-date performance it was the metals sector led by industrial metals which offset losses in energy and agriculture. 

The energy sector was lower with crude oil trading close to unchanged while natural gas continued to suffer with bulls struggling to hold onto positions as they have been left waiting for colder weather to arrive in the US. A major but temporary pipeline closure took out a major chunk of supply from the North Sea. It helped drive Brent crude oil to a fresh two year high before end of year profit taking knocked it lower. Adding to the weakness were monthly reports from major oil organisations all raising forecast for non-Opec production in 2018. 

One week performances

Gold received a boost from another dovish US rate hike, the last under Janet Yellen's tenure. Just like the previous four US rate hikes in this cycle gold had been struggling ahead of the announcement. US tax deal wobbles, a weaker dollar (against the Japanese yen) have raised the prospect of history repeating itself with another post-hike price recovery.

Gold and US rate hike impact

Gold has been caught within a wide $1200 to $1350 range for some time now. We expect this rangebound trading behavior to continue into 2018 with the risk in our opinion being skewed to the upside. Growth concerns combined with the risk of rising inflation could swing the pendulum back in favor. Geo-risks both political and military remains elevated into 2018 and with that in mind investors are likely to maintain and potentially increase demand for safe-haven or tail-end risk protection via precious metals.

Before Janet Yellen's final and once again dovish rate hike, gold had found support at $1240/oz, the 50% retracement of the December 2016 to September rally. Looking ahead resistance above at $1260/oz and more importantly at $1267/oz needs to give way before short-covering and additional longs can take it higher. 

Spot Gold

Source: Saxo Bank

Supply disruptions in Northern Iraq in October, Canada in November and now the North Sea have all together with robust demand and supported by the Opec+ deal to extend production cuts been supporting oil prices this quarter. Brent crude oil surged above $65/b to reach the highest since June 2015 following news that the Fortis Pipeline System, which handles more than a quarter of the North Sea production, had been shut due to the discovery of a fracture in the pipeline. 

The rally, however, quickly faded as profit taking emerged with Christmas and New Year fast approaching. Funds holding a combined long in WTI and Brent crude oil of close to one billion barrels could be tempted to scale back positions in order to avoid the potential negative impact of adverse movements during what is normally a low liquidity time of the year.

The weekly US status report showed the continued drop in crude oil stocks being partly offset by rising gasoline and product stocks. Production reached a fresh record as US shale oil producers continue to benefit from the rally seen these past six months. Heading into 2018 the big unknown remains the potential growth in US shale production. 

Oil data
 Monthly oil market reports from the three major oil organisations all maintained a steady outlook for global demand growth at close to 1.5 million b/d while all raising non-Opec supply to almost equal the increase in demand.

This development, if confirmed over the coming months, could see Opec and its non-Opec friends' efforts to balance the market being pushed further out towards 2019. And with that the increased uncertainty about whether the group will manage to stick together for as long as this is needed. 
Brent crude oil has settled into a relatively tight 4 dollar range with the failed spike above $65/b highlighting end-of-year profit taking. In order for the trickle of long-liquidation turning into a flood the price need to break below the psychological $60/b level. 
Brent Crude oil, first month cont.
A bumpy year for commodities comes to a close

This will be my final weekly update before year-end so let me finish by taking a look at what happened in the commodities space during 2017. It's safe to say that 2017 turned out to be another bumpy year for commodities. Following a return to profit for the first time in six years in 2016, the Bloomberg Commodity Index is once again on track to record a small annual loss. All sectors apart from industrial and precious metals yielded a negative return, not least the agriculture sector which slumped to a nine-year low. 

BCOM year-to-date performance
 Note: The performances above are based on the Bloomberg Commodity Index. This means that the performances include the accumulated loss or gain from rolling the underlying futures contracts. Backwardated markets (ex. Brent, WTI, zinc and cotton) receive the tailwind from a positive monthly roll (selling expiring contract higher than the next). The vast majority of commodities, however, trade in contango due to the cost of storage, particularly agriculture commodities given the overhang of supply.

As can be seen from the tables above, the year belonged to industrial metals, not least aluminium, copper, and zinc, with precious metals being the only other group managing a positive performance.

High-flying palladium, currently up by 50%, is not included in the index due to its limited liquidity.
The agriculture sector slumped to a nine-year low with livestock the only sub-sector managing a positive performance. Soft commodities with the exception of cotton were sold amid ample supply while key crops suffered under the weight of stock following another bin-busting year of crop production.

The important US crop market has not experienced any real weather threats to supplies since 2012 and during this time farmers have continuing to squeeze more yield out of every acre.
The energy sector witnessed a recovery in crude oil with Brent crude outperforming WTI due to the spread widening but also due to Brent's earlier return to backwardation. Natural gas remained under pressure from its notorious bearish curve structure and the delayed arrival of winter demand in the US. On a five-year basis, natural gas is the worst performing commodity with a loss of 72%. 

– Edited by Clare MacCarthy


Ole Hansen is head of commodity strategy at Saxo Bank


Oezy Oezy
Hi Mr. Ole, I would like to ask about NG. I have long positions on NGG8 feb contract. But it continues to fall down sharply every day. I don’t see any reason behind that falling, all fundamentals support bullish. In your point of view is there any important reason for that strong selling? And till where it may continue? My TP is 3.15.. I believe very soon it starts to go up, over 3’s again, I don’t know if I’m wrong. I’m a client of Saxo Swiss, thanks a lot


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