By Ole Hansen
(Head of Commodity Strategy, Saxo Bank)
Commodity markets have initially stabilised following the US presidential election last Tuesday with the markets now expecting more of the same with President Obama back in the White House and support for Federal Reserve Chairman Ben Bernanke thus intact. However within hours of the election result being known and with the President still facing a Republican led majority in the US Congress market attention turned to the potential threat to the US economy of the so-called fiscal cliff. If lawmakers and President Obama fail to reach an agreement on this matter before the January 2 deadline it will trigger automatic tax hikes and spending cuts, which undoubtedly will sink the US economy into recession.
Precious metals,which have all been correcting ahead of the election,subsequently received a boost from the expectation of more quantitative easing but also worry about the potential economic impact of the failure to extend these expiring Bush-era tax cuts and automatic spending cuts to defence and domestic programmes.
Brent crude oil remains range-bound after finding support at USD 105 while gasoline has been the best performing energy contract following the aftermath of hurricane Sandy, which has left US gasoline prices elevated due to supply issues in the New York area. Natural gas has continued to retrace from the USD 4 level as milder weather has resulted in record amounts of gas in underground storage ahead of the winter extraction season, which is about to begin within the next couple of weeks.
The DJ-UBS commodity index showed a small increase last week, the first in three, as precious metals and energy just managed to off-set losses in industrial metals and agriculture, where especially softs and grains came under some selling pressure. The price of soybeans plunged to its lowest level in more than four months following a US government report which projected higher stocks than previously expected and this more than off-set a strong rally in wheat on worries about a tightening global supply outlook.
Crude oil range-bound: The price of Brent crude stabilised before and after the US election following a period of long liquidation from hedge funds, which saw the price move down to our favoured Q4 range between USD 105 and 110 per barrel. Continued geo-political concerns, increased Chinese demand and local supply issues are off-setting worries about US fiscal issues and a stronger dollar which tends to create headwinds for commodities traded in dollars. The product market on the US East Coast is still struggling to get back to normal following Hurricane Sandy and this has kept the prices of gasoline well supported.
US to become the world’s largest oil producer: The significant impact of the current shale revolution, especially in the US, has been highlighted by the International Energy Agency which in a report predicted that the US will overtake Saudi Arabia and Russia as the world’s largest global oil producer by 2017. Even up until recently, the IEA predicted that Saudi Arabia would remain the world’s largest producer until 2035. This highlights the speed at which this revolution has taken place and forecasters have constantly had to upgrade their predictions for US oil production. Rising demand from emerging market (EM) countries, due to a rising population and increased wealth growthwill continue to offer a challenge to global supplies and should ensure that oil prices remain well supported.
Brent crude oil, which in 2012 is on track to average USD 112 thereby exceeding the previous record of USD 110.75 from 2011, currently remains stuck within a 105 to 115 range with fiscal cliff worries expected to be the most significant driver near-term, which should leave the price stuck in the lower end of that range.
Gold and silver receiving an election boost: Following a four-week spell of selling, gold and silver snapped higher last week after the US election - with the outcome seen to be favouring precious metals. Having reached, but not breached, important support levels below USD 1670, traders have begun to rebuild speculative longs which had been reduced by one-quarter during the previous four weeks. It is worth noting that during this period of long liquidation the speculative gross short position did not increased which shows a fundamental lack of interest in going outright short the yellow metal.
This above mentioned long liquidation has left both silver and gold in much better positions to react to a change in the technical or fundamental outlook and we believe the direction of least resistance over the coming weeks will be to the upside. Having found support and stabilised above 1700, a move above 1740 should now open the way back towards important resistance at 1800 - at which level gold has corrected three times during the last year.
Wheat the top performing grain while soybeans falter: Since record prices for both soybeans and corn were achieved back in August both have faltered, especially soybean prices which have now moved into a technical bear market after falling by more than 20 percent from the record price reached just two months ago. The reason for this most recent leg down was a US government report last week which found that the damage from the worst Midwest drought in more than 50 years was not as bad as feared. The United States Department of Agriculture (USDA) forecast that soybean production would reach 2,971bn bushels, up nearly 3 percent from its October estimate. The price of wheat has shown strong performance making consecutive contract highs last week.
The Peninsula
