The weakness seen during the last month in most agriculture commodities which then carried over to precious metals, spread this week to the growth-dependent commodities such as energy and industrial metals. This resulted in widespread losses. Former stalwarts such as Brent crude, platinum and copper all felt the pressure from investors scaling back long exposure which in some commodities had reach overextended levels.
This latest round of weakness was triggered by China which drained a record amount of cash from its banking system in response to an explosion in credit growth. This was the first time in eight months that China failed to provide liquidity and it indicates a growing concern about inflation. Worries that the economy is heating up have been supported by data which showed that property prices in most of the major cities continue to rise at a worrying pace. Industrial metals did not like this news as much of the expected demand for metals like copper (housing and infrastructure) and platinum (automobiles) was seen coming from China. If the focus remains on inflation-fighting measures more than growth, demand for these metals could suffer. The upshot this week was that both metals ended down almost four percent.
The minutes of the latest US Federal Reserve Meeting were published on Wednesday and repeated the concerns expressed by some members at the previous meeting in December. In it some, but not the majority, expressed worries about the effect on financial systems of excessive quantitative easing because low interest rates carried the risk of pushing investors into ever riskier investment. The issue of when QE3 would be reduced or stopped rattled the markets, especially gold and silver as it once again raised the question of what can support precious metals once the liquidity injections cease.
The two major indices, the DJ-UBS and the S&P GSCI, both suffered losses as all sectors apart from agriculture were sold during the week. The 2013 performance of the two indices varies, with the S&P GSCI showing a positive return helped by its high allocation to energy. The DJ-UBS, meanwhile, moved into negative territory for the year not least because of its more diversified approach which resulted in a bigger exposure to the metals which were particularly hard hit.
Looking at performance among individual commodities we see how the losses were concentrated around energy and metals while the agriculture sector, apart from natural gas, provided all the positive returns. Here soybeans in particular stood out because limited rain in Argentina led to expectations of lower production at a time of robust demand from China.
The energy sector in a healthy correction
Following the sell-off in industrial metals, the energy sector (particularly the two crude oils and gasoline) was the only sector left unscathed. This, however, only lasted until Thursday when talk about rising US inventory levels and signs of a slowing demand ahead of the annual refinery maintenance season, triggered some weakness. This eventually pushed both crude oils through established support levels. The sell-off was further assisted by unconfirmed market talk that a commodity fund was liquidating assets. Through 30 minutes of carnage some 70 million barrels of WTI crude changed owners and after failing to move back above previous support, now resistance, at $95/barrel, the weakness continued.
Weekly data from the US Department of Energy confirmed that WTI crude oil inventories continues to rise as production has reached the highest level since 1992 and imports remains at the lowest level in over ten years. This once again put some focus on the spread to Brent crude oil which better reflects the price which consumers are paying across the wold. The US has increased supply with limited possibilities for exports while rising demand from especially emerging economies like China is therefore being reflected in a higher price for Brent crude.
During this week’s correction, the spread remained elevated as the selling pressure on WTI crude was stronger for the reasons outlined above.
Looking ahead, it is too soon to call the end of this 2013 rally, but with the annual maintenance season coming up, demand for crude oil from refineries across the northern hemisphere looks set to be reduced which could help put a cap on prices, at least during the next three months. For now though, it most of all looks like a healthy correction after the speculative net-long positions in both crudes had become close to being overextended. The correction has also brought the price closer in line with current fundamentals after having been running ahead of itself on an expected, though not yet realised, pick-up in demand later this year.
Brent crudes correction was halted when support was found at $113.15/barrel at which level two different support features converged. One is trend line support from the June 2012 low, as seen below, while the other is the 38.2 percent Fibonacci retracement of the rally just seen from the November low. A failure to hold onto this support level would open up for a deeper correction potentially back down to $110/barrel.
Gold hit by death cross and FOMC wobble
The selling of precious metals which for both gold and silver has lasted since October accelerated this past week with gold tumbling to a seven-month low. Once the January low was breached it fell all the way to $1,555/oz. before buyers emerged ahead of the weekend. Longer term and non-leveraged investors through Exchange Traded Products also felt the chill and during the four day week up until Thursday they reduced holdings by 40 tons, the fourth biggest reduction over the last five years.
The Peninsula
