By Ole Hansen
(Head of Commodity Strategy, Saxo Bank)
Risk adversity caused by worries about the outlook for global economic growth continues to set the agenda for most financial markets. On-going concerns about the US President’s ability to reach an agreement with Congress on how to avoid the now famous fiscal cliff are very much in focus. If this issue is not resolved before the January 1 deadline it could trigger a return to recession - not only in the US but across the world. During the past week the S&P 500 index dropped to a three-month low and the dollar rose against an index of currencies.
These market movements created a lot of headwind for commodities with only a handful managing a positive return during the past week. As a result, the DJ-UBS index keeps hovering near a four-month low with the agriculture sector, especially grains, continuing to show weakness. The energy and industrial metals sectors showed small gains primarily driven by natural gas and aluminium respectively.
Brent: Middle East tensions briefly gave crude oil a lift this week but overall the focus remains on the weak economic outlook and general risk adversity that is currently driving most asset classes. As a result Brent crude continues to trade in its now well established range between $105 and $112 a barrel, the latter being the 200 DMA. Likewise, we see WTI crude trading around $85 a barrel.
Natural gas spikes: US natural gas was another strongly performing commodity. It rallied particularly before the weekly inventory data from the Energy Information Administration which showed the first decline of the season as below-normal temperatures have increased demand. The withdrawal of 18bn cubic feet from underground storage was the earliest seasonal decline since 2007 compared with a five-year average injection of 17bn cubic feet for this particular week.
Forecasters are expecting the coming US winter to be colder than last year, which should help support prices as stockpiles will be reduced, especially during January and February when gas consumption for heating peaks. That said, the price will likely remain within a $3.5 to $4.25 range as coal to gas switching would be negatively impacted above $4.25 because natural gas needs to remain competitive against US coal.
Last winter was the fourth warmest on record and it helped trigger the collapse in natural gas prices earlier this year as inventories were not withdrawn at the normal speed. This raised worries that maximum storage capacity would be breached during this year’s injection season from April to November. As we all know, this did not materialise as an unprecedented switch from coal to natural gas helped stabilise prices and inventory levels.
Gold and silver up: The strong rally following the US election ran has run out of steam as both metals looks for a driver to move the price forward. Until a driver emerges, they are both back to being just another risky asset taking direction from weaker equity markets and a dollar which rose to a ten-week high against a basket of currencies. ETF investors are undeterred by these current headwinds and have now taken their total gold holding to a new record of 2,600 tonnnes (Bloomberg). Leveraged investors continues to sit on the fence waiting for a clearer picture to emerge but will undoubtedly be keeping a close eye on the market impact of a break out of the current range between $1,700 and $1,740 and ounce.
Copper: A recent improvement in economic data out of China together with speculation that Japan could be considering further means of stimulating its ailing economy also helped copper to halt its six-week slide. Whether this recent price action is a sign that we have reached a turning point is still too early to say but traders will be keeping an eye on trend line support at $3.40/lb. which stands in the way for further losses while a move above $3.51/lb. will further help sentiment.
Cocoa spikes: Cocoa is another top performing commodity despite hitting some profit taking towards the end of the week. Two pieces of news have been supporting the bean. Initially the price began to recover following reports that cocoa grinders have increased production by the largest amount in two years to meet record demand for chocolate, especially from developing nations. Reduced supply from West Africa could lead to the first shortage of beans in three years. The rally gathered pace on Wednesday when it jumped by $70 to 2457 USD/MT after the President of the Ivory Coast dissolved the government after it rejected a bill proposing that woman would have the same rights as men to head a family.
Palladium: Both platinum and palladium received a boost from a report by Johnson Matthey, a world leader in platinum distribution. In their “Platinum 2012 Interim Review” they helped give palladium a unilateral boost by projecting a shortfall of 915,000 ounces for 2012 due to lower mine supply, reduced Russian stock sales (down to 250koz from 755koz in 2011) and record demand auto catalytic manufacturers.
Palladium, being part of the platinum group metals, has a reasonable strong correlation to platinum but also takes direction from other precious metals such as gold and silver. Palladium is the least traded of the two and often suffers from lack of investor interest due to its illiquidity and ability to trigger sharp price moves in both directions. It remains the worst performing metal this year as it is down five percent compared with plus 10 percent on platinum.
The Peninsula
