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 / 09 February 2018 at 14:58 GMT

WCU: Oil reverses as tech and fund outlook weakens – #SaxoStrats

Head of Commodity Strategy / Saxo Bank
  • Major commodities hit by long liquidation as investors forced to cut exposure 
  • Crude oil pundits wonder whether $70/b was a step too far, too soon
  • Gold corrects lower in response to a stronger dollar and hawkish rate outlook
natural gas
 Natural gas was among the hardest hit in a week of commodity woe. Pic: Shutterstock

By Ole Hansen

The global market has been spooked by recent developments in the US where rising wage pressure at a time of low unemployment and tax cuts is raising concern. The S&P 500 entered into correction territory after falling 10%  from its January 26 high, and with bonds also falling, commodities suffered another week of sharp losses. 

Global market movements since Jan 26

Major commodities, from gold and copper to crude oil, all got hit by long liquidation as investors were forced to cut exposure amid changes to the short-term technical and fundamental outlook.

According to the latest edition of The Economist, the US has embarked on an extraordinary economic gamble which is potentially putting its economy at risk. The delivery of a huge fiscal stimulus through tax cuts towards the end of the current expansion cycle risks leaving the US battling with rising interest rates and inflation and the need to fund increased budget deficits.

Crude oil was heading for the worst week since last March as months of supportive bullish news gave way to surging US production and a seasonal slowdown in refinery demand. These developments finally forced money managers to cut what had become an unsustainable long position. While the fundamental outlook has improved during the past six months due to production cuts, supply disruptions and strong demand, the question that is now being asked is whether $70/b was one step too far at this stage. 

Gold corrected lower for a second week in response to a stronger dollar and speculation that US rates may have to increase faster than previously expected. The turmoil in global stocks help offset some the selling pressure and investors who bought gold in recent months in response to increased market complacency was rewarded with an  – if not absolute – then at least a relative performance compared with other asset classes.

One week performances

Copper slumped for a second week to the lowest since December 15 as funds continuing to scale back bullish exposure amid the ongoing stock market turmoil, a stronger dollar and rising inventories at warehouses monitored by the London Metal Exchange. Risk aversion and the need to reduce risk supported short-covering across the agriculture sector with both grains and soft commodities going against the trend of price declines. 

The Opec+ group's so far successful attempt to curb global production in order to support the price has become unstuck. Once again it is the response from non-Opec producers that have caught the market by surprise. In its latest monthly outlook the US Energy Information Administration lifted the prospect for US oil production growth further. Having broken the 10 million barrel/day mark the Administration now expects to see US production exceed 11 million barrels/day this November, one year earlier than previously expected. 

The selloff accelerated following the weekly US stock report which showed a second weekly rise in US crude oil stocks. Further evidence of the beginning to the seasonal slowdown in refinery demand – due to maintenance – which normally runs until April. The weekly crude oil production estimate was lifted by 332,000 barrels/day to reach 10.25 million barrels/day thereby exceeding Saudi Arabian output for the first time since 1990. 

While supporting a strong recovery in global crude oil prices since last June, Saudi Arabia and its Opec friends, together with Russia, are now beginning to pay the price in terms of lost market share to non-Opec producers. More important in the short term is the risk of prices also beginning to suffer from the boost to non-Opec production mentioned above. 
US vs Saudi oil production

One of the interesting features seen during the multi-month rally in oil has been the raised hedging activity carried out by swap dealers on behalf of oil producers. As a result, we ended up with a record long being held by speculative accounts and a record short held by swap dealers. 

During the rally, this resulted in buyers and sellers having no problem finding the opposite side. A correction, however, breaks down this relation with the short position being in no hurry to cover. That risks create uneven market conditions, which is why oil long liquidation phases can be quite painful.  

US oil specs and swap positions
Continued weakness in global stocks is likely to add to the nervousness currently creeping into the market and we maintain the view from our Q1 outlook, called "How to spot a bubble", that Brent crude could be exposed to a 10-15% decline this quarter.  This could see Brent crude oil make a return towards $60/b before stabilising within a $60-$70 range.  

The correction seen so far in Brent and WTI can extend further without risking a change to the technical outlook which above $61/b would still "only" be described as a healthy correction within a strong uptrend. 

Brent Crude oil, first month cont.

Gold continued to pare back some of the strong gains seen during the 130-dollar rally between December and January. Seven consecutive weeks of buying and the failure once again to establish support above $1350/oz left it vulnerable to a correction as risk aversion rose amid a crazy spike in stock market volatility. 

Despite trading lower, gold's activity was relatively calm compared to what unfolded in both bonds and stocks. Rising US interest rates and dollar short covering are likely to provide some headwinds in the short term. But an increasingly clouded outlook for the US economy, geopolitical concerns and the risk of further stock market losses are likely to provide continued support to gold. 

We see a reduction in the open interest in Comex Gold futures to the one-year average as a sign that most of the long liquidation that was needed has now been carried out. From a technical perspective the next key level of support can be found at $1300/oz. The level that must hold in order for the bullish sentiment being maintained is $1285/oz while a break above $1343/oz could signal a renewed attack on the recent highs.

Spot gold with retracement levels
Source: Saxo Bank 

The weakness among industrial metals also negatively impacted silver with the gold-silver ratio breaking above 80 for only the fourth time in 20 years. Palladium was another metal that was hurt by raised risk aversion. The combination of low liquidity and a very elevated speculative long position saw its premium over platinum return to flat for the first time since September.  

Ratios and spreads

– Edited by Clare MacCarthy


Ole Hansen is head of commodity strategy at Saxo Bank 

RobertTrader RobertTrader
Thank You Ole! As usual are really usefull your analysis
Market Predator Market Predator
MP wish nice weekend to you Ole, thx!
Ole Hansen Ole Hansen
Thank you gents. Have a good one
carlosdemarch carlosdemarch
Txs Ole
cinci cinci
Hi Ole, thanks for all this.

And why is there still such a strong backwardation esp in WTI -- when there is a risk of strong supply growth locally in the US ? Can this flip to contango any time soon ? Martin


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