COT: China Growth Fears and Strong Dollar Drive Exodus From Metals

A week that saw a continued deterioration in the global growth outlook driven by extended China lockdowns, a stronger dollar and increasingly aggressive rate hike signals from members of the US Federal Reserve. The week highlighted how traders positioned themselves ahead of last Wednesday’s FOMC meeting. During the week US ten-year bond yields jumped 25 basis points while the dollar reached fresh cycle highs against most currencies. Commodities were mixed with gains in energy and softs being offset by losses across grains, livestock and 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 Spot index traded close to unchanged in the week to May 3 with a six percent gain in energy led by natural gas and diesel as well higher prices for cocoa and cotton in the softs sector, offsetting weakness in precious (-2.3%) and industrial metals (-5.2%), as well as grains (-2.8%).

Speculators and money managers responding to these price changes and the continued loss of momentum by cutting bullish bets across 24 major commodity futures by 7% to 1.85 million lots, a four month low.

Despite racing to a record high in recent weeks, the sector has increasingly become nervours about the global growth and demand look. In the short term due to Chinese lockdowns and longer term due to high inflation and tightening monetary conditions hurting demand. The drop in the total net long to a four months low also driven by elevated volatility forcing leveraged funds, targeting a certain level of volatiltiy to cut their exposure.

From a recent pre-war and pre-China lockdown peak on February 22 at 2.23 million lots, the energy sector exposure has been cut by 23%, metals are down 67% while the agriculture sector is up 2% led by softs.

Energy

Crude oil and refined product futures witnessed a small build in net longs held by funds while a 14% surge in natural gas helped trigger profit taking resulting in a 14% reduction in the net long held in four Henry Hub deliverable futures and swap contracts. Small buying of crude oil did not hide the fact momentum has slowed and traders have become more risk adverse given the number of multiple forces currently impacting the price of oil in both directions.

Latest: Crude oil (OILUKJUL22 & OILUSJUN22) trades steady near a one-month high with the general risk aversity from a stronger dollar, the economic damage from China lockdowns, inflation and monetary tightening being offset by continued supply concerns from Russia and other OPEC+ producers struggling to meet their production targets. G-7 leaders have joined the EU in making a commitment to phase out their dependency on Russian energy, including oil.

While the risk in our opinion remains skewed to the upside, the latest developments are likely to keep crude oil rangebound with focus instead on refined products where multi-year highs are already hurting demand. Monthly oil market reports from EIA Tuesday, followed by OPEC and IEA on Thursday.

Metals

Gold was sold for a third consecutive week with the net-long falling to a three-month low with rising yields and the stronger dollar driving a loss of momentum. The 17% reduction to 82.9k lots was driven by a combination of long liquidation and fresh short selling lifting the gross short to a seven-month high.

Copper has recently suffered from extended China lockdowns hurting the outlook for demand from the worlds top consumer, as well as short selling from macro-based funds using copper as a short play on China. Four weeks of net selling culminated last week with the position flipping to a net short of 8.8k lots for the first time in two years.

Latest: Gold remains at the mercy of a continued rise in US Treasury yields and the stronger dollar with inflation data this week from the U.S. and elsewhere potentially driving additional volatility across market. China and India, two major sources of demand for gold, both seeing their currencies weakening against the dollar, thereby potentially negatively impacting the short-term demand outlook.

Overall, however, compared with stocks and bonds, gold’s relative strength continues. As of last Friday, an investor based in dollars holding gold was +16% ahead relative to the S&P 500 and more than 26% versus TLT:arcx an ETF that tracks the performance of long-dated US government bonds.

In Europe, an investor based in euros has seen an XAUEUR position outperform the pan-European Stoxx50 index by more than 25% and 20% versus an ETF tracking European government bonds. Support at $1850 and $1830.

Agriculture

The grains sector saw selling across all of the six futures contracts led by a 50k lots reduction across the three soybean contracts. The overall 66k reduction was generally driven by a combination of longs being reduced and fresh short positions being added.

Overall the total net long across the sector and the Bloomberg Grains Spot index remains close to a multiyear high, a reflection of current adverse weather uncertainty across the world raising concerns about production levels, together with the risk of the Ukraine war preventing production and exports of key food commodities from wheat to sunflower oil.

Forex

Broad dollar strength and with that broad demand against its major peers accelerated ahead of last week’s FOMC meeting. As the Dollar index climbed to levels last seen in 2003, all of the nine IMM futures tracked in this saw net selling with the aggregate dollar long jumping by $6.3 billion or 41% to $21.8 billion. Selling was most noticeable in EUR were 28.6k lots of selling flipped the net back to a 6.4k lots net short.

This was followed by CAD (-11.9k) and JPY where 5.3k lots of selling took the net short to within 90% of the recent peak at -111.8k lots. Sterling meanwhile was sold for a ninth week, driving an increase in the net short to a 2-1/2-year high -73.8k lots.

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

Headwinds for Gold Ahead of FOMC

Gold Fundamental Analysis

Gold trades near a ten-week low ahead of today’s FOMC which is expected to yield an accelerated pace of rate hikes with the market pricing in the first 50 basis-point rate hike in over twenty years, and at least the following two meetings are expected to deliver additional half-percent rate moves.

Apart from the recent correlation to lower oil, now trading higher as the EU have announced a ban on Russian oil and fuel imports, other headwinds have been created by the surging dollar, up more than 6% against a broad basket of currencies since the start of the year, and a continued rise in US bond yields. These developments have all helped send the price lower, in part driven by short-term technical selling by hedge funds and CTA’s.

From an absolute performance perspective a 1.5% year-to-date return in dollars at a time of surging inflation seems less than impressive. However when adding the tumble seen across stocks and bonds, an investor having diversified part of his portfolio to gold has little to complain about. Even less so for a non-dollar based investor who have seen a sharp divergence between gold and the mentioned asset classes.

The table below shows how a dollar-based investor has achieved a 14.2% outperformance relative to the S&P 500 and 22.2% versus an ETF tracking long duration US bonds. Across the big pond in Europe, an investor would have seen a 22.2% outperformance against the Euro Stoxx50, a pan-European stock index, and 19.3% against an ETF tracking European government bonds.

The latest weakness which gathered some momentum following Friday’s failed attempt to break above $1920/oz has been driven by a renewed rise in US ten-year real yield into positive territory for the first time since early 2020. Comparing gold and real yields at the current level around +0.12% you could argue that gold is theoretically overvalued by close to 200 dollars.

However, as we have seen in recent months, demand for gold, especially through ETF’s have remained robust during the period of rising real yields. Primarily due to re-allocations by asset managers looking for a hedge against a policy mistake, i.e., the FOMC hikes until the economy breaks, elevated volatility in stocks and bonds and a prolonged period of elevated inflation sapping the outlook for several sectors of the stock market.

In fact, the predicament of the current market situation was highlighted by Paul Tudor Jones in an interview with CNBC yesterday. He said that the environment for investors is worse than ever as the Federal Reserve is raising interest rates when financial conditions have already become increasingly tight. “Clearly you don’t want to own bonds and stocks” was one of his comments.

The sharply higher dollar against both the Indian Rupee and Chinese Renminbi, the world’s biggest buyers of physical gold may trigger a challenging period for gold, until buyers adapt to higher levels, something that is likely to trigger some pent-up demand, especially in India.

Another worry is Russia and its central bank which holds a major percentage of its reserves in gold. As the unjustified and ill-conceived idea to wage war against a sovereign nation eats into its reserves, the market worry Russia would have to start sell some of their gold. Not least considering it can no longer access the euros and dollars held at private institutions and central banks in the U.S. and Europe.

At the March G7 meeting in Brussels, the group said it would continue to work jointly to blunt Russia’s ability to deploy its international reserves to prop up Russia’s economy and fund Putin’s war. They also specifically said that any transaction involving Central bank held gold would be covered by existing sanctions. That would leave India and China as the two major venues for any undercover sales of gold, a risk we see as being limited, at least at this stage.

Technical Levels

From a technical perspective gold needs a break above $1920 in order to force buying from recent short sellers while key support below $1850 on the Comex Gold future is in a band towards $1830. Only a break below that level would begin challenging our bullish view on gold as highlighted in our quarterly outlook.

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

COT: Metals Led Exodus of Spec Longs on FOMC and Growth Fears

A week that saw a continued deterioration in the global growth outlook driven by extended China lockdowns and increasingly aggressive rate hike signals from members of the US FOMC. The S&P 500 lost 6.4% while VIX jumped 12% to 33.5%. The broad Bloomberg dollar index rose 1.3% while ten-year bond yields slumped by 22 basis points to 2.72%.

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 Spot index dropped 2.3% after hitting a post-Easter record high with all sectors registering losses led by industrial metals (-5.2%) and precious metals (-4%). In response to these developments, hedge funds cut bets on rising commodity prices by the most since last November. Seventeen out of 24 contracts saw net selling with overall net long being reduced by 8% to 2 million lots, representing a $14.3 billion drop in the nominal value to $149.3 billion.

Biggest reductions hitting the metal sector led by gold and copper, followed by the softs sector. The energy sector saw no appetite for adding exposure, despite strong gains among the fuel contracts.

Latest updates on crude oil, gold and copper can be found in our daily Market Quick Take here

Energy

Crude oil was mixed with surging fuel prices supporting a relative outperformance of the WTI contract, but overall a 12k lots increase in WTI was more than offset by a 14k lots reduction in Brent, on global demand concerns, thereby leaving the net down by 2k to 411k lots, and near a 17-month low.

Fuel products surged higher amid tightness caused by Russian sanctions with gasoil in Europe and diesel in New York (ULSD) both surging higher by 30% and 27% respectively. These changes, however, did not attract any appetite for adding risk with both contracts seeing only small changes.

Metals

The combination of growth concerns, especially in China, and very aggressive rate hike statements from US FOMC members, combined with a stronger dollar, helped drive a dismal week for both industrial and precious metals.

Speculators responded to the 2.8% drop in gold by cutting bullish bets by 20% to 99.4k lots with the bulk of the change being driven by long liquidation, not fresh short selling. A similar picture in silver which in response to a 7.4% loss saw its net long being cut by 36% to 26.5k lots.

Platinum saw 13.3k lots of selling flip the net positions back to a net short for the first time since September. HG Copper fared even worse with speculators wiping the slate clean with the net returning close to neutral for the first time since May 2020 when the price was trading close to half the current level.

Agriculture

The grains sector saw the net long being reduced from a ten-year high by 36k lots to 783k lots. Selling was led by corn and soybeans while wheat only witnessed a small reduction in an already relative small bullish bet. The exception was soybean oil which jumped 5.4% in response to a growing global supply crisis impacting edible oils such as sunflower and palm oil.

The softs sector saw the biggest week of net selling since November with the stronger dollar and a general deterioration in risk appetite triggering reductions across all four commodities led by sugar and cocoa.

Forex

Another week of broad dollar strength with the Dollar Index rising 1.3% saw speculators turn net buyers of dollars for the first time in four weeks. The net long versus ten IMM currency futures and the Dollar Index rose 8% to $15.7 billion.

Currencies seeing the biggest amount of net selling was led by the euro (-9.1k lots) and sterling (-10.7k lots) with the latter seeing the net short reach a 2-1/2-year high at 69.6k lots. Yen short covering after hitting a 20-year low supported a temporary bounce, and with that a 11.7k lots reduction in the net short to 95.5k lots, still by far the most shorted currency against the dollar.

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

WCU: Fuel Price Surge Lifts Inflation and Risks Killing Demand

Commodity Markets Monthly Fundamental Analysis

The commodity sector raked in another monthly gain in April with the Bloomberg Spot Index tracking 23 major commodity futures, rising for a fifth consecutive month, and in the process hitting a fresh record high. However, the gains were concentrated in the agriculture and energy sectors with precious and industrial metals suffering setbacks in response to extended Covid-19 lockdowns in China hurting growth and demand, and worries that a rapid succession of US rate hikes will hurt an already weakening economic outlook.

In addition to this, the dollar reached multi-year highs against several currencies, most notably a 20-year high against the Japanese yen and a five-year high against the euro.

China’s current situation has by a major investor in Hong Kong been described as the worst in 30 years with Beijing’s increasingly fraught zero-Covid policies slowing growth while raising discontent among the population. As a result, global supply chains are once again being challenged with congestions at Chinese ports building, while demand for key commodities from crude oil to industrial metals have seen a clear drop.

While being short on details, China’s Politburo responded on Friday to this growing unease by promising to boost economic stimulus to drive growth. Earlier this week, President Xi highlighted infrastructure as a big focus and if implemented it would become a key source of extra demand for industrial metals, hence our view that following the recent weakness a floor is not far away.

In my latest online seminar and, in a podcast on MACROVoices this past week, I highlighted the reasons why we see the commodity rally has further ground to cover, and why they may rise even if demand should slow down due to lower growth.

Crude oil

Crude oil continues to trade rangebound within a narrowing range, in Brent currently between $98 and $110 per barrel. It did, however, not prevent the cost of fuel products from surging higher. Diesel, the workhorse of the global economy, rallied strongly led by tightening supply in the New York area driving prices to historic highs.

The war in Ukraine, and subsequent sanctions against Russia, have upended global supply chains while at the same causing a significant amount of stress in the physical market, especially in Europe where Russia for years has been the most important supplier of fuel products.

To fill the void and to benefit from soaring prices, U.S. Gulf Coast refiners have been sending more cargoes to Europe and Latin America at the expense of the U.S. East Coast where stockpiles consequently have dropped to the lowest since 1996. With New York harbor serving as the delivery point for futures trading in the NY Harbor Ultra-Light Sulphur Diesel contract, the tightness there is having an outsized impact on visible prices.

These developments highlight the importance of focusing on the cost of fuel products, and not crude oil, when trying to determine the price levels where demand starts to be negatively impacted by higher prices. As a result, refineries are currently earning a lot of money with margins hitting record levels both in the U.S. and Europe. The charts below show the crack spreads, or the margin achieved by producing diesel from WTI in the U.S. and Brent in Europe.

With the war ongoing and the risk of additional sanctions or actions by Russia, the downside risk to crude oil remains, in our view, limited. In our recently published Quarterly Outlook, we highlighted the reasons why oil may trade within a $90 to $120 range this quarter and why structural issues, most importantly the continued level of underinvestment, will continue to support prices over the coming years.

With regards to the lack of investment currently creating concerns about future level of supply, we will be keeping a close eye on earnings next week from European oil majors such as Shell, Enel, BP and Equinor. Also, given the mentioned surge in refinery margins, the result from Valero.

Gold

Gold was heading for its first monthly loss in three months with an expected turbocharged tightening pace by the US Federal Reserve as well as the mentioned dollar strength being two major catalysts. Silver led the weakness falling to a 2-½-month low around $23 per ounce due to China-related weakness across the industrial metal sector.

As a result, the XAUXAG ratio broke above resistance at 80 ounces of silver to one ounce of gold. Renewed focus on Chinese stimulus initiatives, as mentioned above, would help create a floor under silver, thereby reducing its recent negative pull on gold.

Recently, I have been asked the question why gold is doing so poorly considering we are seeing inflation at the highest level in decades. To this my answer continues to be that gold is doing very well and in line with what a diversified investor would hope for.

We tend to focus primarily on gold traded in dollars, and XAUUSD as can be seen from the table below has ‘only’ returned around 5.5% so far this year. But if we add the performance of the S&P 500 Index and long maturity US bonds the picture looks a lot better. Gold in dollars has outperformed these two major investments sectors by +15% and +23% so far this year. Turning to gold traded in other currencies, the performance looks a great deal better due to the impact of the strong dollar.

Investors in Europe seeking shelter amid rising inflation and a sharp deterioration in the economic outlook have achieved 24% and +21% better returns in gold compared with the Euro Stoxx 50 benchmark and euro government bonds.

We maintain a positive outlook for gold driven by the need to diversify from volatile stocks and bonds, inflation becoming increasingly imbedded and ongoing geopolitical concerns. Having found support at $1875 this week, a weekly close above $1920 may see renewed upside driven by fresh momentum and technical buying.

Copper

Copper broke the uptrend from the 2020 low resulting in a drop to near a three-month low around $4.40 per pound, before sentiment received a boost from China’s pledge to maintain the 5.5% growth target, a level the Chinese economy is currently operating well below.

While the short-term outlook has worsened and inventories at exchange-monitored warehouses have risen during the past four weeks, the outlook in our opinion remains price supportive. The demand for action to isolate Russia through a reduction in dependency of its oil and gas is likely to accelerate the electrification of the world, something that requires an abundant amount of copper.

In addition, Chile, a supplier of 25% of the world’s copper, has seen production slow in recent months, and with an “anti-mining” sentiment emerging in the newly elected government, the prospect of maintaining or even increasing production seems challenged. In addition, Chile’s 13 years of drought and water shortages are having a major impact on the water-intensive process of producing copper.

Moreover, government legislation has been put forward to prioritize human consumption of water and if voted through it may delay investment decision but also force mining companies to invest in desalination facilities, thereby raising the cost of production further.

Agriculture

Soybean oil futures in Chicago reached a record high as Indonesia’s sweeping ban on palm oil exports and rationing of sunflower oil at supermarkets in Europe further stretches global supplies of edible oils. Export restrictions for palm oil used in everything from cooking to cosmetics and fuel will stay in place until domestic prices ease and given that Indonesia consumes only one-third of its production, we should expect exports to resume once inventories are rebuilt and prices stabilize.

The edible oils sector, which according to the UN’s food index has risen by 56% during the past year, is the hardest hit by weather woes and the war in Ukraine, the world’s biggest exporter of sunflower oil, and it is leading to food protectionism by producers which inadvertently may boost prices further.

Speculators have recently increased their exposure to U.S. crop futures to a record with slow planting progress and deteriorating crop conditions highlighting a challenged and price supportive situation. In their latest weekly update, released on Mondays, the US Department of Agriculture said corn planting had advanced by 3% to being 7% complete, the slowest pace in almost ten years and trailing last year’s pace of 17%.

Winter wheat rated good/excellent dropped 3% to 27% and was near the worst on record. The planting delays and conditions have been caused by the weather being too cold, too wet, or a combination of both. Big grain harvests in North America are needed this year after Russia’s invasion of Ukraine has reduced shipments out of the Black Sea, from where 25% of the global wheat export originates, while raising doubts about this year’s crop production in Ukraine.

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

COT: Spec Buying Pauses on China and Growth Concerns

A holiday shortened Easter week that saw stocks trade higher despite fresh warnings being signaled through rising bond yields and a stronger dollar. In the days that followed, tough talking by Fed officials helped send yields and the dollar even higher as the market started pricing in 250 bps of Fed hikes this year, potentially raising the risk of the FOMC delivering 75 bps hikes.

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.

Commodity markets

The Bloomberg Commodity Spot index reached a fresh record high during the reporting week with strength in energy, led by diesel and natural gas, and grains offsetting losses in precious metals and softs. Hedge funds potentially troubled by the prospect for rising yields and China lockdowns killing growth and with that demand held their net length close to unchanged with most of the buying concentrated in crops, resulting in a near record long across major six grains and oilseed contracts.

General comment from today’s Market Quick Take

Commodities across all sectors, led by metals are under pressure this Monday as the focus shifts from Russia sanctions-led supply angst to demand destruction due to already high prices, expectations for an aggressive US rate hike cycle killing growth, and not least continued lockdowns in China which have spread from Shanghai to Beijing.

The Bloomberg Commodity Spot index jumped an unprecedented 24.5% during the first quarter and after hitting a fresh record last week, the shift in focus may trigger an oversized correction. Positions held by investors and speculators are mostly geared towards higher prices, something we may not see until China gets on the other side of the outbreak and the impact of central bank rate hikes are being analyzed.

Agriculture

The risk of a global food crisis caused by weather worries and the risk of a sharp reduction in this year’s Ukraine production, helped underpin the grain and soybean sector. Overall the sector net long, which includes six crop futures, reached a ten year high at 819k lots with buying concentrated in soybean oil and corn. The bullish belief in higher prices can be seen in the long/short ratio with readings of 43 longs to 1 short in soybeans and 33 to 1 in corn highlighting a sector with literally no short positions left. A development, despite strong fundamental support, has left the sector exposed to a speculative sell out should the mentioned general commodity sector weakness continue.

Across-the-board reductions were seen in softs, most notably coffee where the net long at 29.6k lots stood at half the 60k lots record from mid-March. Four weeks of sugar buying paused with the net down 1% to 236k.

Energy

The combined net length in Brent (+27.3k lots) and WTI (-14.5k) crude oil rose by 12.8k lots to 414k lots, thereby highlighting a continued lack of interest in positioning for higher prices. The prospect for very tight market conditions due to sanctions on Russia and OPEC producers struggling to meet their production targets, have in recent weeks been offset by the release of oil from strategic reserves, prolonged lockdown in China and central banks stepping up efforts to lower inflation by killing demand through higher rates.

Despite falling domestic stocks of gasoline and especially diesel as well as robust exports, the WTI net long dropped to a two-year low at 240k lots, primarily driven by long liquidation.

Metals

Gold’s failed attempt in challenging $2000 and subsequent correction triggered another round of long liquidation from technical and momentum driven leveraged funds. The net long has cut by 19.7k lots to 125k, thereby surrendering most of the gains seen during the previous week. Small selling of silver as well as copper concluded a general negative week for the metals week.

Forex

Continued dollar strength in the holiday shortened Easter week to April 19 lifted the Bloomberg Dollar Index by 1% but failed to boost speculators overall appetite for dollars, with flows more about the crosses. Overall, the combined dollar long versus ten IMM currency futures and the Dollar index held steady near a five-week low at $14.5 billion. Selling of euro and Sterling being offset by demand for CHF, JPY and CAD while the net flow in AUD and was tiny.

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

Commodity Rally Fades on China and Turbocharged Rate Hike Expectations

If the latter was the only focus, a peak in commodities would be near, however we see an equally challenged supply side keeping the sector supported for a prolonged period of time.

Commodity Markets Fundamental Analysis

There is little doubt that recent very strong readings on growth and employment will start to be negatively impacted over the coming months by persistently-high inflation and rising rates. If that was only the focus on commodities, the peak would be in by now and lower prices could be expected during the coming months. However, we believe commodities will continue to be supported as supply is likely to be equally or perhaps even more challenged than demand. Sanctions against Russia, now a pariah nation to much of the world, are unlikely to disappear once peace returns to Ukraine.

Being the world’s second largest exporter of commodities from energy to metals and agriculture, consumers and industries around the world will continue to struggle sourcing the raw materials needed. In addition, recent weak first-quarter trading updates from the biggest mining companies, such as BHP, Vale, Rio Tinto and Anglo American, have all highlighted the challenge they face with the rising cost of everything from steel and diesel to labor, as well as social unrest and troubled weather. All factors that have seen production fail to meet expectations.

Copper

Copper, as an example, remains range-bound and while the short-term demand outlook has worsened and inventories at exchange-monitored warehouses have risen during the past four weeks, the outlook in our opinion remains price supportive. The demand for action to isolate Russia through a reduction in dependency of its oil and gas is likely to accelerate the electrification of the world, something that requires an abundant amount of copper.

As the war drags on and hostilities temporarily slow down, the market attentions have turned to the lower demand theme which is currently being driven by some short and other more long-term developments. Crude oil is the most noticeable in this context, having shed most of its invasion-driven gains with the focus turning to China’s worsening covid outbreaks, the release of strategic reserves and a hawkish turn by the US Federal Reserve raising growth and demand concerns.

The possibility of the U.S. tumbling into a recession next year was an outcome suggested by some analysts this week after the Federal Reserve raised the prospect of faster pace rate hikes to combat high and widening inflation. The market has almost priced in ten 25 basis points rate hikes during the next ten months, with the Fed’s Bullard looking for an even faster pace. In addition, the Fed will start to aggressively trim its balance sheet from May and the reduction of liquidity will have the same impact of three or four additional 25 basis point hikes.

Inflation remains a key concern for the market and while it was talked about in 2021, it is now increasingly being felt by consumers and businesses around the world. The impact of EU gas prices trading six times above their long-term average on heating bills and energy intensive production from cucumbers to steel and fertilizer is being felt and the economic fallout can increasingly be seen.

Global food prices meanwhile remain a key concern as highlighted by the FAO Food Price Index. In March it jumped 12.6% to a record after the war wreaked havoc on supply chains in the crucial Black Sea breadbasket region, a key supplier to the global market of wheat, corn and vegetable oils. While the index was 33% higher than the same time last year, the latest increase reflected new all-time highs for vegetable oils (23.2% MoM, 56.1% YoY), cereals (17.1%, 37.3%) and meat sub-indices, while those of sugar (6.7%, 22.6%) and dairy products also rose significantly.

Chile, a supplier of 25% of the world’s copper, have seen production slow in recent months, and with an “anti-mining” sentiment emerging in the newly elected government, the prospect of maintaining or even increasing production seems challenged. In addition, Chile has entered its 13th year of drought and water shortages are having a major impact on the water-intensive process of producing copper. In addition, government legislation has been put forward to prioritize human consumption of water, and if voted through it may delay investment decision but also force mining companies to invest in desalination facilities, thereby raising the cost of production further.

Crude oil

Crude oil continues to trade within a narrowing range around $107 in Brent and $102.5 in WTI. Beneath the surface, however, the market is anything but calm with supply disruptions from Libya and Russia currently being offset by the release of strategic reserves and lower demand in China where officials are struggling to eradicate a wave of Covid-19 in key cities.

In addition, the market is on growth alert with the US Federal Reserve signaling an aggressive tightening mode in order to curb inflation, a process that most likely will reduce growth and eventually demand for crude oil. US refinery margins hit a record earlier this week before falling by more than 10%, developments still reflecting the high prices global consumers are forced to pay as supply of key fuels, such as diesel and gasoline, remain tight due to reduced flows from Russia.

Next week, the focus will turn to earnings from the oil supermajors such as Exxon Mobil, TotalEnergies and Chevron. Apart from delivering eye-watering profits the market will mostly be focusing on the prospect for increased production and how they see the impact of the war in Ukraine, demand destruction from rising prices and monetary tightening.

With the war ongoing and the risk of additional sanctions or actions by Russia, the downside risk to crude oil remains, in our view, limited. In our recently published Quarterly Outlook we highlighted the reasons why oil may trade within a $90 to $120 range this quarter and why structural issues, most importantly the continued level of underinvestment, will continue to support prices over the coming years.

Gold and Silver

Gold and silver price developments this past week described very well the current drivers impacting markets with gold trading relatively steady while silver saw renewed selling pressure. Despite its recent lackluster price performance, gold nevertheless continues to attract demand from asset managers seeking protection against rising inflation, lower growth, geopolitical uncertainties as well as elevated volatility in stocks and not least bonds.

This past week the market once again raised its expectations for US rate hikes with projections now pointing to three consecutive half-point Fed interest-rate hikes. The quickest pace of tightening since the early 1980’s could see rates higher by 2.5% by December.

Gold’s ability to withstand this pressure being seen as the markets attempt to find a hedge against a policy mistake tipping the world’s largest economy into a downturn. So far, however, the current US earnings season has shown companies are able to pass on higher costs and preserve margins.

With input prices staying elevated due to war and sanctions and a general scarcity of supply, only the killing of demand can bring down inflation. A view that has seen the gold-silver ratio hit a two-month high above 80 with silver underperforming given its semi-industrial status.

Total holdings in bullion-backed ETFs meanwhile hit a fresh 14-month high as asset managers continue to accumulate holdings into the current weakness. In addition, signs of strong retail and central bank demand are likely to support gold, despite the recent breakdown in correlation between gold and US ten-year real yields indicating gold on this parameter alone is overvalued.

In our recently published Quarterly Outlook we highlight the reasons why we see the prospect for gold moving higher and eventually reaching a fresh record-high later this year.

Natural Gas

Gas prices in Europe have lost some momentum this month with spring and warmer weather reducing demand, thereby sending the price of prompt delivery gas to the lowest level since the start of the war in Ukraine. Low supplies from Russia and a reduction in flows from Norway due to seasonal maintenance has been offset by strong arrivals of LNG shipments and a warm beginning to spring. As a result, storage levels across the continent have started to build almost a month earlier than last year.

As Europe steps up its effort to reduce dependency on Russian gas these developments have been met with a sigh of relief, but a long and very expensive road lies ahead for this plan to succeed. In the short term, the market will continue to worry European buyers objection to Russia’s rubles-for-gas order with bills due later this month.

While the front month price of Dutch TTF benchmark gas has dropped to around €100/MWh, still six times the long-term average, the cost of securing gas for the coming winter from October to next March remains stubbornly high around the same level. In other words, the usual profitable trade of buying cheap summer gas to storage in order to sell it at a higher price during the peak winter demand season is currently not working. What it will mean for the speed of stock building remains to be seen.

In the US meanwhile the front month Henry Hub natural gas contract reached a 13-year high around Easter above $8/MMBtu or €25/MWh in European money, before reversing lower on technical selling to the current $7/MMBtu. Strong domestic and export demand together with a shortage of coal are testing drillers’ ability to expand supplies, not least considering a US government pledge to increase exports to Europe. So far, no major pick up in production has been seen, resulting in stockpiles trailing the seasonal average by around 17%.

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’s Focus Remains on Oil, Not Yields

Gold Fundamental Analysis

Instead the yellow metal has increasingly been focusing on multiple uncertainties, some of which were already present before Russia invaded Ukraine. Inflation and growth concerns have both been turbocharged by war and sanctions, and together with elevated volatility in stocks and not least bonds, these developments have seen investors increasingly look for safe havens in tangible assets such as investment metals.

The prospect of aggressive tightening by the US Federal Reserve has driven ten-year real yields higher by more than 1% while supporting a near 4% rise in the dollar against a broad index of currencies.

Last year’s relatively weak performance, especially against the dollar, despite emerging inflationary concerns was driven by portfolio managers cutting back on the holdings they accumulated during 2020 as stock markets rallied and bond yields held relatively steady, thereby reducing the need for diversification. Fast forward to 2022 and we are now dealing with multiple uncertainties, some of which were already present before Russia invaded Ukraine.

Inflation and growth concerns have both been turbocharged by war and sanctions, and together with elevated volatility in bonds and not least stocks, investors have sought safe havens in tangible assets such as investment metals.

During the past year, gold and ten-year real yields have struggled to follow their usual inverse paths, and the dislocation accelerated further during Q1 when gold increasingly managed to ignore rising yields. At current levels gold is theoretically overvalued by around 300 dollars, and highlights a major shift in focus.

The net reduction in bullion-backed ETFs that was seen throughout last year came to halt in late December, and since then total holdings have risen by 282 tons to 3325 tons. During the same time leveraged funds, primarily operating in the futures market, given the ability to trade lots valued at $195,000 for a margin of less than $8,000, have been much more dependent on the directional movements in the market.

Following the March 8 failed attempt to reach a fresh record high they spent the following weeks scaling back exposure. An exercise that was not completed until the week of April 12 when they returned as net buyers, thereby aligning them with the mentioned ongoing demand for ETFs.

While inflation was something we talked about last year, the actual impact of sharply higher prices of everything is now increasingly being felt across the world. In response to this investors are increasingly waking up to the fact that the good years which delivered strong equity returns and stable yields are over. Instead the need to become more defensive has set in and these changes together with the risk of what Russia, a pariah nation to much of the world now, may do next if the war fails to yield the desired result.

Gold and Crude Oil Correlation

Instead of real yields, we have increasingly seen gold take some its directional input from crude oil, a development that makes perfect sense. The ebb and flow of the oil price impacts inflation through refined products such as diesel and gasoline while its strength or weakness also tell us something about the level of geopolitical risks in the system.

In our recently published Quarterly Outlook we highlight the reasons why we see gold move higher and reach a fresh record high later this year.

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

Commodity Rally Slows on China Lockdowns and Fed Angst

Commodity Markets Fundamental Analysis

The commodity sector rally has unsurprisingly slowed down during the past couple of weeks as the market continues to digest a whole host of developments impacting the sector. During the first quarter, war and sanctions turbocharged an already strong performing sector, resulting in the Bloomberg Commodity Spot Index registering a 24% gain, its best quarter in living memory, thereby almost eclipsing the 2021 gain of 26.5%, the best annual performance since 2000.

The war in Ukraine and increasingly tough sanctions against Russia have uprooted multiple supply channels from crude oil and gas to key industrial metals as well as food commodities such as wheat, corn, and sunflower oil. All developments that have created logistical challenges and elevated input costs for many industries to the extent that some heavy energy consuming industries have started to scale back production, thereby supporting the painful and potentially long route towards stabilising prices through lower demand.

As the war drags on and hostilities temporarily slow down, the market attentions have turned to the lower demand theme which is currently being driven by some short and other more long-term developments. Crude oil is the most noticeable in this context, having shed most of its invasion-driven gains with the focus turning to China’s worsening covid outbreaks, the release of strategic reserves and a hawkish turn by the US Federal Reserve raising growth and demand concerns.

The possibility of the U.S. tumbling into a recession next year was an outcome suggested by some analysts this week after the Federal Reserve raised the prospect of faster pace rate hikes to combat high and widening inflation. The market has almost priced in ten 25 basis points rate hikes during the next ten months, with the Fed’s Bullard looking for an even faster pace. In addition, the Fed will start to aggressively trim its balance sheet from May and the reduction of liquidity will have the same impact of three or four additional 25 basis point hikes.

Inflation remains a key concern for the market and while it was talked about in 2021, it is now increasingly being felt by consumers and businesses around the world. The impact of EU gas prices trading six times above their long-term average on heating bills and energy intensive production from cucumbers to steel and fertilizer is being felt and the economic fallout can increasingly be seen.

Global food prices meanwhile remain a key concern as highlighted by the FAO Food Price Index. In March it jumped 12.6% to a record after the war wreaked havoc on supply chains in the crucial Black Sea breadbasket region, a key supplier to the global market of wheat, corn and vegetable oils.

While the index was 33% higher than the same time last year, the latest increase reflected new all-time highs for vegetable oils (23.2% MoM, 56.1% YoY), cereals (17.1%, 37.3%) and meat sub-indices, while those of sugar (6.7%, 22.6%) and dairy products also rose significantly.

The prospect of continued supply disruptions from Ukraine this year together with US and South American weather concerns as well as the mentioned rise in the cost of fuel and fertilizers will likely led to another year of tightening supply.

In Ukraine, according to UkrAgroConsult, military actions in some key production regions, closed supply lines and lack of fuel could result in a 38% y/y reduction in the wheat harvest to 19.8 million tons and 55% reduction in the corn harvest to 19 million tons. In the US, the conditions of the winter wheat crop have slumped to the worst level in a decade amid dry soil conditions while surging cost of fertiliser may negatively impact crop production in South America.

Gold

Gold traded unchanged on the week as it continued to find buyers despite a stronger dollar and Treasury yields reaching a fresh cycle high after the Federal Reserve signaled a more aggressive trajectory for rate hikes and quantitative tightening. We maintain a bullish outlook for gold, a view that has been strengthened recently by the yellow metal’s ability to find fresh buying interest despite an increasingly hawkish Fed and the breakdown in the normal strong inverse relation with US real yields.

Overall, however, the yellow metal remains stuck in a wide $1890 to $1950 range with selling attempts in the futures market being offset by asset managers and long-term focused investors seeking protection through gold ETFs against the risk of slowing growth, elevated inflation as well as continued volatility in bonds and equity markets. A fresh upside attempt remains difficult to achieve without renewed support for silver and platinum, both currently struggling on a relative basis with the XAUXAG ratio above 78 and platinum’s discount to gold at a 17-month high at 967 dollars per ounce.

Copper

Copper, the so-called king of green metals, continues to enjoy some tailwind from other industrial metals. Most recently zinc, where the threat of shortages, especially in Europe where LME stocks are critically low, has seen the price move higher. Copper did trade near a one-month high earlier in the week after Chile, the world’s largest producer of the metal, reported a 7% year-on-year decline to 399,817 tons in February, this following a drop of 7.5% year-on-year in January.

While a tight supply outlook and the green transformation will continue to underpin prices over the coming months, the market currently must deal with negative developments in China where draconian lockdown measures to combat covid outbreaks are likely to weaken the growth outlook by more than the government had originally forecast.

Once the covid cloud has lifted, the Chinese government is likely to step in with additional measures to stimulate growth and that should help off-set the impact of lower growth elsewhere caused by soaring prices and accelerated tightening from the US Federal Reserve.

After reaching a record high above $5 per pound last month, HG copper traded back to $4.5 per pound before moving higher again. The outlook for copper remains supportive with tight supply offsetting the risk of an economic slowdown. We maintain this bullish view to take prices to a fresh record high later this year. In the short term, a break below the 200-day moving average, currently at $4.41 per pound, will not ruin our bullish view, only prolong the period of range bound trading.

US and EU gas markets

US and EU gas markets went in opposite directions thereby supporting a long-awaited convergence between the two. US Henry Hub reached a 2008 high near $6.50/mmbtu, driven by robust domestic demand due to unseasonal cold weather and strong export demand for LNG. Natural gas inventories shrank by 33 billion cubic feet last week, with inventories now some 17% below the five-year average, the widest gap since 2019.

In Europe meanwhile, a reluctance to ban Russian gas, together with milder weather and record LNG imports have seen the price of Dutch TTF gas traded lower but at €108/MWh or $34.5/mmbtu it remains very elevated and at levels that will continue to negatively impact demand. Europe and especially Germany’s U-turn on Russian gas dependency will require high prices during the coming months in order to attract record oversea supplies of LNG.

Crude oil

Crude oil has drifted lower following weeks of extreme turbulence and near record prices and this week it managed to retrace most of the invasion-driven gains after breaking below the uptrend from the December low. There are several reasons why the market focus has, at least for now, turned away from the loss of Russian barrels.

The four major factor, some of which are temporary, being 1) EU avoiding adding Russia crude to its growing list of sanctioned products, 2) China’s worsening covid outbreak and extended lockdowns driving a temporary contraction in fuel demand, especially for diesel and jet fuel, 3) slowing US gasoline demand in response to high prices and the prospect of an economic slowdown as the FOMC steps up its battle against inflation, thereby hurting demand, and finally 4) the release of millions of barrels of crude oil from strategic reserves held by the US and other members of the International Energy Agency.

With the war ongoing and the risk of additional sanctions or actions by Russia the downside risk to crude oil remains, in our view, limited. In our recently published Quarterly Outlook we highlighted the reasons why oil may trade within a $90 to $120 range this quarter and why structural issues, most importantly the continued level of underinvestment, will continue to support prices over the coming years.

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

Current Views on Gold, Copper and Crude Oil

Against these, sanctions and self-sanctioning of Russion produced commodities keeps many markets from energy to metals and agriculture supported. In this we take a closer look at gold, crude oil and copper.

Gold Fundamental Analysis

Gold (XAUUSD) remains stuck in relative wide range between $1890 and $1960. Yesterday, another upside attempt was rejected following Fed Governor Lael Brainard hawkish comments on the pace of rate hikes and quantitative tightening, likely to start at the May 4 FOMC meeting.

Her comments helped send US treasury yields sharply higher with, and this time a bit more aggressive at the longer end of the yield curve while the dollar rose. Ten year real yields reached a two-year high at -0.21%, up from -1.1% at the beginning of the year, with the market now pricing in close to ten 25 bps rate hikes during the next ten months.

The combination of a stronger dollar and rising real yields remain the two reasons why many traders continue to look for a much weaker price action. However, with gold currently up 5% in 2022 this view continues to be challenge. Instead we have seen asset managers return to gold via ETF’s as they seek protection against rising inflation, lower growth as well as elevated stock and bond market volatility. So far the battle between short-term momentum and real yield focused short sellers and more long-term focused investors continues and gold, as mentioned, remains range bound as a result of this.

In our recently published Quarterly Outlook we highlight the reasons why we see gold move higher and reach a fresh record high.

Source: Saxo Group

Crude Oil Fundamental Analysis

Crude oil has following weeks of extreme turbulence been settling into a relative tight range between $110 resistance and support at $103.25, the trendline from the December low and the 50-day simple moving average. Some relief selling was seen on Tuesday after the EU avoided adding Russian crude oil to the list of fresh sanctions.

In addition, China lockdowns as well as growth concerns and a stronger dollar following Brainard’s comment on rates helped further deflate an otherwise very tight market. The tightness being seen through the Saudis being able to raise their official selling prices for all oil grades to all regions for May cargoes. Arab Light into Asia was increased by $4.40/b to a record $9.35/b over the benchmark, this at a time where Russia continues to struggle selling its oil at deeply discounted prices of more than 30 dollars per barrel below Brent.

Despite the SPR announcement from last week we struggle to see much additional downside to crude oil while the war in Ukraine continues. Overall, however, the combination of sharply higher global interest rates to combat inflation and an already elevated cost of everything is likely to prevent prices from spiking much above the levels already reached last month when peak panic hit the market.

Focus on EIA’s weekly stock report with the API reporting a 1.1-million-barrel increase in crude stocks. In addition the market will be keeping an eye on production data, SPR releases and implied gasoline demand which has shown seasonal weakness recently.

Source: Saxo Group

Copper Fundamental Analysis

Copper (COPPERUSMAY22), the so-called king of green metals, continues to enjoy some tailwind from other industrial metals. Most recently zinc where the threat of shortages, especially in Europe where LME stocks are critically low, have seen the price move higher. Copper did trade near a one-month high earlier in the week after Chile, the world’s largest producer of the metal, reported a 7% year-on-year decline to 399,817 tons in February, this following a drop of 7.5% year-on-year in January.

While a tight supply outlook and the green transformation will continue to underpin prices over the coming months, the market currently has to deal with negative developments in China where draconian lockdown measures to combat covid outbreaks are likely to weaken the growth outlook by more than the government had originally forecast. Once the covid cloud has lifted, the Chinese government is likely to step in with additional measures to stimulate growth and that should help off-set the impact of lower growth elsewhere caused by high prices and accelerated tightening from the US Federal Reserve.

After reaching a record high above $5 per pound last month, HG copper traded back to $4.5 per pound before moving higher again. The outlook for copper remains supportive with tight supply offsetting the risk of an economic slowdown. We maintain this bullish view as long the price remains above the 200-day moving average, currently at $4.41 per pound.

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

War and Sanctions Turbocharging Already Tight Commodity Markets

The prospect for a long-lasting cycle of rising commodity prices that we first wrote about at the start of 2021 continues to unfold. During the past quarter, the war in Ukraine and sanctions against Russia helped turbocharge a sector that was already witnessing a tightening supply outlook. Before government handouts and central banks dumping rates to zero helped drive a post-pandemic overstimulation of the global economy, years of ample supply with steady prices had reduced investments towards new production, thereby leaving producers ill-prepared for the demand surge that followed.

With supply already tightening, the commodity sector was extremely ill-prepared when President Putin ordered the attack on Ukraine, thereby triggering a change in the market from worrying about tight supply to seeing supply disappear. With Russia, and to a certain extent Ukraine, being major suppliers of raw materials to the global economy, we have witnessed some historic moves with Russia’s growing isolation and self-sanctioning by the international community cutting a major supply line of energy, metals and crops.

The Bloomberg Commodity Spot Index, already showing gains similar to 2021—the best year for commodity returns since 2000—will likely spend Q2 consolidating with a focus on four major potentially market-moving developments: 1) Russia’s willingness to stop the war, thereby beginning the long road to normalising commodity supply chains; 2) China’s slowing economic growth versus its ability to stimulate the world’s biggest commodity-consuming economy; 3) the strength and speed of US rate hikes and their impact on inflation and growth; and finally 4) whether commodity prices, especially across the energy sector and to a certain extent industrial metals, have reached levels that will see demand destruction set in.

Commodities Trading in Backwardation

The tightening supply outlook that emerged across global commodity markets during the past year had already driven prices sharply higher before they were turbocharged by the sudden disruption of flows from Russia and Ukraine.

As a result, the Bloomberg Commodity Spot Index—which tracks a basket of 24 major commodities spread evenly across energy, metals and agriculture—reached a record high on March 8, thereby recording a stunning and in the short term unsustainable year-to-date increase of 38 percent. A rally of such speed and magnitude lifting the input cost across the global economy carries the risk of slowing the growth and demand for many key commodities.

While most commodities—with a few exceptions—have since eased back towards their prevailing trends, the price-supporting tightness across markets has not yet shown any signs of easing. Measuring the spread between the first and second futures month we find that a record 21 out of 28 major commodity futures are currently trading in backwardation, a gauge which helps measure the market’s concern about shortfalls and the higher price buyers are willing to pay for immediate delivery compared to delivery at a later date.

Another measure shows the one-year roll yield on a weighted average of the components in the Bloomberg Commodity Index has reached a record 12 percent, with the strength currently being carried by the energy sector, cotton and grains.

Energy

Brent crude rallied to within a few percent of the 2008 record high after Russia invaded Ukraine, while fuel products, led by diesel, surged to fresh record highs. This was especially true in Europe where, as major buyers of Russian fuel products, self-sanctioning by several commodity traders raised concerns about the availability of supply. However, within a few days most of the gains had been given back with traders instead turning their attention to renewed Covid lockdowns in China and the US Federal Reserve beginning its long-awaited rate hike cycle.

With normal commodity supply channels from Russia broken, an end to the war in Ukraine is unlikely to trigger a swift return to normality. The breakdown in relations and trust between Putin’s Russia and the West is likely to take a long time to mend.

Multiple uncertainties will trigger another wide trading range during the second quarter—potentially between $90 and $120 per barrel. Ultimately the market should stabilise with an upside price risk from reduced spare capacity among key producers and continued supply disruptions related to Russia being partly offset by slowing demand as the global economy becomes increasingly challenged by inflation and rising interest rates. Add to this a temporary Covid-related drop in demand from China and the outlook for a revisit to the March high looks unlikely.

Key events that could trigger additional uncertainty remain the prospect for an Iran nuclear deal, Venezuela being allowed to increase production and, not least, an increase US shale oil production, should producers manage to overcome current challenges related to lack of labour, fracking teams, rigs and sand.

Industrial metals

Aluminium, one of the most energy-intensive metals to produce, raced to a record high during March along with nickel, while copper reluctantly also briefly touched the highest level ever. Current supply disruptions from Russia will continue to support the sector throughout 2022, not least considering the ongoing push towards a decarbonised future.

At the same time increased defence budgets in response to the Russian threat will keep demand robust despite the current risk of an economic slowdown. In addition, and supportive for the sector, is 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.

But considering a weak pipeline of new mining supply we believe the current macro headwinds from China’s property slowdown will moderate throughout 2022. In addition, we also need to consider the prospect that the PBOC and the government, as opposed to the US Federal Reserve, is likely to stimulate the economy, especially with a focus on green transformation initiatives that will require industrial metals.

While the Ukraine war and Russian sanctions turbocharged these metals to fresh record highs well ahead of expectations, the outlook for most metals remains supportive with tight supply and inelastic supply response likely to drive prices even higher throughout the rest of the year.

Precious metals

During the first weeks of 2022 the strength of gold surprised the mfarket, not least because the January rally unfolded while US real yields moved sharply higher. The outbreak of hostilities in Ukraine then added a short-lived geopolitical risk premium which saw gold charge higher, only to miss the 2020 record high by a few dollars.

Heading into the second quarter we see gold eventually adjust to the US rate hike cycle and move higher. Our bullish outlook is based on the belief that inflation will remain elevated, with components such as rising input costs from commodities, wages and rentals not being lowered by rising interest rates. We believe gold is also increasingly being viewed as a hedge against the markets’ currently optimistic view that central banks will be successful in bringing down inflation before slowing growth forces a rethink of the pace of rate hikes and the resulting terminal rate.

Having reached our $2000 per ounce target ahead of time we see the market consolidate its first quarter gains before eventually hitting a fresh record high during the second half as growth slows and inflation remains elevated.

Agriculture

The UN FAO Global Food Price Index hit a record high in February before the Ukraine war made matters worse by raising the prospect of even tighter markets across key food commodities, from wheat and corn to edible oils. Adverse weather in 2021 has already reduced global stock levels of key food commodities from soybeans to palm oil and corn. In addition, surging fuel prices will not only drive increased demand for biofuels, but also raise the cost of production through higher diesel and fertiliser cost.

We see an elevated risk of high food price inflation with the focus being weather events and, not least, the duration of the Ukraine war; an extended period of fighting may limit production from Ukraine, a major global supplier of wheat. In its latest monthly report, the US Department of Agriculture lowered its estimates for exports from Russia and Ukraine by a combined 7 million tons to 52 million; this estimated reduction remains clouded in a high degree of uncertainty and could rise sharply in the event of a long, drawn-out war, thereby keeping prices elevated.

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

COT: Energy Sector Led Cautious Recovery in Risk Appetite

That week that saw a post-FOMC surge in risk appetite with the MSCI World and S&P 500 both jumping by more than 6% while VIX, the fear index, slumped. Bond yields raced higher on the prospect of rising inflation, forcing a more aggressive Fed reaction while the dollar held steady with a sharply weaker yen being offset by gains across most other currencies. The commodity sector traded mixed with strong gains across the energy sector and softs being partly offset by metal weakness and emerging softness across key crops.

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 Spot index traded higher during the reporting week, thereby recouping some the losses from the previous week when surging volatility and increased focus on margin calls forced a blanket reduction of positions across the whole sector.

Energy

The energy sector saw most of the activity with gains from 15% in crude oil to 30% in gas oil (diesel) lifting the net long across the sector for the first time in three weeks. Hedge funds lifted their WTI and Brent crude oil net long by 13k lots, after 123k lots were dumped during the previous two week amid surging volatility and margin calls. The 28% jump in ULSD (diesel) triggered a 23% reduction driven by fresh short selling.

From today’s Market Quick Take:

Crude oil (OILUKMAY22 & OILUSMAY22) trades lower in early trading with Friday’s rebel attacks on Saudi Arabia are being offset by concerns about the short-term demand outlook in China, after the world’s largest importer of crude, said it would lock down half of Shanghai for mass testing as virus flare-ups continue to spread. Russian and Ukraine peace talks resumes this week but with Putin’s government regarded as toxic to many key buyers, self-sanctioning is likely to continue despite a potential solution.

On Thursday, OPEC+ meets virtually to set targets for May but given their inability or unwillingness to discuss the elephant in the room, the drop in Russian production, hopes for additional barrels from GCC producers remain slim. Key resistance in Brent at $123/b while a break below $112/b would signal further loss of momentum.

Metals

Speculators continued to adjust positions following the recent 175 dollar top to bottom correction in gold, and after the FOMC carried out the first of many rate hikes in order to curb runaway inflation. The result being a 9% reduction in both gold and silver length. HG Copper meanwhile saw its net long jump 25% but at just 36.5k lots, it remains around 45% below the one-year peak.

From today’s Market Quick Take:

Gold (XAUUSD) trades lower as the global bond rout continues to gather momentum with the US ten-year Treasury yield surging past 2.5% in Asia while crude oil trades lower as China’s virus flare-ups worsens and Ukraine appears to be ready to discuss a deal (see below). Having failed to punch through resistance at $1962 last week, the market is once again trading on the defense with focus on ETF flows, the key source of underlying demand during the past month. A break below $1922 raising the risk of a return to key support in the $1900 area.

Copper (COPPERUSMAY22) trades lower for a third day with traders worried about the short-term impact of demand as China, the world’s top consumer, continues to battle virus flare-ups. In addition, Jiangxi Copper Co., China’s top producer of the metal, warned on Friday that prices of the metal may fall this year along with other commodities as countries roll back stimulus and high prices curb demand, while logistics bottlenecks ease.

Grains

The grains sector also saw mixed action with length being added to soybeans and corn while wheat saw a small net reduction. Overall, however, the net long across the six major futures markets reached a ten-year high and the third highest on record.

Soft Commodities

A strong across sector gain of 5.5% only attracted net buying to cotton and sugar with coffee’s bounce from a four-month low lacking conviction as longs were reduced as the price moved higher.

Forex

Despite trading lower following the long-awaited first US rate hike on March 16, speculators instead opted to increase their overall dollar long against ten IMM currency futures and the Dollar index by 45% to $15.4 billion.

Except for fresh EUR buying, flows were generally dollar friendly with selling being most noticeable in CAD (-22.6k lots or $1.8 billion equivalent), and JPY (-16k lots or $1.7 billion equivalent) which dropped to a six-year low.

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

Crude Length Cut to Eight-Month Low; Dollar Buying Resumes

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, March 15. A week where risk appetite stage a small comeback with stock markets rising despite a continued flow of troubling news from Ukraine, and US Treasuries staging a sharp reversal with yields on the 10-year notes surging 30 basis point as the market priced in an imminent but long awaited US rate hike. In commodities, the Bloomberg Spot Index gave back the bulk of the 11% gain from the previous week with selling seen across most sectors.

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 Spot index slumped by 8.3%, thereby giving back most of the gains seen during the first week of the Russian invasion. Russia-focused commodities like crude oil, palladium and wheat took the biggest hit in percentage terms. Overall the total net long held by managed money accounts across 24 major commodity futures was reduced by 5% to an eight-week low at 2.06 million lots, the biggest reductions seen in crude oil, natural gas, gold, silver, copper and coffee.

During 2021 the 30-day volatility on the BCOM Spot index traded within a 9% to 19.5% but since the war started on February 24, it has surged higher, reaching 31% last week, thereby forcing many hedge funds targeting a certain level of volatility to cut their exposure.

The jump has been led by spikes in energy, industrial metals and grains, all of which have seen volatility more than double. As long the volatility remains stable, trend and momentum following hedge funds will normally buy into strength and sell into weakness. The mentioned volatility surge helps to explain the current behavior where positions have been cut to pre-war levels.

Energy

Another week of extreme volatility in crude oil, this time a 22% move to the downside, drove a second weekly reduction in the combine WTI and Brent net long by 23k lots to a four-month low at 411k lots and just above the 400k lots reached in early December when crude oil briefly traded below $70/b in response to the omicron virus variant. Brent, the global benchmark saw its net long drop to a 16-month low at 153k lots.

As mentioned, when volatility spikes and traders are faced with rising margin calls on their open futures positions, the first reaction is to make an across the board reduction. This is currently very noticeable in the five oil and fuel contracts which have seen open interest fall from 7.1 million lots on March 12 to a current seven-year low at 4.7 million lots.

Monday am market comment

Crude oil (OILUKMAY22 & OILUSAPR22) rose to a one-week high in Asia as the war in Ukraine keeps global supplies very tight with traders, mostly through self-sanctioning, avoiding Russian crude, currently being offered close to 30-dollar below Brent with a limited number of buyers queuing up to secure cheap cargoes.

In addition, Middle East tensions also rose after Houthi rebels attacked sites across Saudia Arabia over the weekend. With supply tightening, the market will be looking for signs of demand destruction, mostly through the cost of diesel and gasoline as well as the impact of temporary covid related lockdowns in China.

Metals

Gold’s recent surge towards the 2020 record high and subsequent abrupt rejection helped drive a 5.5% correction and with that a relative small 16% reduction in the net long to 147.5k lots, the first weekly reduction in six weeks. Small in the sense that gold almost gave back all of its post invasion gains.

With most of the reduction being driven by long liquidation and a very limited amount of fresh shorts, this highlights a change that was primarily driven by leveraged traders forced to reduce bullish bets. Other big changes were a 41% reduction in the platinum long and a 31% reduction in the copper long to 29k lots and just below the average sized positions leveraged funds have held during the past year.

Monday am market comment

Gold (XAUUSD) & silver (XAGUSD) trade steady as investors continue to weigh monetary policy tightening in the US against the inflationary impact of the Russia-Ukraine war. Long liquidation from leveraged funds who had loaded up on gold futures in recent weeks may have run its course, while longer-term focused investors have been continuing buyers of gold ETFs since the war began.

During this time, total holdings have jumped by 134 tons to a one-year high at 3,246 tons, with more than half of the increase seen during golds recent 175-dollar correction. Gold as being bought as a hedge against elevated inflation and a central bank policy mistake with slowing growth potentially preventing the FOMC from carrying out its planned number of rate hikes before being forced to revert to a period of renewed stimulus. Key support at $1890/oz with a break above $1957 needed to signal fresh upside potential

Agriculture

Coffee long liquidation accelerated as it extended to a fourth week with the net long falling 26% to an eight month low at 29k lots. In sugar, a 4.8k lots small reductions followed the massive 79.5k lots jump the previous week.

Grains were the only sector seeing net buying and after four weeks of continued buying the total long across the six contracts tracked in this has reached a ten-year high at 803k lots. The bulk being held in the soybean complex (363k) and corn (373k) with the recently surge in wheat to record highs only a attracting a 67k lots position in the Kansas and Chicago wheat contracts.

Forex

Continued market turmoil and expectations for an imminent rate hike from the US Federal Reserve helped drive the first increase in bullish dollar bets since early January. The aggregate dollar long against ten IMM currency futures and the Dollar Index jumped by 53% to $10.7 billion.

On an individual level we find several major changes with biggest being a 68% reduction in the euro long to just 18.8k lots, the 40k lots reduction was the biggest one-week of net selling since June 2018. Specs also sold JPY (6.5k), GBP 16.5k) and not least MXN where 63.6k lots of selling, the biggest one-week reduction in two years flipped the position back to a net short. Countering these changes were buying of CAD (10k) as well as the antipodean currencies of NZD (16k) and not least the AUD where the 33.3k lots of buying, the biggest in seven-years helped reduce the net short by 43% to 44.9k lots.

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

WCU: It’s Too Soon to Price Out a War Premium in Commodities

The phenomenal surge across key commodities since Russia invaded Ukraine more than three weeks ago did fade this past week, with the most notable being crude oil which temporarily dipped below $100 per barrel, thereby concluding an 85-dollar roundtrip and in the process removing most of the war premium. Ongoing, but so far fruitless, peace talks between Russia and Ukraine, the first of several US rate hikes together with China’s Vice Premier pledging support for the economy all supported a continued rise in volatility across the commodity sector.

Commodities, with a few exceptions, have rallied strongly since President Putin ordered the attack on Ukraine, thereby triggering a change in the market from worrying about tight supply to actually seeing supply disappear.

With Russia being the second biggest supplier of raw materials to the global economy, we are currently witnessing some historic moves with Russia’s growing isolation and self-sanctioning by the international community cutting a major supply line of energy, metals and crops. Developments that before seeing the commodity sector heading for a weekly decline had triggered some historic moves in terms of prices reached and price ranges travelled.

Note: The LME nickel performance does not reflect the current value which is around 20% lower. The market reopened this week after having been forced shut for more than a week. But daily limits have prevented the market from falling to levels that is being reflected by the futures market in Shanghai, currently to only source for price discovery.

Following some historic moves and levels reached in the immediate aftermath of the invasion, the Bloomberg Commodity Index, which tracks 24 major commodity futures, evenly split between energy, metals and agriculture, traded a bit softer this past week as the initial position adjustment and panicky reactions faded. However, despite seeing some of the markets retreat, the index is still up more than 25% this year and thereby already exceeding last year which was the strongest year for the sector since 2000.

Brent crude oil

Brent crude oil completed a historic three-week 85-dollar roundtrip which took the price from around $97 to $139 and back, thereby returning to pre-war levels. The correction from a near 14-year high was driven by Russia/Ukraine talks and a temporary Covid-related drop in Chinese demand, and traders reducing positions due to extreme volatility.

The weakness in our opinion may prove premature, with lower supplies from Russia increasingly being felt over the coming weeks, more than offsetting any temporary Covid-related slowdown in Chinese demand. The beginning of the US rate hike cycle, however, will add to global growth concerns which despite several months of supply shortfalls may prevent a renewed spike in oil prices towards the recent high, but with the risk premium almost removed the market will be left vulnerable to any deterioration in the Russia-Ukraine situation.

The IEA in their latest monthly Oil Market Report, highlighted the two-way risk to oil prices with surging commodity prices and international sanctions levied against Russia likely to lower global economic growth. On that basis they lowered their forecast for world oil consumption this year by 1.3 million barrels per day, the bulk coming from a drop in Russian demand as the economy collapses to Soviet-era levels, while current lockdowns in China will also lower the temperature on demand. However, against this the prospect of large-scale disruptions to Russian oil production remains a threat, and one that according to the IEA may create a global oil supply shock.

Russia has increasingly been left isolated with demand for its oil falling, mostly due to self-sanctioning from Western oil traders. The best gauge for watching this development is Russian Urals which this past week almost traded at a 30-dollar discount to Brent crude.

Given Russia’s limited ability to store unwanted oil, the IEA very pessimistically estimated that from April some 3 million barrels per day of Russian production could be shut in. If realised, the price of oil and especially products like gasoline and diesel would be forced higher to the point where demand destruction kicks in and lower demand by more than is currently being projected.

European gas market

The European gas market traded lower in line with other commodities with the drop being supported by no sizable reductions in Russian gas flows and the emergence of spring and weaker heating demand. The spot price reverted lower to trade near €100 per MWh, a 70% collapse from the panic peak on March 7 when the price briefly touched a record €345 per MWh, the equivalent of $630 per barrel of crude oil.

In general, the European gas market is in better shape than feared at the start of the year after a mild winter and a flood of US LNG shipments helping boost supplies, thereby avoiding a feared storage depletion. The outlook for next winter, however, remains challenging with the October to winter futures contract trading just below €95 per MWh, a level that points to a continued and prolonged challenge for heavy energy consuming industries.

Gold

Gold, just like most other commodities, reversed lower after hitting a panic peak a few dollars below the 2020 record high at $2074. A combination of lower oil prices, the best gauge for geopolitical risks right now and jitters ahead of the FOMC meeting on Wednesday helped trigger a 175-dollar correction until key support was found just below $1900 per ounce.

The market then bounced after the FOMC finally began its long-awaited rate hike cycle, and while the stock market rose in response to Fed Chair Powell’s optimistic view on growth, the bullion market received a bid on worries that the Fed will struggle to curb inflation without risking a major slowdown.

Long liquidation from leveraged funds who had loaded up on gold futures in recent weeks may have run its course, while longer-term focused investors have been continued buyers of gold ETFs since the war began. During this time, total holdings have jumped by 122 tons to a one-year high at 3,236 tons, and it is worth noting that half of the increase occurred during the mentioned correction.

We maintain our bullish outlook in the belief inflation will remain elevated while central banks may struggle to slam the brakes on hard enough amid the risk of an economic slowdown. We believe the Russia-Ukraine crisis will continue to support the prospect for higher precious metal prices, not only due to a potential short-term safe-haven bid which will ebb and flow, but more importantly due to what this tension will mean for inflation which is likely to remain persistently high as global growth slows, thereby eventually forcing central banks, especially the US Federal Reserve, to abandon further rate hikes and instead revert to a period of renewed stimulus.

In such a scenario, we see further upside to gold and especially silver, given our belief in higher industrial metal prices, especially copper. Gold already up 6% in dollar terms and 9.5% in euro terms versus a 7.5% drop in the S&P 500 and the MSCI World index has already, despite headwind from rising real yields, shown its diversification credentials. Key support at $1890/oz with a break above $1957 needed to signal fresh upside potential.

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 Longs in Major Retreat as Volatility Jumps

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, March 8. A week where the war in Ukraine, and increased sanctions against Russia dictated most of the market swings. The prospect for lower growth and even higher inflation helped send the MSCI World stock index down by 4.5%, bond yields rose while the dollar hit multiple month highs against several major currencies.

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 Spot index jumped a massive 11.2% during the reporting week, with gains being led by industrial metals, and not least energy where crude oil surged higher by 20% before suffering a major correction the day after the reporting week ended. Overall it was another week where surging volatility across most commodities saw money managers cut both long and short position, the net result being a small 2% reduction in the overall long across 24 major commodities to 2.17 million lots. Increasingly difficult market conditions helped trigger a 180k lots reduction across oil, fuel products and natural gas while net length was added to most other sectors led by grains and softs.

During 2021 the 30-day volatility on the BCOM Spot index traded within a 10.5% range between 9% and 19.5% but since the war started on February 24, it has surged higher, thereby forcing many hedge funds targeting a certain level of volatility to cut their exposure. Led by the energy and industrial metal sectors it jumped 3% to 22% during the reporting week before finishing at 28.5% on Friday.

As long the volatility remains stable, trend and momentum following hedge funds will normally buy into strength and sell into weakness. The mentioned volatility surge partly helps to explain the current dislocation in energy between reduced positioning and surging prices.

Energy

Despite rallying by around 20%, speculators cut their combined length in WTI and Brent crude oil by 100.3k lots to a three-month low at 435k lots, the largest one-week reduction since last July. Brent which jumped 22% during the week saw the biggest impact with the 38% to 158k lots being the biggest reduction made by money managers in a single week since ICE started publishing the data in 2011.

The slump took the net in Brent close to the December low at 154k lots low point when oil briefly traded below $70/b in response to the rapidly spreading omicron virus variant. The move was driven mostly by a pullback in outright longs of 63.5k lots, but also by the biggest addition in short bets (+33.6k lots) since 2016.

Long liquidation across all three fuel futures added to the story of speculators booking some profit after a one-week gains up to 42% had taken all three to record highs.

Metals

Gold surged to near the 2020 record high during the reporting and the fear of missing out of further gains saw funds raise their exposure in gold, silver and platinum through a combination of fresh buying and short positions being scaled back. As the table highlights, all three metals saw their net long jump to levels not seen in many months. Gold buyers added to 5% to 176k, a 20-month high, silver 15% to 49k, a two-year high and platinum by 72% to a one-year high at 26k.

Continued gold buying during the past five weeks had lifted the net long by 113k lots or 180% and after failing to hit a fresh record high above $2075 the temptation to book profit helped trigger the subsequent sharp correction which only paused on Friday when support was found at $1960, the 31.8% retracement of the February to March 290 dollar rally.

In HG Copper the return to a fresh record above $5/lb last Monday helped support a 36% increase in the net long to 42k lots, some 49k below the December 2020 peak and an additional 34k lots below the 2017 record at 125k lots. Highlighting a market where money managers remain unconvinced about copper’s short to medium term potentials, not least given continued uncertainty about the strenght of the Chinese economy.

Agriculture

Speculators finally managed to turn their CBOT wheat position around after 27k lots of net buying flipped the net to a long of just 20k lots. However, the hesitancy towards buying wheat at record levels and following a one-week surge of 30% was clear to see in the behavior, with the bulk of the net change being due to short covering and not fresh longs. KCB wheat meanwhile saw a small reduction of 2% after speculators cut short and long positions. Corn was also bought while the soybean complex was mixed.

Following weeks of sugar selling, buyers suddenly returned to lift the net long by 135% to 140k lots. During the week, the price jumped by 6% with surging fuel prices raising the prospect of more demand for plant-based fuels such as sugar towards ethanol production. Net selling of coffee extended to a third week with a weakening demand outlook, as shipments to Russia are cancelled, helping to offset continued worries about weather related declines in the Brazil output this season.

Forex

Russia’s unprovoked attack on a sovereign nation entered a second week, thereby supporting continued broad dollar strength. The Bloomberg Dollar Index reached a 20-month high reflecting haven demand and the market beginning to price in a relative faster pace of US rate hikes.

Speculators using IMM futures contracts to express their views on forex ended up, despite the mentioned strength, reducing bullish dollar bets for an eight consecutive week. Albeit at a slowing pace than recent weeks, the combined dollar long against ten IMM futures contracts was nevertheless reduced by 3% to $7.3 billion, the lowest since last August.

Looking beneath the bonnet we the find the relative small net change hiding increased selling of EUR, GBP and CAD being more than offset by short covering in CHF and JPY. The minor currencies saw demand for MXN and BRL while particularly challenging trading conditions saw continued reductions in both Ruble long and short positions.

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

War and Sanctions Upend Global Commodity Markets

Commodities, with a few exceptions, have rallied strongly since President Putin ordered the attack on Ukraine, thereby triggering a change in the market from worrying about tight supply to actually seeing supply disappear. With Russia, and to a certain extent Ukraine, being major suppliers of raw materials to the global economy, we are currently witnessing some historic moves with Russia’s growing isolation and self-sanctioning by the international community cutting a major supply line of energy, metals and crops.

While the focus has been on crude oil given its global importance as an input cost to the wider economy, other markets such as gas in Europe as well as coal have seen incredible strength with the market attempting to price a potential shortfall in supply. From a global food security perspective, record wheat prices in Europe and US prices at their highest since 2008 are causing a great deal of concerns as well.

The strong and unprecedented response to Russia’s attack on Ukraine is rapidly being felt, not only in Russia where the economy is in free fall with the country’s major stocks collapsing by more than 90% before trading was halted while the Russian Ruble has reached its lowest level during twenty years of President Putin’s leadership. Across the world, a combination of outrage and self-sanctioning have seen flows of oil, coal and many other commodities originating in Russia slow with buyers increasingly viewing Russian-produced and mined products as toxic.

These developments highlight the risks to the global economy, especially from a long drawn-out conflict. In such a situation, prices of commodities in short supply would likely have to rise to levels where demand starts to become negatively impacted, thereby supporting the return to a more balanced market. At this point, having seen these historic moves, it is also incredibly important to stress that we are dealing with a situation that could have a binary outcome. Any sudden solution that warrants the removal of sanctions could trigger a significant correction across many key commodities, potentially reversing the strong gains seen in the table above.

Traders are fully aware of this and what it does in the short term is to create even more volatility as liquidity and conviction levels drop. The average true range using a 14-day lookback period is one way of measuring volatility, and simply said, it tells us what kind of daily price range can be expected for any given stock or commodity, so the higher the volatility and uncertainty the bigger the range. Using the ATR measure we find Brent to have an expected daily range of $6.5/b versus $2/b in recent months, Paris wheat at €24/t versus €6/t and EU gas €32/MWh versus €7.5/MWh.

Global commodity markets are tightening and as a result the Bloomberg Commodity Spot Index continues to reach fresh record highs. The stunning 9.4% surge this past week is the biggest since 1974 when the OPEC oil embargo triggered the 1973-74 oil shock. Looking at the futures curves we find that most of the major commodity futures are seeing a rising backwardation, a gauge which helps measure the market’s concern about shortfalls and the higher price buyers are willing to pay for immediate delivery compared with delivery at a later date.

Apart from showing the spike in the Bloomberg Commodity Spot Index, the above charts also show different ways of measuring the backwardation which is now the broadest and highest in recent history. Measuring the spread between the first and second futures month we find that 15 out of 28 major commodity futures are currently trading in backwardation, while another measure shows the one-year roll yield on a weighted average of the components in the Bloomberg Commodity Index has reached a record 12% with the strength currently being carried by the energy sector, cotton and grains.

Copper

Copper, a rangebound market for the past year, burst higher this week to almost reach the record high from May last year at $4.89/lb. Since then copper has been trading sideways, thereby underperformed the Bloomberg Industrial Metal index by close to 25%. This during a time where other metals such as aluminum has reached a record high, zinc the highest since 2007 and nickel a 2011 high.

Driven by supply disruptions from Russia as well as European smelters faced with punitively high energy prices cutting back production, thereby exacerbating acute supply constraints in the region. Russia is one of the world’s largest copper producers, and while the price for months has been held back due worries about Chinese demand, the focus is now turning towards a sanctions-led further tightness in supply, and with that the prospect of new record being reached sooner rather than later.

Crude oil

Crude oil reached a 14-year high on Thursday after Brent almost touched $120/b before suffering a ten-dollar correction on speculation that a nuclear deal with Iran could be reached this weekend. Global oil majors including BP Plc, Shell Plc and Exxon Mobil Corp. are exiting Russia while buyers are shunning the nation’s crude as they navigate financial penalties and soaring shipping costs. As a result, the global market is currently in a flux with Russian unwanted crude varieties trading at a deep discount to Brent.

Following a record short meeting on Wednesday, OPEC+ decided to rubberstamp another unobtainable 400k b/d production increase for April. As it turned out, this meeting was more about keeping OPEC+ stable than the oil market with the elephant in the room of the Ukraine war and Russian sanctions not being addressed. It highlights the tightrope the group has to walk, perhaps also considering the fact the toolbox, i.e. spare capacity, is running close to empty. In the short-term, with no solution in sight, the price may need to rally to levels that kill demand. A peace deal on the other hand may remove a large chunk of the gains seen during the past ten days.

European gas

European gas briefly surged to €200/MWh and at current prices more than ten times above the long-term average we have reached levels that will see demand from heavy energy consuming industries begin to fall, the result being weaker growth on top of surging inflation. The biggest casualty of these developments was the ICE carbon futures contract which has slumped by one-third from the February peak. While signs of reduced demand for carbon offset was the trigger, the speed and depth of selling was driven by speculators exciting what up until recently had been considered a safe bet with prices only going up as EU politicians stepped up their battle against climate change.

Coal

Coal prices have more than doubled since the start of the year with Europe, Japan and Korea seeking alternative suppliers to Russian coal and power producers seeking substitutes to for Russian gas. In addition, coal production has faced challenges elsewhere with labor shortages in China and Mongolia, flooding across Australian mining regions, while a January export ban from Indonesia has been adding to the current tightness.

Wheat

Wheat prices spiked to a fresh 14-year high in Chicago while the Paris high-protein milling wheat contract has been setting daily records culminating on Friday when it jumped to €385/tons, some 30% above the previous record from 2008. Ukraine and Russia export 29% of the world’s wheat, mostly via the Black Sea, a route that is now offline following attacks on cargo ships near Odessa. From a global food security perspective, this is a very serious development as wheat together with rice are two of the most important food staples. Among the world’s top ten importers of wheat we find several developing nations from Egypt and Turkey to Indonesia and Algeria, all countries where surging food costs will have an outsized negative impact.

Gold and Silver

Gold and silver headed for the highest weekly close since November with demand being driven by safe-haven demand, not only from the Russian invasion but also as a hedge against inflation which has been turbocharged by surging commodity prices as well as the prospect for incoming economic weakness. Federal Reserve Chair Powell reaffirmed the central bank’s commitment to commence a series of hikes, starting this month, to curb the highest inflation since the 1980’s. However, the market shrugged off the news with Russian aggression potentially forcing a careful approach.

US 10-year real yields saw a gold-supportive collapse back to -0.9%, the lowest since early January, in response to rising inflation expectations and safe-haven demand at the same time driving nominal yields lower.

Besides the hard-to-quantify geopolitical risk premium currently present in the market, we maintain our bullish outlook in the belief inflation will remain elevated while central banks may struggle to slam the brakes on hard enough amid the risk of an economic slowdown. We believe the Russia-Ukraine crisis will continue to support the prospect for higher precious metal prices, not only due to a potential short-term safe-haven bid which will ebb and flow, but more importantly due to what this tension will mean for inflation (up), growth (down) and central banks’ rate hike expectations (fewer).

Arabica Coffee

Arabica Coffee, a recent highflyer, dropped to the lowest since November with hedge funds reallocating some of their portfolio in response to the mentioned turmoil across markets. While the tight supply outlook from Brazil has not seen any improvement, the demand outlook has softened with Brazilian exporters cancelling contracts with Russia and Ukraine, thereby raising the availability for other destinations. As a result, we are seeing a small rebound in ICE-monitored stockpiles, further easing concerns – for now – of reserves being depleted.

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

Beware Extraordinary Headline Risks in Commodities

The turmoil across markets continues following Russia’s unprovoked invasion of Ukraine last Thursday. Not least across the commodity sector where tougher US and European sanctions threaten to partly cut off supplies from Russia, thereby impacting several key commodities from gas and oil to several industrial metals and key crops such as wheat. Ukraine, often called the breadbasket of Europe given its extensive fertile lands, which are naturally suited to grain production, has seen is supply chains break down with closed harbors preventing exports of key food commodities such as wheat, barley and corn.

Headline risks, however, goes both ways, and if the current crisis and war should see a sudden solution, crude oil could drop by 10% to 15%, EU gas by up to 50%, Paris wheat by up to 25% while gold could see a more muted 2% to 4% downward reaction.

Brent crude oil

Brent crude oil is heading for its first daily close above 100 dollar per barrel since 2012, and despite the price by now probably includes a Russian supply risk premium close to ten dollars, the outlook remains supportive as long global demand shows no sign of easing. The price jumped following the invasion news last Thursday and the market remains bid with traders trying with some difficulty to quantify a potential drop in supply from Russia amid banks pulling financing and as shipping costs rise.

These developments have driven the front end of the futures curve sharply higher with prompt and deferred spread all pricing very tight market conditions. An example being the six-month spread which has jumped to $11.50, the highest for this spread going back to at least 2007.

Also, in focus are talks, between US and major consuming nations about releasing up towards 60 million barrels of oil from strategic reserves and Wednesday’s OPEC+ meeting where the group is expected to rubber stamp another illusive 400k b/d production increase. Illusive in the sense that many producers have struggled to reach their production targets while Russia, if allowed, is likely to hit its production limit within months.

The group’s Joint Technical Committee meets today, and they will pass on their analysis and recommendations to the energy ministers ahead the meeting. Nuclear talks with Iran has reached the final and most difficult stage with Iran potentially playing a hard game considering how recent price developments have moved in their favor, leaving them less likely to give the concessions needed for the US and others to accept a new deal.

With global supply still struggling to meet robust demand, the result may end up being a continued rally in crude oil until global growth slows, which it will at some point, or until soaring prices eventually kills demand.

European gas

The European gas benchmark, the Dutch Title Transfer Facility (TTF) trades up 12% today (Saxo ticker: TTFMJ1) at €110/MWh, or $203 per barrel of crude oil equivalent. The current price is seven times higher than the average price seen in the years prior to the rally which started last August. Intraday price swings of 25% during the past three days highlights the market’s difficulty in pricing the risk of a potential further loss of supply from Russia, a supplier of close to 40% of Europe’s gas.

Storage facilities across Europe are currently around 30% full, somewhat higher than originally feared, after withdrawals slowed during February due to milder weather. The injection season normally begins in late March, and while the worst risk of supply short fall this winter is close to over, a prolonged conflict with Russia however raises the risk for next winter where the price for winter gas (October 2022 to March 2023) is currently trading close to €100/MWh while the following 2023/24 winter is priced at €51/MWh.

Wheat

Wheat prices globally ended February on a strong note with the price in Chicago showing the biggest monthly jump in six years. Today, prices in Europe and Chicago has continued higher with Paris Milling wheat (EBMH2) trading near the record €341.75 per tons record high reached last Thursday while Chicago wheat (ZWH2) continues to race towards $10 per bushel, a level that it last seen in March 2008.

Wheat is one of the world’s two most important food stables, the other being rice, and the current explosive rally will continue to add pain to consumers around the world, specifically those in emerging market countries that can least afford it.

Russia and Ukraine supply more than 25% of the world’s wheat, and for now Ukraine export terminals remain shut. However, with Ukraine having already shipped two-thirds of its intended exports by November last year, the short-term impact should be limited, but worries will remain about the upcoming season and the impact a prolonged war will have on the availability of farm hands.

Somewhat helping ease global shortages caused by drought and the war in Ukraine are news that Australia, another major shipper of wheat, upgraded its already record harvest by 5.5%. However, the prospect of a continued rise in global food price inflation remains real with the negative consequences it may have on stability and growth.

Gold and silver

Gold and silver have both managed to hold onto the bulk of their recent strong gains, and following last Thursday’s 100 dollar top to bottom move support has now been established around $1880 from where it has since recovered, and at the current price of $1921 gold is heading for its highest close in 13 months.

A world in turmoil continues to attract safe haven interest from investors with sanctions against Russia potentially increasing an already elevated risk to global growth. Thereby potentially turbocharging the reasons why we throughout have maintained a bullish outlook as inflation are likely remain higher for longer, thereby raising the risk of a gold supportive period of stagflation.

In the short term, the market will continue to look for direction from developments in Ukraine as well as any further news on sanctions and so far, futile talks between Russia and Ukraine. The prospect of a 50 basis US rate hike is off the table with the market reducing the number of rates hikes this year to less than six. While support has been established at $1877, the 50% retracement of the recent rally, a signal for further upside gains may emerge on a break above $1937.

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

Russia-centric Commodities in Focus Last Week

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, February 22. Once again a reporting week that ended a few days before a major risk event took place, this time Russia’s attack on Ukraine last Thursday which triggered major moves across most asset classes. During the week in question risk appetite was already being challenged with the MSCI World Index as well as the S&P 500 Index losing more than 3% while US treasury yields reversed lower with the 10-year tenor falling 10 basis points to 1.94%

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 dollar traded unchanged, with speculators continuing to reduce their net longs, before rallying in the days that followed while commodities saw strong gains led by grains, energy and precious metals.

Commodities

The Bloomberg Commodity Spot index rose 3.3% in the week to last Tuesday, thereby reaching a fresh record high. Gains were led by commodities and sectors most at risk of being impacted by supply disruptions from Russia and Ukraine. These were crude oil, gas, palladium and grains while gold and silver received a safe haven bid amid lower bond yields and stock market turmoil.

Speculators reacted to these developments by adding length to gold and silver as well as grains, while net selling of crude oil surprisingly extended into a fifth week. Overall the total exposure across 24 major commodity futures rose 4% to 2.2 million lots representing an $8.4 billion increased in the nominal exposure to $171 billion.

Energy

Large money manager accounts cut, perhaps somewhat surprisingly, their combined lenght in crude oil for a fifth week by 5.6k lots to 509k lots. A $1.7/b widening of the WTI/Brent spread to $4.8/b during the week, now at at $6.9/b, helped drive a diversion between the two with the Brent crude oil long rising by 13.4k lots while the WTI long was cut by 19k lots. Fuel products and natural gas all saw their net longs being reduced.

Metals

The gold long jumped 28% to 161k lots as the price returned to $1900, and following three weeks of buying the net long was lifted by 98k lot to the highest since November. Such an aggressive position adjustments within a relative short period of time always tend to create a certain amount of volatility with corrections often ending up being deeper than otherwise warrented, something that was on clear display last Thursday – after this reporting week – when the price after reaching a one-year high suddenly dropped close to 100 dollars.

Silver also saw a sizable amount of buying lifting the net long by 48% to a four-week high at 26k lots. In platinum, the net long received a 157% boost while palladium, despite rallying by more than 5% saw no interest in adding length with the net remaining neutral. A quiet week in copper meanwhile driving a 9% reduction in the net long to 33.4k lots.

Agriculture

The grains sector saw broad buying interest with the net long in across the six futures contracts rising 65k lots to a ten-month high at 717k. Buying was concentrated in corn, and not least wheat where the 8.5% price jump only helped trigger a halving of the net short to 18k lots, hence the panic buying last Thursday when the price in Paris reached a record high while Chicago wheat reached levels not seen since 2008.

The soybean long meanwhile reached a 14-month high at 180k lots, still some 58k lots below the October 2020 high. All four soft commodity contracts saw witnessed long liquidation led by cocoa while the sugar long continued to deflate dropping 8% to 53.8k lots, lowest since since June 2020. Coffee and cotton both seeing a relative small 4% reduction.

 

Forex

Before surging higher last Thursday, following Russia’s attack on a sovereign nation, speculators had cut bets on a rising dollar to a six-month low. After six weeks of non-stop selling the dollar long against ten IMM currency futures and the Dollar index dropped to $8.5 billion last Tuesday with the main driver being a 25% increase in the euro long to 59.3k lots or $8.4 billion equivalent. Additional short covering in JPY and AUD also helped more than offset selling of CHF, GBP, CAD and NZD.

Among the minor currencies the Russian Ruble long rose 21% to 19.5k lots or $0.6 bn equivalent, a 14-week high, just days before starting a collapse which so far has seen drop by close to 30%. Length was also added to BRL which reached a five-year high at 24.4k lots and MXN which at 16.8k lots reached a 14-month high.

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

Commodity Market’s Reaction to Russian Invasion

The commodity sector continued its ascent this past week with the Bloomberg Commodity Spot Index reaching a fresh record high on Thursday after Russia’s unprovoked attack on a sovereign nation saw volatility jump across most asset classes. The stock market suffered steep losses while investors looked for shelter in bonds, the dollar, and not least commodities where an already tight supply outlook supported the sector’s geopolitical and safe-haven credentials.

Ahead of the weekend, the across market temperature was lowered after a fresh round of sanctions by Western nations stayed clear of impacting Russia’s ability to produce and export commodities such as crude oil and gas. As mentioned, the Bloomberg Commodity index rose with gains seen across all sectors, with the exception of softs. The biggest moves involving gas, crude oil and wheat, all commodities where a prolonged conflict could impact supply from Russia and Ukraine.

Natural Gas

Dutch TTF gas futures saw the biggest impact of the increased tensions with Europe depending on Russia for 40% of its supplies, most of which is being transported through major pipelines including one cutting through Ukraine.

Following an initial panicky reaction which saw the price jump above €140/MWh, gas then spent most of Friday trading back below €100/MWh, still a very high price that will continue to negatively impact European consumers and energy intensive industries, not least those producing other raw materials such as aluminum, as well as producers of automobiles, machinery and chemicals.

Germany and Italy are the two major European countries relying mostly on supplies from Russia and with a high percentage of Germany’s export being very energy intensive to produce, it is currently seeing an economic slowdown with Producer Prices running at 25%, its highest annual increase since 1949.

The current extreme volatility is driven by traders’ attempts to price in the risk of Russia making further reductions in their supplies to Europe, a fear that was temporarily reduced on Friday when Gazprom increased supplies due to increased demand from European buyers.

The long-term prospect for gas prices to come down looks increasingly limited with the Nord Stream 2 pipeline staying closed indefinitely, and in the event of a prolonged disruption, EU gas inventories cannot be rebuilt before next winter, and as a result the winter 2022/23 TTF gas price currently trades close to €100/MWh, more than six times higher than the long-term average.

Crude oil

Crude oil experienced another week of wild swings with the initial but later deflated threat of Russian supplies being curbed due to sanctions driving Brent crude oil above $105 and WTI above $100 for the first time in seven years. After surging 15 dollars in a matter of days, crude oil then gave back more than half of those gains ahead of the weekend after US sanctions stayed clear of targeting Russia’s ability to export crude oil. In addition, traders had to deal with the potential impact of another release of oil from US strategic reserves as well as ongoing Iran nuclear talks where an agreement would increase supply.

OPEC+ meets next week but at this stage the group has shown no inclination to increase production, primarily due to the fact many producers are already struggling to reach their production targets while Russia, if allowed, is likely to hit its production limit within months. With this in mind, the oil market is likely to remain supported with an easing of tensions unlikely to send prices down by more than ten dollars.

With Saudi Arabia being one of the few producers with a meaningful amount of spare capacity not showing any willingness to add additional supplies, the market has increasingly turned its attention to Iran and renewed efforts to revive the nuclear accord. An agreement could according to the IEA add 1.3 million barrels per day, an amount that would help stabilize but probably not send prices lower.

Global oil demand, barring any sharp economic slowdown, 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 that current high and even higher prices will remain for longer.

Gold 

Gold traders experienced a very bruising day on Thursday with gold tumbling close to 100 dollars after surging to a 17-month high. A combination of a heavy overbought market running out of momentum ahead of $2000, fears Russia would need to sell gold to prop up the ruble and President Biden’s sanctions underwhelming the market in terms of impact, helped trigger the turnaround with crude oil and bonds selling off and the stock market rallying.

Besides the hard-to-quantify geopolitical risk premium currently present in the market, we maintain our bullish outlook in the belief inflation will remain elevated while central banks may struggle to slam the brakes on hard enough amid the risk of an economic slowdown.

We believe the Russia-Ukraine crisis will continue to support the prospect for higher precious metal prices, not only due to a potential short-term safe-haven bid which will ebb and flow, but more importantly due to what this tension will mean for inflation (Up), growth (Down) and central banks’ rate hike expectations (Fewer).

In the short-term, however, the technical outlook has deteriorated to the point that a break below $1877 could see it trade lower towards the next key area of support around $1800.

Wheat

As Russian troops, tanks and missiles entered Ukraine, global wheat prices leapt to a record with other key crops such as corn and edible oils also receiving a strong bid. These developments helped drive the Bloomberg Grains Index higher by 4% on the week, thereby outperforming the energy sector.

Paris and Chicago traded wheat futures jumped by more than ten percent with a disruption to shipments from the Black Sea region as well as potential risks to this seasons harvest in a Ukraine known as the “breadbasket of Europe” raising the prospect for even higher food prices.

However, with Ukraine having already shipped two-thirds of its intended exports by November last year, the short-term impact should be limited. With that in mind, the focus will be turning to this year’s harvest and with the global market for wheat, just like many other commodities currently being as tight as it is, any disruptions or reduced crop will be felt across the world.

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 Longs Trimmed Again Ahead of Spike

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, February 8. A week that included the much stronger than expected US report, but not last Thursday’s CPI shocker. The job report helped send US 10-year Treasury yield to a two-year high while stocks resumed their decline as the market priced in a more aggressive pace of US rate hikes. The dollar traded softer, especially against the euro, while a near unchanged week in commodities hid the fact that most raw materials saw strong gains with the exception of few led by a slump in natural gas.

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 Spot index reached a fresh record high during the week before ending close to unchanged after an 11% loss in natural gas offset broad gains across most other commodities and sectors. Once again, however, the continued turmoil in stocks and bonds lifting volatility probably prevented leveraged funds from adding exposure.

As a result the combined net long across 24 major commodity futures held steady at 2.1 million lots. Long liquidation across the energy sector together with pockets of risk reduction across the agriculture sector led by corn and soybeans helped offset net buying of gold, copper, soybeans, cocoa and cattle.

Energy

Instead of adding fresh longs as crude oil rallied to a seven year high, speculators instead cut their net long for a third consecutive week. A decision probably driven by a loss of momentum as the market focused on the prospect for an Iranian deal, as well as elevated volatility across other assets forcing a broad reduction in exposure.

During the past three weeks, an +8% rally in crude oil up until last Tuesday triggered a 5k lot increase in the gross short to 102k lots (One lot equals 1000 barrels) while profit taking reduced the gross long by 35k lots to 621k lots. Other major changes was a 30% reduction in the NY Harbor ULSD Diesel long while the the 11% collapse in natural gas only attracted a 5% reduction driven by fresh short selling.

Metals

Speculators continued to chase the recent volatile price action in gold, and following a 55k reduction the previous week after the hawkish FOMC meeting, the net long rose 22k lots to 85k lots (One lot equals 100 ounces) on a combination of fresh longs and short covering.

Gold’s relative big price swings within an established range tends to be an unprofitable period for many leveraged funds as they are constantly forced to adjust positions amid a constant changing technical outlook. In addition, correlation tracking trading ideas continue to suffer with golds ability to withstand surging real yields forcing short covering.

Silver’s near 3% rally triggered some additional long liquidation with the net falling to 10k lots, a two-month low. Steady trading copper which was about to attempt another (failed) upside breakout attempt was bought to the tune of 5.5k lots lifting the net long to 24.8k lots, still some 73% below the record long interest from October 2020.

Agriculture

The grains sector was mixed with continued buying of soybeans lifting the net to a nine-month high at 166k lots, being more than offset by selling of corn and wheat, the latter seeing an increase in the net short to 29k lots, the most bearish since July 2020. In softs, the sugar long was cut to a fresh 20 month low, the cocoa long jumped 130% to 34.2k while a renewed rally in coffee lifted the net long by 8% to 56k lots.

Forex

Ahead of Thursday’s US CPI shocker speculators continued to be net sellers of dollars, this time driven by EUR and GBP buying, the previous weeks laggards. As a result the dollar long against ten IMM currency futures and the Dollar Index has now during the past four weeks more than halved, dropping to a 5-1/2-month low at $10.8 billion.

The most elevated position compared with the past twelve months remain the Aussie dollar short which after three weeks of short covering was sold again. The net short at 85.7k lots is just 6% below the record reached last month.

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

Growth Worries Slow Tight Supply-led Commodity Surge

Commodities traded mixed with some weakness and profit taking emerging after US inflation surged to 7.5%, its fastest annual rise in 40 years. The nervous response to the high inflation print, which sent treasury yields sharply higher while also reinjected renewed uncertainty in the stock market, was driven by concerns an aggressive rate hike cycle would hurt economic growth more than previously expected.

For now, however, the commodity market’s main concern remains the outlook for tight conditions supporting prices across all sectors from crude oil and fuel to aluminum and copper, as well as key crops and coffee.

Weakness across the energy sector led by a mild weather slump in natural gas as well as the first weekly drop in crude oil since December, on the prospect for a revival of the Iran nuclear deal, helped send the Bloomberg Commodity Spot Index towards its first, albeit small, weekly loss in two months.

The LME Industrial metals index reached a fresh record on broad supply tightness led by aluminum and copper before suffering an end-of-week setback in response to the US CPI print and its potential negative impact on growth with a succession of rate hikes priced in over the coming months.

Industrial metals and grains

Industrial metals, led by aluminum and copper, and the grains sector led by soybeans all surged higher before being disrupted by Thursday’s eyepopping US inflation print as it may dampen the outlook for demand. Aluminum hit a 13-year high with the most energy intensive metal to produce suffering supply cuts at a time when Chinese monetary easing and infrastructure spending pledges has supported demand. Copper, which has traded within the same range for the past ten months, made another breakout attempt only to be slapped down as the CPI print hit the screens.

Soybeans and corn traded higher but off their highs as weather worries in South America continue to support a tight supply outlook. Soybean’s premium over corn reached the highest level since 2014 and with the US planting season approaching these developments could see farmers favor soybeans over corn, thereby inadvertently supporting the price of corn due to the risk of lower acreage leading to lower production during the coming season.

Weather worries in Brazil supported a renewed rally in Arabica coffee with the futures price in New York reaching a fresh 11-year high. The latest move in response to a continued drop in ICE exchange monitored stocks to 1.03 million bags, the lowest level in 22 years.

Inflation, Federal Reserve, Interest Rates and Gold

As mentioned, US January CPI rose to the highest in 40 years, and the numbers jolted Fed expectations sharply higher for coming meetings and saw risk sentiment rolling over as the Fed is seen as needing to chase this development and show some credibility. With seven rate hikes now priced in over the coming 12 months, the latest inflation print suggest that the Fed remains so badly behind the curve that it must move aggressively to catch up with the inflation debacle that is unfolding and regain some credibility.

Given that we are more than a month away from the next FOMC meeting on March 16th, some argue that the Fed may have to make a move ahead of the meeting – the first inter-meeting move for the purpose of tightening policy in modern memory.

With supply of many key commodities being as tight as they are, the prospect for higher prices remains but a flattening yield curve in US is being taken as a warning sign that the US economy, and several others that has been on a sugar high following the pandemic, are at risk of seeing an economic slowdown as central banks apply the brakes.

Into this period of uncertainty, we see continued demand for gold which despite an extended sell-off in US treasury bonds has managed to hold onto a second weekly gain. This week, ten-year yields punched past 2% with real yields rising to a fresh cycle high at -0.43%, up nearly 0.7% since the start of the year. However, the mentioned flattening of the yield curve suggests investors expect slowing growth into the oncoming rate hike cycle.

In our latest gold update we highlighted gold’s ability to defy gravity amid rising US yields and how any weakness below $1800 has so far proven to be short-lived. Support driven by gold’s credentials as an inflation hedge as well as a defensive asset during a period of elevated stock and bond market volatility as the market adjusts to a rising interest rate environment.

At the same time, we believe inflation will remain elevated with rising input costs, wages and rentals being a few components that may not be lowered by rising interest rates. With this in mind, gold is increasingly being viewed as a hedge against the market’s current optimistic view that central banks will be successful in bringing down inflation.

While asset managers have shown renewed interest through the accumulation of longs in ETFs backed by bullion, the price action has yet to trigger any increased interest from momentum focused leveraged money managers who tends to buy into strength and sell into weakness. For this segment to get involved, gold as a minimum needs to break above the 50% retracement of the 2020 to 2021 correction at $1876 which is also the 2021 high. In the other direction, failure to hold above $1780 and more importantly $1750 may signal a deeper correction.

Crude oil

Crude oil was heading for its first weekly drop in eight with the focus being the prospect for a deal with Iran paving the way for additional production and exports. An injection of extra barrels that, according to IEA’s latest Oil Market Report, is sorely missed because of the OPEC+ groups “chronic” struggle to revive production.

Plagued by under-investment and disruptions, output from the 23-nation OPEC+ alliance missed the agreed production targets by 900,000 barrels per day in January, and the IEA could see this situation continue to worsen, thereby exacerbating the current market tightness. In addition, the IEA said that the punitively-high gas prices in Europe during the final quarter of 2021 had added 250-300,000 barrels per day to Europe’s oil demand.

With Saudi Arabia being one of the few producers with a meaningful amount of spare capacity not showing any willingness to add additional supplies, the market has increasingly turned its attention to Iran and renewed efforts to revive the nuclear accord. An agreement could according to the IEA add 1.3 million barrels per day, an amount that would go a long way to stabilise the market before rising non-OPEC production, led by the US will help tip world oil.

Global oil demand, however, 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.

However, in the short-term, Brent crude oil, in a steep uptrend since early December, looks increasingly in need of consolidation, and in case of further economic growth worries and not least a Iran deal the price could drop to $83 or even $80 without changing the long-term bullish prospect. For now, the price has settled into a four-dollar range between $90 and $94.

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