Surging Crude Oil in Need of Consolidation

The energy sector led by crude oil continues its month-long rally, thereby supporting the recent jump in government bond yields in anticipation of even tougher action by the US Federal Reserve to curb inflationary pressures. As a result, energy sector stocks and ETF’s have avoided the sell-off hurting other sectors and not least the tech-heavy Nasdaq Index. Developments highlighting the fact that while surging bond yields may hurt interest rate sensitive stocks, the so-called old economy stocks are alive and well with the supply of crude oil, some partly due to temporary disruptions, struggling to keep up with current strong demand. 

Besides the surging omicron having a much smaller negative impact on global consumption it’s the realization that several countries within the OPEC+ group are struggling to raise production to the agreed levels that has been driving the energy sector futures and stocks higher in recent weeks. 

For several months now we have seen overcompliance from the group as the 400,000 barrels per day of monthly increases wasn’t met, especially due to problems in Nigeria and Angola. However, recently several other countries, including Russia have struggled to increase production further. The International Energy Agency in their just published monthly Oil Market Report said that the OPEC+ coalition managed only 60% of its planned increase in December while S&P Global Platts estimated the accumulated daily shortfall in December had risen to 1.1 million barrels per day. 

As expected, the IEA also lowered previous forecast for supply surpluses during the first and the second quarter after saying that the global surplus is shrinking and oil demand is on track to hit pre-pandemic levels. The Covid pandemic is once again causing record infections, but this time round, the surge is having a much more muted impact on demand. In addition the IEA also mentioned the current gas crisis which has led to an increased amount of gas-to-fuel switching. 

Following a 5.5 million barrels a day increase in global oil demand in 2021 the IEA sees demand growing by 3.3 million barrels this year and with spare capacity being run down courtesy of the OPEC+ gradual production increases, the remaining spare capacity may end up being concentrated in a few Middle Eastern producers and the US. 

This week Brent and WTI crude oil both broke their recent cycle highs with current levels not seen since 2014. The breakout has increased focus on $90, a level Goldman Sachs says could be reached in the second half, and even $100 per barrel with some OPEC members believing that could be a possible target given the outlook for tight market conditions during the coming months and even years.

Momentum remains strong and open interest in both futures contracts are showing a healthy rise while speculators, a bit late to the recent rally, boosted bullish oil bets in WTI and Brent bets by the most in 14 months in the week to January 11. The combined net long—the difference between bullish and bearish bets—in Brent and WTI jumped during that week by the most since November 2020 to reach 538,000 lots or 538 million barrels. This is still well below the most recent peak at 737,000 lots from last June.

In the short-term, an elevated RSI above 70 and continued trading near the upper Bollinger band points to a need for consolidation. If triggered, the initial support will be the recent highs, $86.75 in Brent and $85.50 in WTI. Given the strength of the recent rally, both contracts can correct around 10% without putting the prospect for further upside gains into doubt.

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Speculators Rotate Towards Crude Oil and Natgas

A week that saw continued stock market weakness and rising bond, albeit at a much reduced pace after Jerome Powell pledged to do what’s necessary to reduced inflation while at the same time prolonging the economic expansion. The dollar traded weaker ahead of last Wednesday’s, thereby supporting a strong rally in commodities led by energy and industrial metals.

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

Commodities

The Bloomberg Commodity Index jumped 2.2% during the reporting week to January 11 with a 6.3% gain in energy and 1.2% in industrial metals offsetting weakness across the agriculture sector which with the exception of coffee and cocoa saw broad losses led by sugar and hogs. Responding to these developments, money managers accumulated fresh longs across the energy sector, not least in crude oil, while cutting back on exposure across all other sectors.

In crude oil, the combined net long in Brent and WTI jumped by the most since November 2020 to reach 538k lots or 538 million barrels, still well below the most recent peak at 737k lots from last June. A US cold blast helped send natural gas up by 14% and the net long up by 30% to 163k lots.

In the other sectors of metals and agriculture, speculators opted to reduce their exposure with the few exceptions being soybeans, cocoa and coffee. Rangebound HG copper as an example saw its net long reduced by 15% to 22.2k lots, primarily due to increased short selling, some of which were probably stopped out during the failed breakout attempt above $4.47 towards the end of last week. Gold and silver both saw net selling , while the platinum short jumped 86%.

In agriculture, speculators increased their long positions in all three soybeans contract, the corn long was cut by 6% while the CBOT wheat short jumped by 40% to an 18-month high. In softs, the sugar long continued to be cut, this time by 61.6k lots to 76.5k lots, and since hitting a cycle peak last August the net long has now been reduced by 72% to a near 18 month low. Cocoa flipped back to a small net long, the coffee long rose 4% while the cotton long was cut by a similar percentage.

Market comments from today’s Market Quick Take:

Crude oil (OILUSFEB22 & OILUKMAR22) trades mixed with Brent crude oil briefly challenging the double-top at $86.75, a seven-year high, before having a rethink as China GDP and retail sales slowed amid ongoing measures to curb the spreading of the omicron variant.

The prompt spreads in WTI and Brent remain elevated at 63 and 74 cents per barrel, thereby signaling rising tightness. Later this week monthly Oil Market Reports from OPEC on Tuesday and IEA on Wednesday will shed some further light on the current situation. Speculators, a little late to the recent rally, boosted bullish oil bets in WTI and Brent bets by the most in 14 months last week.

Copper (COPPERMAR22) slid the most in seven weeks on Friday as weaker-than-expected U.S. economic data (see below) together with weakness in China added to concerns that global growth may slowing amid rising inflation and the spreading virus. High Grade’s drop back below $4.50 triggered some stop loss selling from recently established longs before stabilizing overnight after China, the world’s top consumer, cut rates to support its economy. The worry over tight supplies, however, has not gone away and should cushion any short-term weakness.

Gold (XAUUSD) remains resilient despite Friday’s renewed surge in bond yields as the market continues to price in the prospect of rising US interest rates, potentially at a more aggressive pace than previously expected. Support continues to build in the $1800-area while a break above $1830 could see it target $1850 ahead of the November peak at $1877.

Forex

In forex, the major flow was selling of JPY, where the net short increased by 25.3k lot or the equivalent of $2.7bn. Additional selling of AUD (-2.1k lots) took the net short to a fresh record short at 91.5k lots. The EUR position flipped back to a net long after speculators bought 7.6k lots while the GBP short was reduced by 26%. Overall, the dollar long against ten IMM currency futures and the Doller Index rose by a small 1% to $23.5 billion.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other

Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Gas Markets Lead Broad Commodity Strength in 2022

Commodities extended their strong start to the year this week and once again the energy sector was the main focus with tighter-than-expected supply driving crude oil higher while extreme roller-coaster rides best describe what unfolded in the natural gas market, both in the US and especially in Europe. Gold traded steady with easing yields and a weaker dollar supporting a surprisingly robust start to the year. The industrial metals sector jumped to a three-month high driven by rapidly declining inventories, supply disruptions and the prospect for Chinese stimulus.

On the macroeconomic front the commodity sector received some additional tailwind from a weaker dollar and softer bond yields after data showed US consumer prices reached a forty-year high at 7% in December, in line with expectations. China, in contrast, saw its CPI cool, and together with weak lending data it raised the prospect for the Chinese government speeding up the pace of some of the 102 major projects outlined in its 2021-25 development plan. Many of the areas pinpointed will required industrial metals in some sort as they focus on energy security, affordable housing, infrastructure developments and logistics.

Industrial metals sector

The industrial metals sector jumped to a three-month high on the prospect of rapidly declining inventories, supply disruptions and the mentioned prospect for Chinese stimulus raising the potential for a renewed upside push. Nickel led from the front after reaching a decade high on worries Indonesia, the world’s biggest shipper, will introduce export taxes on raw nickel exports to focus on expanding more profitable refining activities at home. The move by Indonesia, together with solid demand towards the production of electrical-vehicles batteries, may trigger a large supply deficit in 2022.

Following months of sideways trading, copper showed signs of breaking higher with the move above the $4.47-50 area of resistance-turned-support being driven by the prospect for rising demand towards electrification, tight supplies and signs China is stepping up its policy response to support a slowing economy, thereby off-setting recent macro risks, especially those stemming from China’s beleaguered property sector.

Agriculture sector

The agriculture sector has seen a mixed start to the year with tight supply markets such as coffee, cotton and soybeans trading higher while weakness in wheat has continued this month. Gathering pace after the USDA raised its forecast for world inventories, and after the International Grains Council forecast record world production in the upcoming 2022-23 season. Adverse weather developments in Brazil continues to negatively impact supplies of coffee and most recently also soybeans, although some beneficial rains are now expected in the growing areas.

Natural gas

Another roller-coaster week unfolded in global gas markets. The US natural gas first month futures contract jumped 14% on Wednesday to a six-week high, in response to frigid freezing weather before collapsing by 12% the following day on the prospect for weather turning milder and after the weekly stock draw was in line with expectations. Adding to this was the recent surge in LNG shipments to Europe and the once-insulated US market has become much more exposed to international developments, all of which supported the biggest weekly rise since November.

Meanwhile in Europe, the energy crisis rumbles on and despite an armada of LNG ships delivering increased supplies, prices remain at punitively and, for some, unaffordable prices. The mentioned arrival of LNG shipments and so far mild January weather has reduced the risk of blackouts and gas storage running empty, but uncertainties regarding the Nord Stream 2 pipeline and Russia’s intentions in Ukraine continue to trigger sudden spikes and high volatility.

On Thursday, the Dutch TTF benchmark gas future briefly traded below €70/MWh in response to the mentioned mild weather and strong overseas LNG supplies, before suffering a sharp reversal higher back above €90/MWh after Russia-US talks failed to ease fears of military action in Ukraine, a crossing point for around one-third of Russian gas to Europe.

Crude oil

Crude oil continues its month-long rally and while the early January jump was driven by temporary worries about supply disruptions in Libya and Kazakhstan, a bigger and more worrying development has become apparent during this time. Besides the surging Omicron variant having a much smaller negative impact on global consumption, it is the emerging sign that several countries within the OPEC+ group are struggling to raise production to the agreed levels that has supported prices this month.

For several months now we have seen overcompliance from the group as the 400,000 barrels per day of monthly increases was not met, especially due to problems in Nigeria and Angola. However, in their latest production survey for December, SP Global Platts found that 14 out of the 18 members, including Russia, fell short of their targets. According to Platts, the 18 members in December produced 37.72 million barrels a day, some 1.1 million barrels below their combined quota.

The rising gap between OPEC+ crude oil quotas and actual production has already been felt in the market with front month futures prices in both WTI and Brent having rallied stronger than later-expiring contracts. The spread or so-called backwardation between the first and the second Brent futures contract has risen from a low point at 20 cents a barrel in early December, when Omicron worries sparked a sharp correction, to 70 cents a barrel currently.

Global oil demand is not expected to peak anytime soon and that will add further pressure to available spare capacity, which is already being reduced monthly, thereby raising the risk of even higher prices. This supports our long-term bullish view on the oil market as it will be facing years of under investment with oil majors diverging some of their already-reduced capital expenditures towards low carbon energy production.

The timing of the next move up hinges on Brent’s short-term ability to close above $85.50/b, the 61.8% retracement of the 2012 to 2020 selloff, followed up by a break above the double top at $86.75. First though, the chart below increasingly points to the need for a period of consolidation or perhaps even a correction. But with firm fundamentals in play only a bigger than expected omicron development and stronger production can send the price sharply lower.

Gold

Gold traded higher thereby almost reversing the losses seen during the first few days of the month, when surging US bond yields triggered some weakness. Gold’s ability to withstand the 0.3% jump in US ten-year real yields at the start of the year has surprised some, but not us, given our focus on gold’s relative cheapness to real yields that had been rising since last July.

Having seen that misalignment disappear, gold then received additional support this week from a weaker dollar, not only against the JPY as risk sentiment rolled over, but also against the big EURUSD pair which managed to break free of sub-1.1400 resistance after US CPI jumped to the highest in decades.

Several hawkish comments from Fed members, led by Fed Vice Chair nominee Lael Brainard who said she was open to a March rate move, had limited impact on gold, the most interest and dollar sensitive of all commodities. It highlights our view that the gold market has by now fully priced in a succession of US rate hikes starting this March, and with the bond market being torn between a Fed-driven increase in bond yields against the rising risk of a bond-friendly economic slowdown, we see a much more balanced risk-reward situation emerging in gold.

Silver’s recent outperformance faded in response to some end-of-week profit taking among the industrial metals. For silver to shine and move higher towards the $23.90 resistance area, it first needs to break above $23.41, the 50% retracement of the November to December selloff. Gold meanwhile has once again established some support in the $1800 area ahead of key support at $1777. A break above the $1830-35 area could see it target $1850 ahead of the November peak at $1877.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Tighter Than Expected Market Conditions Support Crude Oil

Adding to this a sector unloved by regulators but very much needed for years to come, and the risk of even higher prices going forward persist.

For several months now we have seen overcompliance from the group as the 400,000 barrels per day of monthly increases wasn’t met, especially due to problems in Nigeria and Angola. However, in their latest production survey for December, SP Global Platts found that 14 out of the 18 members, including Russia, fell short of their targets. According to Platts the 18 members in December produced 37.72 million barrels a day, some 1.1 million barrels below their combined quota.

The rising gap between OPEC+ crude oil quotas and actual production has already been felt in the market with front month futures prices in both WTI and Brent having rallied stronger than deferred, thereby increasing the so-called backwardation, a curve structure that benefits long-only strategies through the positive yield when rolling (selling) expiring futures contracts at a higher price than the next month.

The US Energy information Administration was the first out of the three major forecasters, the other two being IEA and OPEC, to recognize this development. In their January Short-Term Energy Outlook (STEO), the EIA revised their Q1 global inventory outlook from a surplus to a small deficit. The report also showed that global oil stockpiles declined by a massive 3 million barrels per day in December. In addition, the EIA also forecasts that US oil production growth in 2022 would be slightly lower than previously forecast before averaging a record 12.41 million barrels a day in 2023. This in line with the latest Dallas Fed Energy survey were almost 50% of executives at 88 exploration and production firms said their focus was to grow production in 2022.

The International Energy Agency (IEA) will not publish its Monthly Oil Market Report until January 19, but with its head Fatih Birol saying “Demand dynamics are stronger than many of the market observers had thought” it is safe to assume the IEA will also lower their recent forecast for a 1Q22 surplus of 1.7 million barrels a day and 2 million barrels a day in 2Q22.

Major US shale oil producers such as Occidental Petroleum last year and more recently Pioneer Natural Resources have increasingly abandoned their forward hedging activity. Since the shale oil revolution began more around a decade ago, forward hedging has been a constant feature by many of these oil producers. During periods of ample supply, the idea made sense as forward prices traded higher than the spot market. In addition, the sector borrowed billions of dollars to pump at will, but in order to do so several were forced to hedge some of their production in order to receive their credit lines.

Surging prices since the pandemic low point, and a newfound discipline among producers cutting back their debt has given several producers the financial freedom to manage their cash flows as they see fit. But behind the decisions obviously also lies a belief that oil prices will remain at current or potentially higher levels going forward. Not least considering robust demand and dwindling spare capacity as seen through the inability by several OPEC+ members in raising production.

Despite a continued, but reduced worry about the omicron variants impact on mobility, and with demand for fuel, the outlook for crude oil remains supportive, and we maintain a long-term bullish view on the oil market as it will be facing years of likely under investment with oil majors losing their appetite for big projects, partly due to an uncertain long-term outlook for oil demand, but also increasingly due to lending restrictions being put on banks and investors owing to a focus on ESG and the green transformation.

Global oil demand is not expected to peak anytime soon and that will add further pressure on spare capacity, which is already being reduced on a monthly basis, thereby raising the risk of even higher prices. The timing of which hinges on Brent’s short-term ability to close above $85.50/b, the 61.8% retracement of the 2012 to 2020 selloff, followed up by a break above the double top at $86.75.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Industrial Metals Off to a Strong Start on China Stimulus Signs

The prospects for rising electrical vehicle demand, tight supplies and signs China is stepping up its policy response to a slowing economy have all helped reduce some of the macro risks that has weighed on the market in recent months, especially those stemming from China’s beleaguered property sector.

In my December 1 update I highlighted the reasons why we see further upside for copper and other industrial metals in 2022, not least driven by the prospect for inelastic supply struggling to meet green transformation demand towards electrification. In another update from November 19, Peter Garnry, our head of Equity Strategy also highlighted how copper is an essential metal in our green transformation push driven by electric vehicles and upgrades to our electric grid infrastructure. 

In addition, the ongoing urbanisation in the world is also driving construction which is one of the key demand drivers for copper. Apart from describing how to get exposure to copper through futures, CFD’s and ETF’s, he also published a list of mining stocks topped with the six miners with the highest exposure to copper.

While the decarbonisation of the world remains a key long-term driver for industrial metals demand and with that the risk of even higher prices, the short-term focus remains squarely on China where decades of high growth has paused with some economists seeing growth falling below 5% in 2022. Chinese authorities are widely believed to have set their sights on a growth rate of at least five percent for this year, and the policy response to ensure that is now under way. Not least considering how economic and social stability are very important to the Communist Party in the run-up to its 20th National Congress, 2022, a key party meeting held every five years and due sometime during the second half.

China’s cabinet has already signaled a desire to speed up the pace of 102 major projects outlined in its 2021-25 development plan. Many of the areas pinpointed will required industrial metals in some sort as they focus on energy security, affordable housing, infrastructure developments and logistics. 

All developments that are likely to drive increasingly tight market conditions across the sector, not least nickel which has reached a decade high as demand from battery producers, due to strong EV trends, has put the spotlight on a tightening supply outlook. Despite months of worrying about the Chinese property market, copper stocks have remained low and as a result exposed to a pickup in demand. 

High Grade Copper has broken out of its recent range, and the move higher may now attract renewed momentum buying from money managers, who following months of sideways trading have cut their HG copper long to 26,000 lots, well below the 2020 high at 91,600 lots, and the record high from 2017 at 125,000 lots. If successful in defending the breakout above $4.47 per pound, only $4.56, the 61.8% retracement of the October to December selloff, and which is already being tested, stands in the way for a renewed upside attempt, initially towards the October high at $4.82/lb.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Speculators Initial Reaction to Stock and Bond Market Rout

This COT report highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, January 4. A week where a rout in tech shares dragged US stocks from all-time highs on worries about higher interest rates amid a rout in US bonds. The commodity sector traded higher, primarily supported by the industrial metal and soft sector, with the best individual performances being crude oil, soybeans, coffee and cotton.

In terms of market action around New Year the Nasdaq lost 1.3% while the higher concentration of value stocks saw the S&P 500 trade close to unchanged. The dollar held steady while US ten-year yields jumped 17 basis points to 1.65%.

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

Commodities

The commodity sector traded higher, primarily supported by the industrial metal and soft sector, with the best individual performances being crude oil, soybeans, coffee and cotton. Somewhat offsetting these were losses in natural gas, palladium, wheat and sugar.

Speculators reaction to these developments were relatively muted, most likely due to the time of year with books barely reopened before the reporting week ended last Tuesday. Overall the energy sector saw buying led by Brent crude oil and gasoline. Metals were mixed with gold selling being offset by silver buying, the platinum short  was halved while copper length rose by 27%.

The agriculture sector saw strong demand for soybeans in response to Brazil crop worries while ample supply saw the CBOT wheat short rise by 69% to a six-month high. In softs, selling of sugar took the net long to a 17-month low while the 7% increase in the cotton long lifted the long/short ratio to a very unhealthy 151 longs per each short.

Latest comments from today’s Market Quick Take:

Crude oil (OILUKMAR22 & OILUSFEB22) trades steady with focus on robust demand and so far, a limited fallout from the omicron surge, together with the prospect for OPEC+ struggling to deliver the promised production hikes as several producers have started to hit their limit, some due to lack of investments.

Countering the short-term threat of even higher prices are easing supply disruptions in both Libya and Kazakhstan, but overall, demand remains robust as signaled in the six-month futures spread in Brent which has more than doubled since the December, omicron demand worry low point. Focus this week on EIA’s STEO and US CPI, as well as omicron developments, especially in China where the zero-tolerance approach may hurt demand through lockdowns.

Gold (XAUUSD) had a relatively strong first week of trading with the massive 30 bp surge in US ten-year real yields to a six-month high at –0.78% being partly offset by a softer dollar and stocks as well as geopolitical risks, and rising inflation as seen through higher wage pressures in Friday’s US job report.

Yields have climbed further overnight with the market starting to price in four Fed rate hikes in 2022, starting as early as March. Silver (XAGUSD) meanwhile continues to find support around $22 ahead of the key double bottom at $21.42 while resistance can be found at $22.65. Gold remains challenged as long it stays below the triple top at $1830 and so far, $1783 has prevented an even deeper selloff.

Forex

In forex, the speculative flows were mixed resulting in the combined dollar long against ten IMM currency futures and the Dollar index holding steady at $23.2 billion, with buying of EUR, CHF and GBP being offset by selling of JPY and AUD.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other

Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

Start trading now

This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Surging Energy and US Yields the Early 2022 Focus

The energy sector meanwhile remained immune to these developments with tight supply driving crude oil and gas sharply higher while industrial metals traded mixed with focus on developments in China, where the zero-tolerance policy on Covid-19 could stifle consumer spending at a time where the economy is already slowing.

NOTE: This week’s update was written and published before Friday’s US job report

Turbulent best described the first few trading days of 2022, and just like the nervous start to 2021, it was a sharp rise in US Treasury yields that provided the initial directional inspiration across the different asset classes, including commodities such as gold and silver. The energy sector meanwhile remained immune to these developments with tight supply driving crude oil and gas sharply higher while industrial metals traded mixed with focus on developments in China, where the zero-tolerance policy on Covid-19 could stifle consumer spending at a time where the economy is already slowing.  

The jump in sovereign bond yields from Japan to Germany and the UK gathered momentum after minutes from the Fed’s December meeting raised expectations for an accelerated pace of Fed rate hikes to combat inflation while the FOMC also discussed ways to outright reduce its balance sheet, thereby further removing some of the oxygen that had been driving stock markets sharply higher during the past three years. 

These moves signaled an interest from the Fed to guide bond yields higher, not only at the front but across the whole curve. The benchmark ten-year yield jumped to within touching distance of the 1.77% high from last April.

Precious metals

Precious metals with gold in particular being one of the most interest rate-sensitive commodities, traded lower, but not to the extent that the 0.3% jump in US ten-year real yields would otherwise dictate. Part of the explanation being gold’s relative cheapness to real yields during the past six months while a softer dollar, increased stock market fluctuations as well as virus and geopolitical risks also helped off-set what otherwise could have been a very challenging start to the year.

Silver meanwhile was troubled by the slump in risk appetite as well as the weakness in bellwether industrial metals such as copper. After showing some end-of-year strength, the white metal succumbed to fresh technical selling which helped lift its relative cheapness to gold to a three-week high above 81 ounces of silver to one ounce of gold.

The outlook for 2022 remains clouded with most of the bearish gold forecasts being driven by expectations for sharply higher real yields. Real yields have, as seen below, throughout the past few years shown a high degree of inverse correlation with gold, and it’s the risk of a hawkish Fed driving yields higher that currently worries the market.

In our first precious metal update for the year titled “Gold and silver may spring a 2022 surprise” we highlighted the reasons why gold’s negative performance last year was on balance a good one from a relative perspective and what needs to happen for the metal to spring an upside surprise in 2022.

Gold remains stuck around $1800 within a wide $1740 to $1860 range, and key to the short-term direction is how it balances the opposite pulls mentioned from surging yields and raised market uncertainty.

Industrial metals

Industrial metals were mixed with HG copper trading lower in response to the general loss of risk appetite and continued worries about the outlook for the Chinese property market, as well as the short-term growth impact from surging omicron cases leading to shutdowns across China. Aluminum, one of the most energy-intensive metals to produce, rose as recent supply disruptions added further fuel to expectations of a growing supply deficit this year. Not least considering the outlook for slowing capacity growth in China as the government steps up its efforts to combat pollution, and ex-China producers for the same reasons being very reluctant to invest in new capacity.

While the energy transformation towards a less carbon-intensive future is expected to generate strong and rising demand for many key metals, the outlook for China is currently the major unknown, especially for copper where a sizable portion of Chinese demand relates to the property sector.

Considering a weak pipeline of new mining supply, we believe the current macro headwinds from China’s property slowdown will begin to moderate through the early part of 2022. Not least considering the prospect of the PBOC and the government, as opposed to the US Federal Reserve, is likely to stimulate the economy, especially with focus on green transformation initiatives that will require industrial metals. With inventories of both copper and aluminum already running low, development could in our opinion be the trigger that sends prices back towards and potentially above the record levels seen last year. Months of sideways price action has cut the speculative length close to neutral, thereby raising the prospect for renewed buying once the technical outlook improves.

Crude oil

Crude oil traded higher throughout the first few trading days, thereby extending the end of December rally, while also going against the general trend of risk aversity seen across other commodities and asset classes. Supply disruptions in Libya, down more than 400,000 barrels a day compared with 2021, and geopolitical risks associated with rising fuel protests in Kazakhstan, a 1.9 million barrels a day producer, helped off-set any short-term demand worries related to surging virus cases around the world. Not least in China, where its aggressive handling of its worst Covid-19 outbreak since Wuhan could drive some short-term demand weakness.

OPEC+ agreed to maintain the current pace of monthly increases of 400,000 barrels a day and the market, despite the outlook for an emerging supply surplus this quarter, rose with the prospect of several producers not being able to meet their production targets. Besides the prospect of a global supply surplus, according to both the International Energy Agency as well as OPEC, emerging during the early parts of 2022, the futures market is also sending a signal about reduced participation.

The open interest which measures the total exposure, long and short, held by traders in WTI and Brent has fallen to the lowest in more than five years, and since the December 1 low point it has dropped further in recent weeks despite a price rally close to 20%. Perhaps a sign that many investors and traders remain skeptical about oil’s upside potential, at least during the early parts of 2022.

However, despite these signals we maintain a long-term bullish view on the oil market as it will be facing years of likely under investment with oil majors losing their appetite for big projects, partly due to an uncertain long-term outlook for oil demand, but also increasingly due to lending restrictions being put on banks and investors owing to a focus on ESG and the green transformation.

Global oil demand is not expected to peak anytime soon and that will add further pressure on spare capacity, which is already being reduced on a monthly basis, courtesy of OPEC+ production increases. Adding to this the prospect for a resumption of inventory declines into the second half and the risk of higher energy prices keeping inflation elevated, is the most likely route prices will take in 2022.

European enery crysis

The European energy crisis shows no sign of finding a solution with the direction of gas and with that power prices remaining at the mercy of weather developments, the level of Russian supplies as well as the pace of LNG shipments reaching Europe.

During the past couple of weeks, the gas market has witnessed an extreme roller coaster ride. Before Christmas, very cold weather across Europe and the UK helped send EU benchmark gas to a level that was ten times higher than the long-term average. This was followed by a 65% price collapse in response to news that multiple LNG ships had changed course from Asia and South America to Europe in order to sell their gas at the highest price on the planet. A sudden turn towards milder-than-normal winter weather also helped, at least in the short term, to alleviate current concerns about very low stock levels of gas.

Into January and the price of gas has resumed its ascent, again with the prospect of colder weather driving increased demand for heating and unseasonably very low supplies from Russia, especially via two important pipelines through Poland and Ukraine. Whether Russia is deliberately keeping supplies down due to Nord Stream 2 pipeline approval delays and the Ukraine border crisis is difficult to say. But it highlights failed energy and storage policies in Europe and the UK which have left the region very dependent on imports of gas, especially given the still unreliable level of power generation from renewable sources.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Gold and Silver May Spring a 2022 Surprise

Gold managed a small rally during the final days of 2021 thereby cutting the annual loss to around 3.6%, and while being the worst decline since 2015, it was nevertheless a respectable year for the yellow metal, not least considering the headwinds from rising interest rate expectations and the strongest dollar in six years. Once the dust settles it is very important to watch what the FOMC does and not what it says and with that in mind gold, silver and not least platinum may all spring positive surprises in 2022.

Gold managed a small rally during the final days of 2021 thereby cutting the annual loss to around 3.6%, and while being the worst decline since 2015, it was actually a respectable year for the yellow metal. Not least considering the headwinds from rising interest rate expectations and the dollar which against a wide basket of currencies rose by 5%, its best year since 2015.

Gold is often used by fund managers as a protection against the unexpected, whether it is macroeconomic or geopolitical developments. The wall of money provided by governments and central banks following the first wave of the Covid-19 outbreak helped reduce macroeconomic risks while sending the stock market sharply higher resulting in what my colleague called a mindboggling year for equities.

Responding to these developments, total holdings in exchange-traded funds backed by bullion saw a steady decline throughout the year as investors, including some of the largest real money asset managers, cut their holdings by 287 tons, thereby reversing parts of the 750 tons that was added in 2020 during the first year of the pandemic.

Metals performance per year

Responding to these developments, total holdings in exchange-traded funds backed by bullion saw a steady decline throughout the year as investors, including some of the largest real money asset managers, cut their holdings by 287 tons, the most since 2013, and thereby reversing parts of the 750 tons that were added in 2020 during the first year of the pandemic.

Gold ETF Holdings (tons)

During the first days of trading in 2022 gold has after reaching a six-week high returned to its established comfort zone close to $1800 per ounce. This the biggest decline in six weeks was triggered by surging bond yields as investors braced themselves for monetary policy tightening in 2022.

The weakness has been driven by a sharp turnaround across some of the other metals, not least platinum, which at one point on Monday slumped more than 50 dollars, thereby seeing its discount to gold rise to a 13 month high above 870 dollars per ounce.

The first couple of weeks in a new year often fails to deliver much in terms of directional inspiration and clues as to what happens next, and until the picture becomes clearer with the regards to the direction of the dollar, the timing and pace of Fed rate hikes, gold may struggle for direction. Key to the ultimate direction hinges, as mentioned, on the direction of the dollar and not least the how high real yields can go. We believe 2022 could offer a rough ride for global stocks as interest rates rise and consumers keep more money in their pockets following a wild year of strong consumer spending.

Gold vs US 10 year Real ield (rhs, inv)

We need to watch closely what the US FOMC does, and not what it says, as that will create the real impact. Investors getting the Fed actions, and after that the direction of the Chinese economy right in 2022 are likely to be the ones realizing the biggest profits on their investments.

We do not believe US real yields can rise to the extent that others are forecasting, and with that in mind and given prospect for US stocks coming off the boil, we believe that gold as well as silver and platinum will offer a positive return in 2022, with the yellow metal once again showing its credentials as an investment that over time improve returns while reducing risk, and overall volatility in a portfolio.

A recovering gold price is likely to result in an even stronger performance in silver, and potentially also platinum. Both metals will enjoy the tailwind from increased focus on the evolving green energy transition with platinum demand, apart from a recovering automobile industry, coming from the production of hydrogen and silver from solar panels and other electrical appliances.

Gold chart

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Specs in Wind Down Mode as Multiple Uncertainties Reign

A week that encapsulated a market in wind down mode and preoccupied with the risk of hawkish FOMC meeting on December 15 and the rising threat of another virus-driven market disruption.

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The weekly COT update is taking break and will return January 4.

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, December 14. A week that encapsulated a market preoccupied with the risk of hawkish FOMC meeting on December 15 and the rising threat of another virus-driven market disruption. Responding to these developments stock markets weakened, the dollar rose and bond yields drifted lower. Commodities traded lower as well with broad weakness seen across all sectors.

Commodities 

Ahead of last Wednesday’s FOMC meeting, and raised concerns the Federal Reserve would deliver a hawkish tilt, money managers opted to cut further their exposure across the five metals contracts. The selling was led by gold and silver while the net-short in palladium rose to a record high at 3,209 lots. Additional selling in HG copper reduced the net long to just 12k lots, an 18-month low.

In energy, the combined WTI and Brent crude oil long continued to be reduced, and following two months of almost continued selling the net length has seen a 38% reduction to 400k lots, a 13-month low. The latest change primarily driven by a 14.7k lots reduction in the WTI long driven by equal measures of long liquidation and fresh short selling.

The agriculture sector speculative length received a 41k lots boost to 948k lots with net buying of corn, sugar and cocoa more than offsetting selling in soybean oil and Chicago wheat, the latter seeing a return to a net short for the sixth time this year.

Forex

In forex, the focus among speculators was for a second week primarily geared towards reducing exposure, both long and short, thereby potentially reducing the signal value. Overall, the combined dollar long against ten IMM currency futures and the Dollar index was reduced for a second week, but this time only by 2% to $22.7 billion. Flows were mixed with selling of EUR, GBP and NZD being more than offset by demand for CHF, JPY and MXN.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other

Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Omicron and EU Power Volatility Dominate Focus Into Year-End

Commodities traded mixed during a week which saw the US FOMC deliver an expected hawkish message as they stepped up efforts to combat surging inflation. However, a vicious post-FOMC reversal in risk sentiment unfolded, driving the dollar and bond yields lower, thereby supporting a recovery among some the commodities that had been under pressure ahead of the FOMC meeting. Crude oil traded mixed with the omicron variant clouding the short-term outlook while in Europe the energy crisis showed no signs of abating with strong demand not being met by an equally strong supply response.

US Treasuries, a key directional guide for investment metals, also delivered a surprise post-FOMC reaction. Just the day after making a hawkish shift complete with a fresh series of stronger economic, inflation and Fed policy forecasts, yields dropped along the entire curve. Apart from a relief rally driven by a deeper knowledge about the thinking within the central bank, the reaction was most likely also supported by the continued and rapid spreading of the Omicron virus, with the new variant driving a surge in cases around the world.

Despite the tailwind from a weaker dollar, the oil market traded softer with short-term demand concerns related to the Omicron virus supporting the International Energy Agency in its forecast for an oversupplied market into the early months of 2022. Natural gas prices continued to diverge with mild US winter weather driving prices down to levels normally seen during the summer months, while here in Europe a perfect storm of price-supportive events helped drive gas and power prices to fresh record highs.

The result of these developments was a relatively neutral week for the Bloomberg Commodity Index, which tracks a basket of major commodities spread evenly between energy, metals, and agriculture. Thereby consolidating its very strong 2021 performance, currently at 24%, the strongest annual jump since 2001.

Precious Metals

Precious metals received a boost after the FOMC meeting delivered the expected hawkish tilt. Both metals had been under pressure since the surprisingly hawkish acceptance speeches from Fed chair Powell and vice chair Brainard on November 22. With most of the announced actions being priced in ahead of the meeting, both metals seized the opportunity to claw back some of their recent losses. With 10-year real yields returning to pre-FOMC levels below –1% and the dollar seeing its biggest retreat since October, gold managed to break above its 200-day moving average, a level that had been providing resistance in the run up to the meeting.

The outlook for 2022 remains clouded with most of the bearish gold forecasts being driven by expectations for sharply higher real yields. Real yields have throughout the past few years shown a high degree of inverse correlation with gold, and it’s the risk of a hawkish Fed driving yields higher that currently worries the market.

However, with three rate hikes already priced in for 2022 and 2023 and with gold trading at levels which look around 0.25% too cheap relative to 10-year real yields, the downside risk should be limited unless the Fed over the coming weeks and months turns up the rhetoric and signals a more aggressive pace of rate hikes.

It is also worth keeping in mind that rising interest rates will likely increase stock market risks with many non-profit high-growth stocks suffering a potential revaluation. In addition, concerns about persistent government and private debt levels, increased central bank buying and the dollar rolling over following months of strength, are all potential drivers that could offset the negative impact of rising bond yields.

Having broken above resistance-turned-support at $1795, gold will find support from short-term momentum buyers, but for the newfound strength to extend beyond that, longer-term focused investors need to emerge, and so far, total holdings in bullion-backed exchange-traded funds are not showing any signs of picking up. Perhaps due to the time of year when only strong investment cases are being reacted upon while others are being postponed to January.

Silver also deserves some attention after once again managing to find support, and since September buyers have emerged on four occasions below $22, thereby preventing a challenge at $21.15 key support from 2016. The chart action could potentially signal a major low is in the process of being established, but for now the metal needs support from both gold and industrial metals to force a major change in the direction.

Industrial Metals

Industrial metals, just like precious metals, received a post-FOMC boost but not before once again fending off another downside attempt with copper temporarily falling to a two-month low. Supporting the recovery was news that Chinese production of aluminum for November slowed due to persistent restrictions on energy consumption, thereby driving increased demand for stocks held at LME-monitored warehouses. Copper meanwhile found support after one of Peru’s biggest mines started winding down production amid community protests hampering output.

Annual outlooks and price forecasts from major banks with a commodity operation have started to roll in, and while the outlook for energy and agriculture is generally positive, and precious metals negative, due to expectations for a rise in US short-term rates and long-end yields, the outlook for industrial metals is mixed. While the energy transformation towards a less carbon intensive future is expected to generate strong and rising demand for many key metals, the outlook for China is currently the major unknown, especially for copper where a sizable portion of Chinese demand relates to the property sector.

Considering a weak pipeline of new mining supply, we believe the current macro headwinds from China’s property slowdown will begin to moderate through the early part of 2022, and with inventories of both copper and aluminum already running low, this development could be the trigger that sends prices back towards and potentially above the record levels seen earlier this year. Months of sideways price action has cut the speculative length close to neutral, thereby raising the prospect for renewed buying once the technical outlook improves.

Crude Oil

Crude oil dipped on Friday to trade down on the week as Omicron developments continue to impact the short-term demand outlook. A weaker dollar has been offset by tighter monetary policies potentially softening the 2022 growth outlook further. While Europe is dealing with a worsening energy crisis, milder than normal weather in Asia has led to a less demand for fuel products used in power generation and heating. With the clouded outlook we expect most of the trading ahead of New Year to be driven by short-term technical trading strategies.

With the International Energy Agency, as well as OPEC forecasting a balance market during the early months of 2022, the risk of higher prices may have been delayed but not removed. We still maintain a long-term bullish view on the oil market as it will be facing years of likely under investment with oil majors losing their appetite for big projects, partly due to an uncertain long-term outlook for oil demand, but also increasingly due to lending restrictions being put on banks and investors owing to a focus on ESG and the green transformation.

EU Gas and Power Market

The EU gas and power market surged to a new record high on Thursday before paring back gains on Friday after Gazprom booked some pipeline capacity. Before then, the Dutch TTF gas future had closed above €140/MWh or $45/MMBtu, more than nine times the long/term average, while German Power traded more than six times higher than the long-term averaged at €245/MWh.

A combination French nuclear power plants temporary shutting down due to faults on pipes, an expected cold snap next week and low flows from Russia continue to reduce already-low inventories. Adding to this is US pressure to apply sanctions on Russia over Ukraine and German regulators saying the Nord Stream 2 gas pipeline may not be approved before July.

The market is clearly driven by fears about a February shortage of gas and with this in mind the market will continue to focus intensely on short-term weather developments as well as any signs of increased supplies from Russia. An improvement in both could see prices suffer a sharp correction as current levels are killing growth, raising inflation while creating pockets of fuel poverty across Europe.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

 

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Yearend Risk Reduction Despite Underlying Strength

 The COT reports published weekly by the US CFTC highlight futures positions and changes made by hedge funds across commodities, forex and financials during the latest reporting week to last Tuesday, December 7. A week that saw stocks trading higher on optimism the omicron variant wouldn’t derail global growth. Treasury yields and the dollar rose while the commodity sector received a fresh bid following its worst slump in more than a year. With yearend and the low liquidity season upon us, speculators went against the direction of the markets and instead opted to reduce exposure in both commodities and the dollar.

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, December 7. A week that saw the biggest one-day rally in US stocks since March on optimism the omicron variant wouldn’t derail global growth. Treasury yields and the dollar rose while the commodity sector received a fresh bid following its worst slump in more than a year.

However, looking across all the asset classes covered in this update, we find position squaring becoming a major theme. December is normally a time of year when traders reduce exposure as liquidity starts to dry up as trading books are being reduced ahead of the holidays and yearend. With this in mind the net changes may not give much insights with regards to the short-term direction of the market. Examples being the reductions in dollar longs and commodities, both occurring in a week where both rose.

Commodities

Net selling of commodities continued for a second week, but at 117k lots the reduction slowed compared with the previous week where the 364k lots reduction was the biggest one-week reduction since the first round of Covid-19 panic hit the market in February last year. Despite strong gains with 20 out of 24 futures contracts trading higher, the general theme as mentioned was one of risk reduction with gross longs seeing a 124k lots reduction while the gross short was reduced by 8k lots.

Only a handful of contracts saw net buying led by corn (17.2k lots), soybeans (4.5k) and WTI (2.4k) while selling was led by natural gas (-37k), sugar (-22.8k), Brent (-13k) and gold (-11.6k).

Energy

The most interesting of the changes last week was the 13.1k lots reduction in the Brent crude oil long to a fresh 13-month low at 154k lots. The contract has now seen nonstop selling for the past nine weeks, and despite rallying by 9% last week, the recovery from the omicron washout and break above the 200-day moving average was not enough to persuade speculators to change their defensive stance. A behavior which is in stark contrast to the overall market belief in higher prices into 2022.

Commodity related updates from our daily Market Quick Take available here

Crude Oil

Crude oil (OILUKFEB22 & OILUSJAN22) trades near a three-week high as the market continues to view current omicron worries as short term concerns and mounting speculation that China, the world’s biggest buyer of crude oil, will start adding fiscal stimulus in early 2022 in order to stabilise the economy. Both Brent and WTI are challenging their 21-day moving averages with a break above potentially adding more technical momentum. Speculators meanwhile reduced Brent crude oil longs in the week to December 9 for a ninth, and nine weeks of non-stop reductions have seen the net long drop to a 13-month low. A behavior which is in stark contrast to the overall market belief in higher prices into 2022. Focus turning to monthly oil market reports from OPEC today and IEA tomorrow.

Gold

Gold (XAUUSD) remains stuck below its 200-day moving average at $1794 with focus this week on Wednesday’s FOMC meeting, and how they will respond to inflation rising at the fastest pace since the 1980’s. The market is currently pricing in three rate hikes next year with the first one due around June. Countering the negative price impact of a potential more aggressive US central bank, the rapid spreading of the omicron virus is also receiving some attention given its potential negative growth impact.

Industrial metals

Industrial metals have started the week on a firmer footing with iron ore jumping 6% on raised expectations that China will move to increase stimulus next year to support the economy. Following the end of a three-day annual Central Economic Work Conference, the party signaled a clear change in focus away from growth towards ensuring stability. They also vowed to front load policies to halt the recent slide.

Natural Gas

Surging EU gas prices ahead of the European Council meeting on December 16. Apart from having to deal with Covid-19 and the Russian threat on its eastern borders, the council is also set to decide whether investments in gas and nuclear energy should be labelled climate friendly. The design of the EU green investment classification system is closely watched by investors worldwide and could potentially attract billions of euros in private finance to help the green transition, especially given the need to reduce the usage of coal, the biggest polluter.

Forex

In forex, the speculative flow was skewed towards dollar sales, primarily driven by short covering in EUR, JPY and CAD. Just one week after hitting an 18-month high on omicron worries and heightened Fed tightening focus, the overall dollar long against ten IMM currency futures and the Dollar index was reduced by 16% to $23.3 billion.

As can be seen in the table below, the overall focus was primarily on reducing exposure which helps to explain that the dollar length was reduced in a week where the greenback rose. The 4.6 billion dollar reduction was primarily driven by a 5.1 billion dollar equivalent broad reduction in gross short positions led by JPY ($1.9 bn) and EUR. Other major changes was the MXN net short which reached a four-year high at 64k lots or the equivalent of $1.5 billion.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other
Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other
Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Commodities Back on Track for a Strong 2021 Finish

Commodities saw their first broad increase in eight weeks as the initial negative impact of the Omicron variant faded, thereby giving crude oil a strong boost. The energy crisis in Europe went from bad to worse with gas and power prices tearing higher amid shrinking stockpiles. Gold was held down by the prospect for an accelerated pace of US rate hikes in 2022 but overall the latest developments helped the commodity sector stay on course for its strongest performance since 2000.

The second week of December normally signals the beginning of a calm period where markets settle down ahead of the upcoming holiday break and new year. This year so far looks to be an exception with plenty of major uncertainties still casting a shadow over the market, thereby also raising the prospect of volatile market activity into a period where liquidity starts to dry out.

The initial negative market reaction at the beginning of the month to the new Omicron variant did fade during the past week. But reports about its rapid spreading capabilities and worries about the efficacy of existing vaccines has led to a wave of new restrictions, thereby once again raising a threat to economic activity. At the same time, the market has had to deal with surging inflation and the prospect of a return to a new and potentially aggressive US rate hiking cycle, now priced in to start around June next year.

The Bloomberg Commodity Index, which tracks a basket of major commodities spread evenly between energy, metals, and agriculture, rose for the first time in eight weeks, thereby consolidating its very strong 2021 performance, currently at 25%, the strongest annual jump since 2000. Most of the gains, however, have initially been driven by the market finding its poise following the Omicron-driven sell-off the previous week. With that in mind, it was no surprise to find the energy sector on top with crude oil recouping half what it had lost in the correction from the October peak.

Agriculture was mixed with profit taking hitting coffee after reaching a decade high, buyers returned to cotton and sugar following a recent +12% correction. The grains sector traded lower for a second week, led by wheat, which dropped to a five-week low after the USDA raised its outlook for global stocks. The drop in Chicago also helped drag down the recent highflying futures contracts for Kansas and Paris milling wheat. In its monthly supply and demand update, the US government raised the level of global wheat stock at the end of the 2022-23 season after receiving a boost from production upgrades in Russia and Australia while US export slowed with high prices curbing demand.

Industrial metals received a bid from signs of an improved demand outlook in China, despite ongoing concerns about its property sector. The industrial metal sector outlook for 2022 remains clouded with a great deal of uncertainty with forecasters struggling to find consensus, and this uncertainty also helps explain why a bellwether metal like copper has been rangebound for close to six months now.

Annual outlooks and price forecasts from major banks with a commodity operation have started to roll in, and while the outlook for energy and agriculture is generally positive, and precious metals negative, due to expectations for a rise in US short-term rates and long-end yields, the outlook for industrial metals is mixed. While the energy transformation towards a less carbon intensive future is expected to generate strong and rising demand for many key metals, the outlook for China is currently the major unknown, especially for copper where a sizable portion of Chinese demand relates to the property sector.

During the past few months, however, copper has in our opinion performed relatively well considering the mentioned and known worries about the economic outlook for China, and more specifically its property sector. Additional headwinds have been created by the stronger dollar and central banks beginning to focus more on inflation than stimulus. To counter Chinese economic growth concerns, the government has been turning more vocal in their support saying it plans more support for business.

With this in mind, and considering a weak pipeline of new mining supply, we believe the current macro headwinds from China’s property slowdown will begin to moderate through the early part of 2022, and with inventories of both copper and aluminum already running low, this development could be the trigger that sends prices back towards and potentially above the record levels seen earlier this year. Months of sideways price action has cut the speculative length close to neutral, thereby raising the prospect for renewed buying once the technical outlook improves.

Gold

Gold’s less than impressive performance extended to a fourth week, and while it managed to consolidate above the previous week low at $1761, it struggled to find a bid strong enough to challenge resistance at $1793, the 200-day moving average. The yellow metal has struggled since Jerome Powell, the Fed chair, signaled a clear change in the FOMC’s focus from creating jobs to fighting inflation.

In response to the recent inflation surge, market expectations for future US rate hikes have jumped with three 0.25% hikes now priced in for 2022, with the first one expected no later than June, a year earlier than expected just a few weeks ago. It is these expectations that have seen analysts lower their 2022 price forecasts for gold, with some even now predicting the metal could fall out of favor and trade lower next year.

We do not share this view, and still see gold trading higher in a year from now. However, we fully understand the reasons as they are predominantly being led by expectations for rising bond yields driving up real yields which for several years have been heavily negatively correlated to the price of gold. Looking at the correlation below, gold should be able to weather an initial rise in real yields to around –0.75% from the current level below –1%.

Rising interest rates will likely increase stock market risks with many non-profit high growth stocks suffering a potential violent revaluation. In addition, concerns about persistent government and private debt levels, increased central bank buying and the dollar rolling over following months of strength, are all potential drivers that could offset the negative impact of rising bond yields.

For now, gold needs a trigger and after the November CPI print rose to 6.8%, the highest since the 80’s, the attention will turn to the December 15 FOMC meeting for additional guidance on the pace of tapering and the timing of future rate hikes. With silver continuing to underperform, having suffered a recent 14% correction, the upside potential ahead of yearend looks limited. Speculators have reduced most of the length that was added in the futures market during the early November breakout attempt but for them to return to the buy side, the technical outlook needs to improve significantly

Crude oil

Crude oil’s week-long recovery from the recent Omicron-related slump slowed after a study found the new variant is 4.2 times more transmissible than Delta, leading to rising infections and with those new restrictions on movements in several nations. The negative short-term impact on mobility in response to new variants has become shallower with vaccine rollouts protecting the health system from breaking down. For now, the market is expecting the Omicron virus surge, despite its high infection rate, to show the same pattern, thereby preventing a major drop in mobility and demand for fuel.

While potentially delayed by a few quarters, we still maintain a long-term bullish view on the oil market as it will be facing years of likely under investment with oil majors losing their appetite for big projects, partly due to an uncertain long-term outlook for oil demand, but also increasingly due to lending restrictions being put on banks and investors owing to a focus on ESG and the green transformation.

The short-term outlook depends on whether Brent and WTI can build a strong foundation above the 200-day moving averages at $73 and $69.80 respectively. No doubt that the main threat to this support remains concerns about the virus and its ability to pose a bigger threat than the Delta variant.

Natural gas

While the US gas market tried to recover from a two-month top to bottom slump of more than 40% caused by mild winter weather across Central and Eastern US, the EU gas and power market went from bad to worse. The combination of an unplanned outage temporarily cutting supplies from Norway’s giant Troll field, geopolitical risks related to Ukraine, stable winter supplies from Russia, freezing cold weather and rapidly declining stocks, all helped drive the Dutch TTF one month benchmark gas back above €100 per MWh or $34 per MMBtu.

With rising demand for coal driving the cost of EU emissions to a fresh record above €90 per tons, before suffering a 12% correction on speculative long liquidation, the cost of power has surged as well. In Germany the one-year baseload contract reached a record €192 per MWh, or more than 5 times the long-term average. Looking at the current trajectory of gas consumption and with no signs of extra supplies from Russia, the risk of inventories depleting before spring remains a major threat to the European market and the main reason why gas prices trade at levels high enough to kill demand.

The EU is expected to decide before December 22 whether investments in gas and nuclear energy should be labelled climate friendly. The design of the EU green investment classification system is closely watched by investors worldwide and could potentially attract billions of euros in private finance to help the green transition, especially given the need to reduce the usage of coal, the biggest polluter.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Coffee Hits Decade High on Tightening Supply Outlook

Arabica Coffee futures trade at a fresh decade high above $2.50 per pound, and following a half-decade of sideways trading, the price has almost doubled this year after the worst drought and frost period in decades have decimated the Brazilian crop. Tight market conditions has seen the market return to backwardation for the first time in years, and following a five-year period where a negative roll yield rewarded short sellers, the sharp turnaround towards tighter market conditions is now once again supporting long positions.

Coffee’s ability to withstand last week’s wide-sweeping omicron-led weakness, which caused a (temporary) negative shift in global risk sentiment, shows how this market increasingly has been supported by ongoing supply issues in several of the major Arabica-producing nations.

The March Arabica Coffee future trades at a fresh decade high above $2.50 per pound, and following a half-decade of sideways trading, the price has almost doubled this year after the worst drought and frost period in decades have decimated the Brazilian crop, not only in 2021 but potentially also for at least two more seasons.

Above $2.56 per pound, the next major level in the Arabica coffee future will be the 2011 highs at $2.90 per pound and the followed by the 24-year high at $3.09 per pound.

Following one of the worst crop years caused by adverse weather developments in Brazil, a shortage of shipping containers has further obstructed coffee exports thereby tightening supplies at roasters in Europe and the US. Brazil’s November coffee exports at 2.918 million bags each containing 60 kilos trailed the five-year average by 8% while over in Columbia, the world’s second largest shipper, coffee exports fell 11% to 1.132 million bags. Tightening supply and supply chain issues has reduce coffee stocks at ICE exchange monitored warehouses to 1.6 million bags, or 11% below the five year average.

While these numbers alone do not warrant a near doubling of the price of Arabica coffee this year, it’s the prospect for even tighter markets during the next couple of years that continue to attract a lot of nervous attention. The frost damage to trees earlier this year has in some areas led to replanting while other farmers have switched crops.

The below charts shows some to the latest developments supporting the market.

The futures forward curves in commodities often tells an even greater story than what you find from just watching action in the near futures month. A half decade of oversupply between 2015 and 2020 created a period where buyers constantly lost money.

During this time, price spikes were always followed by sharp reversals, with a major driver being the shape of the forward curve. An oversupplied market is categorized by an upward sloping forward curve, where the cheapest price is found at or near the spot price. Rolling a long position basically meant traders were constantly selling at a lower expiring price than where the next month was trading.

Between 2015 and 2020 the spread in percent between spot and the one-year forward price was averaging around ten percent. This so-called negative carry occurs when the market is oversupplied, thereby trading in a structure called contango. For a number of years coffee had the highest contango and as such was one of the most favorite short trades among all commodities by financial investors.

The tightening market conditions this year has seen the one-year roll yield return to positive or backwardation, so for the first time 2011 an investor is now being rewarded a positive carry for holding a long position in the futures market.

This development is being reflected in the managed money position with the net long position having reaching a 5-1/2 year high in the week to November 30. With the futures market being a zero sum game in terms of position, for each long there has to be a short. The bulk of that short position is being held by producers and merchants, and as the price rally, these mostly physical coffee oriented operators need to put up more funds to maintain their increasingly costly short position.

Archer Consulting in Sao Paulo in a recent report, estimated the margin calls on holding a position in the New York futures market have cost traders about $13.4 billion in the past five months alone, potentially forcing some to buy back their short position, thereby adding further upward pressure to the price.

In today’s podcast we discussed some of these mentioned developments, and why the forward curve can be an important guide.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

 

Specs Exit Commodities on Omicron and Fed Worries

Futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, November 30. A week that encapsulated the markets very nervous reaction to the Omicron virus news as well as Jerome Powell’s increased focus on combatting inflation. While global stocks and US long end yields dropped, a 7% correction in the Bloomberg commodity index helped trigger the biggest and most widespread hedge fund exodus since February 2020.

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, November 30. The reporting week encapsulated the markets very nervous reaction to the Omicron virus news as well as Jerome Powell confirming inflation is no longer being transitory. His comments to the Senate banking committee raised expectations for faster tapering with the first full 0.25% rate hike now priced in for July next year.

The US yield curve flattened considerably with virus related safe-haven demand driving down the yield on 10-year US treasury notes by 22 basis point. Global stocks slumped with the VIX jumping 8%. Hardest hit, however was the commodity sector after the Bloomberg commodity index slumped by 7%, thereby triggering the biggest and most widespread hedge fund exodus since February 2020.

Commodities

Hedge funds responded to heightened growth and demand concerns related to the omicron virus, and the potential faster pace of US tapering, by cutting their net long across 24 major commodity futures by 17% to a 15-month low at 1.8 million lots. This the biggest one-week reduction since the first round of Covid-19 panic in February last year was triggered by net selling of all but three livestock contracts.

Energy

Hardest hit was the energy sector where renewed demand concerns sent the prices of WTI and Brent down by more than 15%. In response to this, hedge funds accelerated their pace of futures selling with the combined net long slumping by 90k lots to a one-year low at 425k lots. The loss of momentum following the late October peak has driven an eight-week exodus out of oil contracts, culminating last week, and during this time the net length has seen a 35% or 224k lots reduction. Potentially setting the market up for a strong speculative driven recovery once the technical and fundamental outlook turns more friendly.

Latest: Crude oil (OILUKFEB22 & OILUSJAN21) trades higher following its longest stretch of weekly declines since 2018. Today’s rise apart from a general positive risk sentiment in Asia has been supported by Saudi Arabia’s decision to hike their official selling prices (OSP) to Asia and US next month. Thereby signaling confidence demand will be strong enough to absorb last week’s OPEC+ production increase at a time when mobility is challenged by the omicron virus. For now, both WTI and Brent continue to find resistance at their 200-day moving averages, currently at $69.50 and$72.88 respectively. 

Metals

Gold was net sold for a second week as speculators continued to reduce exposure following the failed breakout attempt above $1830. With Fed chair Powell signaling a change in focus from job creation to fighting inflation, sentiment took another knock, thereby driving a 13.7k lots reduction to a four-week low at 105k lots. Industrial metals also suffered with the net long in HG copper slumping by one-third to a three-month low at 13.4k lots. Copper’s rangebound trading behavior since July has sapped hedge funds involvement with the current net length a far cry from the 92k record peak seen this time last year.

LatestGold (XAUUSD) received a small bid on Friday following mixed US data, but overall, it continues to lack the momentum needed to challenge an area of resistance just above $1790 where both the 50- and 200-day moving averages meet. Focus on Friday’s US CPI data with the gold market struggling to respond to rising inflation as it could speed up rate hike expectations thereby putting upward pressure on real yields which are inverse correlated to gold’s performance.  A full 25 basis point rate hike has now been priced in for July and the short-term direction will likely be determined by the ebb and flow of future rate hike expectations.

Agriculture

The whole sector with the exception of livestock took a major hit, just one week after funds had increased bullish bets on grains and softs by the most in 15 months. Both sectors suffered setbacks of more than 5% with recent highflyers like wheat and cotton taking big hits. As mentioned, selling was broad and led by corn, soybeans, sugar and cocoa, with the latter together with palladium being the only two contracts where speculators hold an outright short position.

This week the grain market will be focusing on weather developments in Australia and its potential impact on the wheat harvest, as well as the monthly World Agriculture Supply & Demand report (WASDE) from the USDA.

Forex

In forex, speculators reacted to renewed virus concerns by increasing bullish dollar bets against ten IMM currency futures and the Dollar Index to an 18-month high at $27.9 billion. Speculators were buyers of JPY (18.4k lots or $2 billion equivalent) but sellers of everything else, including euros (6.8k) and the two commodity currencies of AUD (16.9k) and CAD (10.9k). These changes resulting in the aggregate dollar long rising by $2.3 billion.

In terms of extended positioning, a euro short at 23k lots was last seen in March 2020, the GBP short at 39k lots was a two-year high while the 60k lots MXN short was the highest since March 2017.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other

Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

OPEC+ Surprise in a Week Driven by Omicron Angst

The commodity sector traded lower for a second week in response to fresh demand and growth worries triggered by the new Omicron coronavirus variant. In addition, the US Federal Reserve, as mentioned in our latest update, officially changed its focus from job creation to battling surging inflation, thereby raising the prospect for an accelerated reduction of stimulus and rising interest rates. The two-week loss measured by the Bloomberg Commodity Index reached the highest level since March 2020, but it could have been quite a bit worse if OPEC+ hadn’t successfully managed to ‘sell’ another production increase to the market.

Agriculture

Weeks of strong demand for agriculture commodities saw a small reversal as the Omicron variant and improved regional weather developments helped trigger profit taking among some the recent highflyers led by cotton, sugar and wheat. In recent weeks up until November 23, funds had aggressively been buying up food commodities while reducing exposure in energy and metals. The result being an increase in the combined long held across 13 major futures contracts to a six-month high at 1.13 million lots, representing a nominal value of $43.5 billion.

It helps to explain some of the price weakness this past week with recently established longs being reduced, not due to a change in the underlying fundamentals supporting the individual futures markets, but more as part of the general risk reduction seen in response to Omicron uncertainties.

During the week, the UN FAO published its monthly Global Food Price Index for November and it showed a 1.2% increase on the month while Year-on-Year growth slowed to a still very elevated 27.3%. The index now sits less than 0.5% below the 2011 record with last month’s increase driven by strong gains in cereals, such as wheat, dairy and sugar.

Natural gas

Natural gas prices around the world continue to diverge with US prices collapsing to near $4 per MMBtu while in Europe the price of Dutch TTF benchmark gas remains stuck above $30 per MMBtu driven by tight supply and strong cold weather demand. Gas prices in the US on the other hand have come under pressure from milder-than-normal weather and rising production, and this week it drove a 22% price drop, the biggest weekly drop since 2014. While the EU is already witnessing a major energy crisis which could get worse, should we see another cold winter, the US has seen its inventory levels held in underground caverns return to their long-term average, thereby almost completely ruling out the risk of winter shortages.

Crude oil

Crude oil witnessed a very volatile week with traders having to grapple with the risk of another virus-related drop in demand, the recent SPR release announcement and not least the response from the OPEC+ group of producers meeting on Thursday to set their production target for January. Before then, the price of Brent crude oil had slumped by 21% from the October high with very wide trading ranges reflecting a deep uncertainty in the market with prices jumping around as the Omicron news flowed ebb and flowed between bad and less bad.

Heading into Thursday’s meeting, the market had built up expectations the group would come out defending oil prices by reducing or potentially even cancelling the January production increase. Instead, they managed to pull off a remarkable feat by supporting the price while at the same time raising production by the usual 400k barrels per day. There are several reasons why they managed to pull this off:

  • The market had already priced in a significant, and not yet realised, Omicron-related drop in demand
  • The group kept the meeting “in session” meaning they can meet and adjust production levels at short notice before the next planned meeting on January 4
  • The decision to ease political tensions with large consumers, led by the US, potentially resulting in a reduced number of strategic reserves leaving storage due to lack of demand from refineries.
  • Members with spare capacity, such as Russia and Saudi Arabia, wanted to increase production, partly to off-set the short fall from producers such as Nigeria, Angola and Equatorial Guinea who are currently producing around 500k barrels per day below their allocated quotas.
  • Finally, the recent slump in WTI back below $70 and even lower further out the curve may reduce the threat from US producers who could now adopt more cautious spending plans for 2022.

While potentially delayed by a few quarters, we still maintain a long-term bullish view on the oil market as it will be facing years of likely under investment with oil majors losing their appetite for big projects, partly due to an uncertain long-term outlook for oil demand, but also increasingly due to lending restrictions being put on banks and investors owing to a focus on ESG and the green transformation.

From a technical perspective, Thursday’s price action created a so-called Hammer which often signals a reversal of the recent trend. For that to be confirmed Brent crude oil would need a close back above its 200-day moving average, currently at $72.85.

Gold

Gold’s less than impressive behavior continued during a week where it failed to find a bid despite raised Omicron concerns sending Treasury yields lower and, at least temporarily, the dollar lower as well. Adding to this, an unfolding destruction of value across many so-called and up until recently very popular bubble stock names, the exodus out of these also failed to attract any safe-haven demand for investment metals.

Instead, it slumped to a one-month low at $1762, less than three weeks after its failed upside break to $1877. It highlights a market which during the past five months has seen plenty of failed breakout attempts in both directions, with the end result being a noisy, but rangebound, market struggling for direction. What could change that in the short term remains unclear with the metal on one hand finding support from persistently low real yields and raised virus uncertainties, and on the other struggling with the potential for a more aggressive inflation fighting stance from the US Federal Reserve.

Following the renomination, both Powell and Brainard, the new vice-chair, have come out showing a clear change in focus. Powell, among other comments, has said: “We know that high inflation takes a toll on families, especially those less able to meet the higher costs of essentials like food, housing, and transportation. We will use our tools both to support the economy and a strong labor market, and to prevent higher inflation from becoming entrenched”.

As mentioned, the current technical picture looks very messy with resistance now established at $1792 which coincides with the average price seen these past five months, while the nearest area of support can be found around $1760 followed by $1720.

Industrial metal sector

The industrial metal sector traded flat on the week with no major price movements seen in bellwether metals such as copper and aluminum. The market focus has started to shift to what may lie in store for 2022, not least the potential price impact from slowing growth in China versus rising demand for the so-called green metals that will be key components in the energy transition away from fossil fuels to renewables.

During the past few months, copper has in our opinion performed relatively well considering heightened worries about the economic outlook for China, and more specifically its property sector which has seen near defaults as well as a slump in home sales. Additional headwinds have been created by the stronger dollar and central banks beginning to focus more on inflation than stimulus. In order to counter Chinese economic growth concerns, Vice Premier Liu He has been out saying growth this year should exceed targets, and the government plans more support for business.

With this in mind, we believe the current macro headwinds from China’s property slowdown will begin to moderate through the early part of 2022, and with inventories of both copper and aluminum already running low, this development could be the trigger that sends prices back towards and potentially above the record levels seen earlier this year.

Staying on the subject of inventories, recently we have seen stock levels of aluminum and copper at the LME fall to their lowest levels since 2007 and 2005 respectively. In fact, the six industrial metals traded on the LME are currently all trading in backwardation, and such a synchronized level of tightness was last seen in 2007.

High Grade Copper has been averaging $4.35 since April with the current action confined to a range between $4.2 and $4.5 while major support can be found in the $4 area. The lack of momentum in recent months has driven a sharp reduction in the speculative long held by hedge funds, a development that could trigger a significant amount of activity once the technical and/or fundamental picture becomes clearer.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Speculative Positioning Ahead of Fridays Omicron Dump

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

Futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, November 23. While a lot of water has flowed under the bridge since last Tuesday, it is nevertheless interesting, not least considering the report encapsulated the market reaction to last weeks renomination of Fed chair Powell which helped send both treasury yields and the dollar sharply higher, as well as the oil market reaction to the coordinated SPR release announcement. Finally, it also gives us an idea about the level of positioning ahead of Friday’s omicron related sell off.

The below summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, November 23. The report normally released on Friday’s was delayed due to last weeks Federal holidays, and while a lot of water has flowed under the bridge, its nevertheless interesting.

Not least considering the report encapsulated the market reaction to last weeks renomination of Fed chair Powell which helped send both treasury yields and the dollar sharply higher, as well as the oil market reaction to the coordinated SPR release announcement. Also it gives a good idea about how funds and speculators were positioned ahead of the sharp risk off to the new omicron virus variant.

Commodities

The commodity sector saw sizable shift out of energy and metals into the agriculture sector where all 13 futures contracts covered in this update saw net buying. During the week the energy sector lost 2.1% while precious metals dropped 4.3% after gold broke below key support at $1830. A 1.5% rise in copper was not enough to convince speculators who cut their net long by 20%. Most noticeable however was the strong buying seen across the agriculture sector, with strong demand and weather worries more than offsetting the headwind caused by the stronger dollar.

Energy

Crude oil, both Brent and WTI, were sold ahead of the coordinated SPR release announcement last Tuesday. The combined net long dropped by 14k lots to a one-year low at 514.6k lots. The loss of price momentum during the past few months has, despite an overriding bullish sentiment in the market, been driving the reduction, and following Friday’s 10% price collapse these traders have been rewarded for sticking to the signals the market was sending instead of listening to bullish price forecasts. Hedge funds are not “married” to their positions hence their better ability to respond to changes in the technical and/or fundamental outlook.

Metals

Having increase bullish gold bets by 65k lots during the previous two weeks, funds were forced to make 45k lots reduction last week in response to the Powell renomination sending gold sharply lower and below support in the $1830-35 area. Speculators have been whipsawed by the price action in recent weeks and it helps to explain why they are in no mood to reenter in size despite renewed support from Covid19 angst. Silver’s 6% sell off during the week helped trigger a 17% reduction in the net long to 30k lots while in copper a small price increase was not enough to stem the slide in net length.

Following seven weeks of selling, the net length has dropped by 64% to 19.5k lots, a 13-week low. Months of rangebound behaviour has reduced investor focus, and until we see High Grade Copper make an attempt to break its current $4.2 to $4.5 range, the level of positioning is likely to remain muted.

Agriculture

More concerned with other drivers such as weather, strong demand and supply chain disruptions helped trigger across the board buying of all 13 futures contracts split into grains, softs and livestock. The combined long held across these contracts reached a six-month high at 1.13 million lots, representing a nominal value of $43.5 billion. Buying was broad with the top three being corn, sugar and soybeans. Elsewhere the net long in Arabica coffee reached a fresh five-year high at 58k lots and KCB wheat a four-year high at 65.6k lots.

UPDATES from today’s Market Quick Take

Crude oil (OILUKJAN22 & OILUSJAN21) turned sharply lower in early European trading as the mood across markets soured on renewed concerns about the omicron virus strain. This after Moderna’s head told the Financial Times that existing vaccines will be less effective at tackling omicron and it may take months before variant-specific jabs are available at scale.

The news come days before the OPEC+ group of producers meet to discuss production levels for January. Brent crude oil already heading for its biggest monthly loss since March 2020 trades below its 200-day moving average for the first time in a year, a sign that more weakness may lie ahead, thereby raising the prospect for OPEC+ deciding to pause or perhaps even make a temporary production cut.

Gold (XAUUSD) received a muted bid overnight in response to the omicron virus comments from the head of Moderna (see oil section above). In addition, comments from Fed chair Powell helped reduced 2022 rate expectations from three to two after he said the omicron virus posed risks to both sides of the central bank’s mandate for stable prices and maximum employment.

Despite this development together with softer Treasury yields and a weaker dollar, gold continues to struggle attracting a safe-haven bid. Silver (XAGUSD) looks even worse having dropped to a six-week low on weakness spilling over from industrial metals.

Forex

Broad dollar buying following Fed chair Powell’s renomination helped drive a 20% increase in the greenback long against ten IMM currency futures and the Dollar index to $25.4 billion and near a two-year high. All the currencies tracked in this saw net selling with the biggest contributors being euro (12.6k lots), CAD (11.8k) and JPY (4.1). The net short on the latter reached 97.2k lots or the equivalent of $10.6 billion, a short of this magnitude helps explain the strength of the sell off in USDJPY since last Thursday when safe haven demand picked up as the omicron news began to spread.

Despite hitting a 16-month low last week the euro short only reached 12.6k lots, a far cry from the -114k lots reached during the panic month of February last year when the pair briefly traded below €1.08.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other

Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Omicron-driven Oil Slump Raises Risk of OPEC+ Action

Crude oil suffered its largest one-day crash since April 2020 on Friday in response to worries the new omicron virus variant could drive renewed demand weakness at a time where the US is about to release millions of barrels of crude oil from its strategic reserves. While many have already concluded Friday’s slump was an overreaction caused by thin market liquidity, the focus is once again squarely on the response from OPEC+ who will meet on Thursday to set production levels for January and potentially beyond.

Equally importantly was probably the very bad timing with the news hitting the markets on a low liquidity day after the Thanksgiving holiday. Long held bullish conviction trades got stopped out as the sudden elevated level of risk aversion drove major position adjustments across most asset classes.

As volatility spiked, the options market also kicked into gear with hedging of short puts adding an additional layer of pressure with sell orders being executed at whatever price available. On Friday the 30-day historical volatility jumped from below 25% to 44% and it has ticked higher today, an indication of some unfinished business from Friday, but also a market which is struggling to settle down with Thursday’s OPEC+ decision adding an additional layer uncertainty.

So far today, the market is trading higher, but already off their overnight highs, but the reduction in hedge selling has allowed buyers to take a fresh look with some concluding the move on Friday was most likely an overreaction. Not least considering the prospect for support being provided by OPEC+ who may attempt to prop up prices when they meet this Thursday. The group may decide to postpone the January production increase or if necessary, temporary cut production into a period that was already expected to see the return of a balanced market.

Brent crude oil’s 11.6% top to bottom slump on Friday was only arrested when the price reached its 200-day moving average at $72.70 and after the price retraced 61.8% of the August to October surge. A key reason behind that run up in prices was driven by increased switching demand from record priced gas to cheaper oil-based fuels such as diesel, heating oil and propane. Following the drop in crude oil and continued strength in gas and power prices, the prospect for continued and rising switching activity will remain a key source of extra demand that did not exist during the 2020 slump.

Adding to crude oil’s current bid are forecasts from the world’s top commodity traders, all speaking at the FT’s Global Commodity Summit, that oil prices could return to $100 over the coming years as investment in new supplies slows down with oil majors diverting capex towards renewables instead of continued oil and gas production. It highlights a potential rising dilemma where politicians and investors want to move towards renewables at a much faster pace than actual changes can be made. Thereby creating the risk of a supply shortfall before demand eventually begins to slow towards the second half of this decade.

Brent crude oil has set its sight on the 2019 peak at $75.6 ahead of the downtrend (red line) from the 2008 peak. Some focus on today’s FOMC meeting which may yield a change in the interest rate outlook while the market seeks further clues about the Fed’s view on inflation, and with that the need for inflation hedges through long commodity exposure.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Commodities Challenged by Fresh Covid Concerns

The commodity sector traded lower for a sixth straight week with continued losses in energy and metals, both precious and industrial, being only somewhat offset by another week of gains across the agriculture sector. Apart from recent dollar strength, renewed Covid-related lockdowns in Europe and the risk of a slowdown in China, the world’s top consumer of raw materials, markets were rocked on Friday on the discovery of a new variant of the coronavirus.

The new Covid variant, with a scientific description of B.1.1.529 but no Greek letter yet designated, has been identified in South Africa and observers fear that its significant mutations could mean that current vaccines may not prove effective, leading to new strains on healthcare systems and complicating efforts to reopen economies and borders.

These fears helped send a wave of caution over global markets on Friday with stock markets around the world slumping and US Treasury yields reversing course after rising earlier in the week on increased risk that central banks would speed up their normalization efforts to combat surging inflation. In forex, the Japanese yen jumped and the dollar, which had reached a 16-month high earlier in the week, reversed lower thereby challenging recently establish long positions.

Gold recovered after taking a 70-dollar tumble earlier in week when a break below the key $1830 technical level triggered selling from recently established hedge fund longs. Crude oil slumped following a week of high drama in the energy market which started with the US-led coordinated release of oil from strategic reserves. A move that raised concerns about a counterstrike from the OPEC+ group of nations who are due to meet on December 2 to set production targets for January and potentially beyond.

The agriculture market stayed relative immune to these developments with the Bloomberg Agriculture index hitting a fresh seven-year high led by continued gains in coffee and the key crops of wheat, corn and soybeans. There are individual reasons behind the strong gains recently, but what they all have in common has been a troubled weather year, and the prospect for another season’s production being interrupted by La Niña developments, a post-pandemic jump in demand leading to widespread supply chains disruptions and labour shortages, and more recently, rising production costs via surging fertilizer prices and the rising cost of fuels, such as diesel. On December 2, the UN FAO will publish its monthly Food Price Index, and following gains during November, the index is expected to reach a fresh ten-year high.

The top performing commodity, apart from coffee, was iron ore which despite weakness on Friday had managed to recover from a recent slump on signs the Chinese steel industry was picking up speed again, thereby driving demand for the most China-centric of all commodities. Over in Europe, the energy crisis continued with punitively high gas and power prices driven up the cost of the benchmark EU emission futures contract rising to a record high, both in an attempt to support demand for cleaner-burning fuels such as currently-in-short-supply gas and to offset increased demand for higher polluting fuels like coal. With gas flows from Russia not yet showing any signs of picking up, the market did find some comfort from the inflows of LNG reaching a six-month high.

Crude oil

Crude oil was heading for a fifth straight week of losses, with the move primarily driven by worries that the new South African virus strain could once again led to lockdowns and reduced mobility. The Stoxx 600 Travel and Leisure Index has lost 16% during the past three weeks with renewed lockdowns in Europe potentially spreading to other regions. Before then, the US coordinated release of crude oil from strategic reserves had driven prices higher in anticipation of a countermove from OPEC+.

The OPEC+ alliance called the SPR release “unjustified” given current conditions and as a result they may opt to reduce future production hikes, currently running near 12 million barrels per month. The group will meet on December 2, and given the prospect for renewed Covid demand worries adding to the assumption of a balanced oil market early next year, OPEC+ may decide to reduce planned production increases in order to counter and partly offset the U.S. release.

With these developments in mind, the only thing oil traders can be assured of is elevated volatility into the final and often low liquidity weeks of the year. Having broken below the July high at $77.85, little stands in the way of a revisit to trendline support from the 2020 low, currently at $74.75.

However, we maintain a long-term bullish view on the oil market, although now potentially delayed by several months or quarters, as it will be facing years of likely under investment with oil majors losing their appetite for big projects, partly due to an uncertain long-term outlook for oil demand, but also increasingly due to lending restrictions being put on banks and investors owing to a focus on ESG and the green transformation.

Gold

Gold dropped below support in the $1830-35 area following Jerome Powell’s renomination as Fed Chair which, combined with speculation the White House, has forced a change in focus at the Federal Reserve. Faced with the prospect of more than 200 million people with a job getting hurt by the Fed’s passive action on inflation in order to support job creation for 8 million without, possibly led President Biden and his team to decide to keep Powell on board while at the same time reading him the riot act, demanding a change in focus.

Following the renomination both Powell and Brainard, the new vice-chair, came out showing a clear change in focus. Powell, among other comments, said: “We know that high inflation takes a toll on families, especially those less able to meet the higher costs of essentials like food, housing, and transportation. We will use our tools both to support the economy and a strong labor market, and to prevent higher inflation from becoming entrenched”.

Gold was hurt by these comments as they gave the dollar an additional boost while sending the number of 25 basis point rate hike expectations for 2022 up to three. At the long end, the yield on ten-year notes began challenging key resistance around 1.7%. Adding fuel to the sell-off in gold was data from the US CFTC highlighting the level of speculative gold long positions in the futures market had seen a tripling to a 14-month high before and especially after the early November CPI shock.

These developments saw a sharp reversal on Friday when the virus news broke, thereby supporting a strong recovery in gold back above $1800. Apart from long liquidation having created the space for new longs to enter, the initial recovery was clearly driven by safe-haven demand with crypto currencies slumping by more than ten percent while silver and platinum, given their industrial metal credentials, could be found at the bottom of this week’s performance table. A development that could see gold struggle to make further progress.

From a technical perspective, gold will need to climb through a band of resistance starting at $1816, and only a break above $1840 will signal momentum has recovered enough to trigger a move to a fresh cycle high above $1877. Much will depend on whether current vaccines will prove effective against the new strain, thereby potentially avoiding a bigger economic fallout.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Oil Market Awaits OPEC+ Response to SPR Release

Crude oil reacted decisively positive to yesterday’s announcement about a global release of Strategic Reserves. Brent crude initially climbed 3.8% and so far today it has managed to hold on to most of those gains in the belief the release is unlikely to have a long-term negative impact on prices.

Some of the reasons behind the bullish reaction to the news are:

  • A ten percent drop, partly due to raised expectations, during the past couple of weeks helped reduce the effectiveness of the actual announcement.
  • The decision to add supplies from strategic reserves was not driven by an acute shortage of supply but more a political signal from the under-pressure Biden White House to show action towards combatting rising inflation and high gasoline prices.
  • Out of the 50 million barrel US SPR release, 18 million will come from speeding up an already planned release, which so far has supplied 31 million barrels into the market this year. The additional 32 million being offered to refineries will have to be returned at a later day before 2024, thereby creating a zero sum solution. In addition, international contributions were smaller than expected with China being ambiguous on its involvement, despite being named as one of the participants.
  • Expectations for a balanced market in early 2022 as projected recently by all the major forecasters EIA, IEA and OPEC would support lower prices. But if they turn out to be wrong, the latest reduction in SPR could leave the market worried about available spare capacity to fend off another price spike. Not least considering OPEC+ may have little spare capacity left by then.
  • Equally important, the OPEC+ alliance called the move unjustified given current conditions and as a result they may opt to reduce future production hikes, currently running near 12 million barrels per month. The group meets next week to set the target for January.
  • Given the assumption of a balanced oil market next year, OPEC+ may at its meeting next week decide to reduce planned production increases in order to counter and partly offset the U.S. release.

Failure to send prices lower may also raise speculation about an outright ban on US crude oil exports, but such a move could potentially cripple domestic refinery activity. Many U.S. refineries can not use the oil currently being produced from fracking as the quality is to light. Instead the US is dependent on imports of heavier grades from Canada, Mexico and OPEC while shipping its light crude oil to refineries that can use it in Mexico, Canada, China, Japan and India.

While the short-term oil market focus is squarely on the December 2 OPEC+ meeting and whether the group agree to delay or reduce planned increases for January and beyond, the market will also try to gauge the current status in the US oil market in EIA’s weekly inventory report.

Last night the API released their weekly update and their assessment of higher crude oil and gasoline stocks both went against surveys pointing to a drop. The report will also shed some light on the current pace of SPR releases which for the last ten weeks has been averaging 1.5 million barrels per week. Furthermore the market will also keep an eye on refinery activity to see whether there is much room for the additional SPR barrels.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Solid Gold Buying Raising Short Term Concerns

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, November 16. A week where the market responded to the US inflation shock on November 11 by sending  the dollar up by 2% to fresh high for the cycle while 10-year breakeven yields jumped 20 basis point a decade high. While bond market volatility jumped, stocks held steady with the VIX showing a small decline. The commodity sector was mixed with gains in precious metals and not least grains and soft commodities helping offset weakness across the energy sector.

Commodities

Hedge funds raised their total commodity exposure, measured in lots, across 24 major futures contracts by the most since July. Driven by continued strong price action across the agriculture sector and more recently also precious metals in response to surging inflation. These sectors saw all but one market being bought while the energy sector were mixed with continued selling of crude oil only being partly offset by demand for gasoline and natural gas.

Energy

Crude oil’s four week slide resulted in the biggest weekly reduction since July, and this time, as opposed to recent weeks, it was WTI that led the reduction with a 10% cut to 307k apart from a deteriorating short-term technical outlook also being driven the prospect of a US stockpile release to dampen domestic gasoline prices. Brent meanwhile saw its net long slump to a one-year low at 221.5k lots, and during the past six weeks the net length has now slumped by one-third, a reduction which gathered momentum after the late October failure to break the 2018 high at $86.75, now a double top.

Crude oil comment from our daily Market Quick Take

Crude oil (OILUKJAN22 & OILUSDEC21) opened softer in Asia after Friday’s big drop but has so far managed to find support at $77.85, the previous top from July. The market focus has during the past few weeks shifted from the current tight supply to the risk of a coordinated reserve release, fears about a renewed Covid-driven slowdown in demand and recent oil market reports from the EIA and IEA pointing to a balanced market in early 2022. Having dropped by around 10% from the recent peak, the market may have started to conclude that a SPR release has mostly been price in by now.

Metals

Another week of strong gold buying has now raised the alarm bells given the risk of long liquidation should the yellow metal fail to hold onto its US CPI price boost above $1830. Last week the net long in gold reached a 14-month high at 164k lots and the speed of the accumulation, especially the 70% jump during the past two weeks alone carries, will be raising a red flag for tactical trading strategies looking for pay day on short positions should support give way.

Gold extended Friday’s drop below $1850 overnight, before bouncing ahead of key support in the mentioned $1830-35 area. The risk of a quicker withdrawal of Fed stimulus supporting real yields and the dollar has for now reduced gold’s ability to build on the technical breakout. However, the price softness on Friday helped attract ETF buying with Bloomberg reporting a 10 tons increase, the biggest one-day jump since January 15.

A second week of silver buying lifted the net to a four-week high at 35.9k lots, but still below the May peak at 47.8k lots. Copper’s rangebound trading behavior kept the price and the net long unchanged. The latter due to an even size addition of both new long and short positions.

Agriculture

Broad gains across the grains market lifted the combined long across the six most traded contracts to a six-month high at 560k lots. Buyers returned to soybeans after the net long recently hit a 17-month low, the corn long was the biggest since May while the KCB wheat long at 60.6k lots was the highest since August 2018. Supported by an increasingly worrying supply outlook, coffee speculators lifted their net long by 16% to a five-year high at 55k lots. Cotton and sugar longs also rose while short-covering helped halve the cocoa net short.

More on the reasons behind the current strength in wheat and coffee, and agriculture in general can be found in may recent update: Agriculture rally resumes led by coffee, wheat and sugar

Forex

In a surprise response to the US inflation shock on November 11 speculators ended up making a small reduction in their overall dollar long against ten IMM futures and the Dollar index. Selling of euro in response to the 2.4% drop and a 161% increase in the sterling short to a 17 month high ended up being more than off-set by the buying of all other major currencies, most notably JPY and CHF. The result being a fifth weekly reduction in the dollar long to $21.3 billion, now down by 17% reduction from the near 30-month high reached during October.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other

Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire