Article / 29 September 2017 at 13:10 GMT

WCU: Risk of oil correction looms as US exports spike — #SaxoStrats

Head of Commodity Strategy / Saxo Bank
  • In total commodities were flat in September
  • Energy prices increased while metals headed lower the past four weeks
  • Politics, a Fed speech, as well as a Kurdish vote all impacted markets
  • China is likely to increase combating pollution, meaning headwind to iron ore
  • Palladium traded above platinum for the first time in 15 years
  • Increased availability of gasoline saw refinery margins return to pre-Harvey level
Steel plant Chine
China is willing to close steel plants and reduce production 
to fight pollution. Photo: Shutterstock

By Ole Hansen

The month of September yielded no return for the Bloomberg Commodity index. However, behind its flat performance we saw a continued recovery in the energy sector being offset by losses in precious and industrial metals. 

The metal sector, not least precious metals, reacted negatively to a hawkish speech from Fed chief Janet Yellen, which left the door wide open for a December rate hike. This was followed by the tax plan announcement fromt US president Donald Trump and the Republican party. 

US stocks rallied, while the dollar made a renewed attempt to recover from a 2½-year low in the belief that lower taxes would spur faster economic growth. In addition, bond yields jumped on concerns an unfunded tax plan could increase federal borrowing to finance a bigger government deficit.

The biggest commodities news this past month, however, has been the recovery in the energy sector. The disruptions caused by Hurricane Harvey in August helped boost especially Brent crude and fuel prices. The International Energy Agency provided additional and general support when it said that strong demand growth had led to second-quarter demand outstripping supply for the first time since 2014. 

One month performance

In China, iron ore and steel prices have come under pressure ahead of the Communist Party's twice-in-a-decade congress on October 18. The Chinese government is likely to continue to step up its efforts to combat pollution. This could lead to further plant closures and production curbs during the most-polluting months from November to March. These developments have hurt iron ore particularly hard at a time when cargoes from the world's biggest producers in Australia and Brazil have been rising. 

The persistent divergence between platinum and palladium has resulted in palladium trading above platinum for the first time in 15 years. Ever since the Volkswagen diesel emissions scandal broke a couple of years ago, palladium, which is the preferred metal used in pollution control for gasoline engines, has continued to outshine platinum (preferred in diesel engines).

Platinum and Palladium

These developments have led to tight supply of palladium, while platinum is suffering from ample supply. Further developments in this spread hinges initially on the direction of gold and later on the potential response from global car manufacturers. Although platinum trades at a record discount to gold of more than $360, its positive correlation to gold remains higher than against palladium. So the short-term direction of gold holds the key to which of the platinum group metals will perform.

Gold has now retraced half of the $150 rally seen between July and early September. Corrections, as long they do not become too deep, are healthy as they provide an opportunity to get involved for others who missed the initial move.

Gold has, however, been trading sideways for the past four years, with the price averaging $1,235/oz during this time. With the latest developments, the chance of this range being broken any time soon has diminished once again. The early September rally fell short of challenging the 2016 high at $1,375/oz, and so we are seeing an increased risk of the market staying range-bound for longer.

In the short term, we need to establish whether the current weakness is more than a relatively deep correction. The positive technical outlook, albeit challenged, should remain as long gold holds above $1,260/oz, a level of significant technical importance.

Gold drivers

Geopolitical risks related to North Korea remain. The Kurdish independence vote in Northern Iraq has raised the risk of confrontation as Turkey, Iraq and Iran all oppose an independent and oil-rich Kurdish state. On that basis, we do not see an immediate threat to gold from escalated long liquidation, not least considering our belief that the gold-unfriendly dollar rally during the past few weeks is likely to prove temporary.

In the US, President Trump remains unpopular, and the successful passage of his tax plan is nowhere near certain as it will trigger a substantial rise in the government deficit. 

Gold: Back below $1,300/oz. and looking for support
Spot Gold
 Source: Saxo Bank

Crude oil traded higher for a fourth week as improved fundamentals continued to support friendlier investor sentiment towards oil. Key developments this past week were signs that the US energy market has begun returning to normal after hurricane disruptions, while the Kurdish vote in Northern Iraq raised concerns about supply being cut from the oil-rich region. 

The Weekly Petroleum Status Report from the US Energy Information Administration showed US crude oil exports jumped to a record, while surging imports of fuel together with increased refinery activity helped boost gasoline inventories. These two developments helped reduce WTI's discount to Brent, with increased export of WTI crude oil supporting a reduction in the tightness seen in the Brent spot market this month. 

Increased availability of gasoline saw refinery margins return to pre-Harvey levels, with tightness now only seen in middle distillates such as diesel. Lower refinery margins could ultimately mean lower demand for crude oil.

Crude oil spreads and trade developments

Oil fundamentals continue to improve, with Q2 demand outstripping supply for the first time since 2014, according to the International Energy Agency. On that basis, a return to levels last seen during the unsuccessful attempt to rally during Q1 seems justified. 

Record US exports — if maintained during the coming weeks together with Libya's intent to boost production by 30% before year-end — risk putting some downward pressure on Brent relative to WTI. Brent has seen surging demand from funds and passive long-only investors after the return to an investor friendly backwardation. 

In the week to September 19, funds held a net long of 465 million barrels in Brent crude oil, just 43 million below the February record. The failure to break higher back then eventually helped trigger a 13% correction. 

Given the improved outlook, we raise our Brent crude oil band by $5 to a range between  $50/barrel and $60/b. In the short term, and baring any escalation in Northern Iraq, the performance this past week has increased the risk of a correction which potentially could see Brent reverse lower towards $54/b.

A developing shooting star on the weekly charts, both on Brent and WTI crude, has increased the risk of a potential top and subsequent reversal. Such a reversal tends to be strongest when it forms after a series of at least three or more consecutive rising candles with higher highs. 
Brent crude oil, first month weekly
Source: Saxo Bank

— Edited by John Acher and Clare MacCarthy


Ole Hansen is head of commodity strategy at Saxo Bank  
Ole Hansen Ole Hansen
Funds increased bullish bets on Brent crude to a fresh record in week to Sep. 26. Looking stretched with length also added again to products
torres089 torres089
The largest traders are longs in CL


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