- Commodities still under pressure
- Oil and industrial metals hit by glut and FOMC worries
- Gold consolidating as December rate hike now priced in
- Arabica boosted by bad weather and strong BRL
No light at the end of the tunnel for industrial metals. Photo: iStock
By Ole Hansen
Commodities continue their week-long slump with growth dependent raw materials from energy and industrial metals taking the brunt of the selling. Oversupply in the oil market continues to be a concern, not least considering the uncertainty about when the adjustment process kicks off in earnest.
While the oil market can take comfort from the fact that demand is rising the same can not be said about industrial metals. This sector is suffering from the combination of oversupply and slowing demand, not least from China where the process of moving away from an investment and export driven economy towards a consumer driven economy has taken its toll on raw materials such as copper, steel and iron ore.
This major shift in demand patterns from the largest commodity consuming nation has helped drive the Baltic Dry index to an all-time low this past week and in the process taken the 12-month loss to more than 60%. The index, which is seen by many as a leading indicator of the state of the world economy, tracks the activity on 23 shipping routes and different types of vessels carrying a range of commodities including coal, iron ore and grain.
A big jump in zinc during Friday's trading session, however, could be the first sign of selling fatigue and it helped the sector finish clear of the 6½-year low that was reached earlier in the week.
Something that unfortunately continues to rise is the weather risk related to El Niño. This week the US weather agency NOAA reported that a key indicator for the strength of El Niño has reached a record.
It added that this pattern known for causing extreme droughts, storms and floods could become one of the strongest ever. If this happens it could positively impact the prices of commodities from palm oil and cotton to coffee and sugar.
Soft commodities is the only sector which continue to attract buyers and while sugar is settling down following a strong rally last month Arabica coffee jumped higher. The rally was driven by developments in Brazil where drought conditions has curbed production of local robusta coffee and raised concern about the 2016 output. Meanwhile, heavy rains and storms in coffee-producing areas in Brazil risk damaging newly formed cherries and this, along with BRL strength, gave Arabica coffee an added boost.
Gold reached a new five-year low while silver was toying with key support at $14. But after four weeks of almost non-stop selling both markets had become oversold and this combined with the realisation that a December US rate hike had been fully priced in helped stabilise the price of both.
During the past few weeks silver also managed to set an unprecedented record by falling 15 days in a row. Since at least 1991 silver had only once before fallen 10 consecutive days and that was at the beginning of the global financial crisis in 2008.
Strong dollar is a golden handcuff
The December outlook to a rate hike in the US and more quantitative easing in Europe should help the dollar make additional gains. As the chart below shows the stronger dollar (EURUSD
) maintain a stranglehold on gold and the periods of gold weakness are also the periods where the dollar has been rising.
Much therefore depend on investors attitude to the greenback in the aftermath of a near certain rate hike on December 16. The future speed of additional rate hikes will play a big part in the attractiveness of the dollar and to what extend this will create some additional headwind to precious metals.
With just under four weeks to go before the Federal Open Market Committee meeting we see limited upside to precious metals during this time. The market will be headline driven and barring any major geopolitical event these headlines should mostly be gold negative considering the intense focus on the rate hike.
The short-term upside potential for gold seems limited to $1,110/oz while the 2010 low at $1,045/oz will provide the first major level of downside support.
Oil still dogged by glut
Crude oil, both Brent and WTI, has returned to the lows of the year as the intense focus on oversupply continued to pressure the market. US stockpiles expanded for an eighth week and that helped maintain a stockpile more than 100 million barrels above the five-year average.
Opec's crude oil basket price fell below $40/barrel for the first time since 2009 and with prices approaching the financial crisis low in 2008 the Opec meeting on December 4 will gain some additional importance. The pressure on Saudi Arabia, the architect of the current strategy to favour market share over price, will continue to rise as the economic outlook among its fellow cartel members continue to deteriorate.
Lack of signs of production cutbacks, not least from non-Opec producers, will help create a very nervous environment ahead of the first quarter of 2016. During this quarter which seasonal tends to be a period where inventories rise the market will also have to deal with increased supplies from Iran, and the potential for a stronger dollar in the aftermath of a US rate hike.
The seasonal rise in US crude inventories that occurs during the first quarter could add some additional downside price pressure barring any major production cutbacks.
While the short-term outlook for oil remains challenging we maintain the view that the current price level is low enough to eventually trigger a further reduction in non-Opec production, not least from US shale oil producers. Only then will Opec be able to make an announcement on production cut backs which should further help the price stabilise and eventually move higher in the second half of 2016.
Weekly inventory reports
the next two Wednesdays remain the key market moving events ahead of the Opec meeting on December 4.
WTI crude oil for January delivery is less than a dollar from completing a 100% extension of the October selloff and this combined support at $40 should provide some technical support.
Source: Saxo Bank
– Edited by Clare MacCarthy
Ole Hansen is head of commodity strategy at Saxo Bank