Trifecta of Drivers Supporting Silver

What is our trading focus?

XAUUSD – Spot gold
XAGUSD – Spot silver
XAUXAG – Gold-Silver ratio
GDX:xlon – VanEck Vectors Gold Miners UCITS ETF
IGLN:xlon – iShares Physical Gold ETC
ISLN:xlon – iShares Physical Silver ETC


Gold and silver trade a tad higher today after spending the past week consolidating around $1800 and $19. Its raising the question whether they are getting ready to continue their journey higher? With the dollar punching at major support, U.S.-China tensions on the rise and real yields moving deeper into negative territory, the foundation for a move higher is there.

In our June 9 market update we highlighted the reasons why the potential introduction of yield-curve control by the U.S. Federal Reserve could end up being gold’s best friend. Yesterday Federal Reserve Governor Lael Brainard, an influential “dove” on the Fed’s board, warned that the U.S. economy appears to be slowing. While the Fed would need to carry out more analysis she gave a strong signal that yield-curve control was coming.

Some of the major moves in gold during the past decade often started with developments in the bond market. The real yield is the return an investor get on holding a bond position once the nominal yield has been reduced by the expected inflation during the life of the bond. Rising inflation expectations would normally increase the nominal yield as investors would want to be compensated for the lower real return.

Yield-curve control locks the nominal yield at a certain maturity at a certain level above which the central bank steps in and buy whatever bonds are on offer in order to prevent yields from rising any further. Such a development would make fixed income investments utter useless as a safe haven asset, especially into a period where inflation is expected to make a comeback. Not only due to the massive amount of liquidity that central banks have provided but also due to unprecedented government stimulus creating the political need for higher inflation to support rising debt levels.

U.S Bond Market

The U.S. bond market has since April behaved as if yield-curve control was already in operation. While the yield on U.S. ten-year Notes (above chart) have been anchored within a relatively tight range between 70 and 80 bp, the real yield and breakeven have moved in opposite direction. A development supporting the fundamental investment case for holding precious metals in a balanced portfolio.

Following another shallow correction gold is once again testing the upside. The chart highlights a market in need of a deeper correction and a longer period of consolidation. So far however, the underlying investment demand has been strong enough to prevent this from happening. Demand for bullion-backed ETF’s remain firm with total holdings continuing to reach fresh record highs.

Following the March collapse, silver has now completed a dramatic V-shaped recovery to take aim at the next level of resistance at $19.65, the 2019 high. In the process the gold-silver ratio has dropped to 93.7 (ounces of silver to one ounce of gold), the lowest since February. The current triple support from rising gold, rising industrial metals and a weaker dollar could see silver attempt to further reduce its cheapness to gold, currently some 16% below the five-year average.

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

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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

Funds Rushing into Commodities

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

This summary highlights futures positions and changes made by speculators such as hedge funds and CTA’s across 24 major commodity futures up until last Tuesday, July 7. During this U.S. holiday shortened week the appetite for risk was firm with the Nasdaq 100 rising by 3.6% and the CSI 300 by a staggering 12.8%. Strong buying across all sectors lifted the Bloomberg Commodity Index by 2.4% with gains seen in all but four of the 24 major commodity futures tracked in this update.

Hedge funds responded to the favorable price movements by raising bullish bets in all but four of the 24 major commodity futures tracked in this update. While the biggest price gains were seen across the energy sector, led by gasoline and natural gas, it was short covering in the grains sector that helped lift the combine net-long back above one million lots for the first time since late January.

Energy

Despite solid price gains, both WTI and Brent crude oil were net-sold with the combined net-long falling by 26k lots to 557k lots. The reductions primarily due to long liquidation as both contracts struggled to break resistance at $41/b in WTI and $44/b in Brent. However, based on the reduction being led by long liquidation and not fresh short selling, the bullish narrative has yet to challenged. The long position in natural gas jumped by 27% as an emerging heatwave across the U.S. helped lift the price by 7%

Latest developments

Crude oil trades lower today following Friday’s rally. Key focus this week will be Wednesday’s OPEC+ meeting where the group needs to decide whether to keep the temporary 9.6 million barrels/day production cut into August or begin to restore up towards 2 million barrels/day. Reports over the weekend said the group look set to ease oil cuts as demand continues to recover.

The decision however comes at a time where Libya attempts to restore production, U.S. stocks are close to record levels while the pandemic is far from under control. Especially across the three biggest fuel consuming U.S. states. Both benchmark oil contracts in our view remain range-bound with resistance at $41 on WTI and $44 on Brent capping the upside

Metals

A relatively quiet week across the metal space with funds adding exposure to all five contracts. The gold net-long only increased by 1% during the reporting week that finished the day before the yellow metal traded above $1800/oz. for the first time since 2011. However, with funds increasing fresh short positions (+6k) almost by as much they added to the long side (+7.6k), some nervousness may emerge about the underlying strength in the market. Something that was highlighted on Friday when after having struggled to attract fresh momentum on the break above $1800/oz closed back below on virus treatment hopes,.

The HG copper net-long rose 14% to reach 31.5k lots, the highest since June 2018. This before finishing another strong week at $2.8975, a level last seen in May 2019. The 40% rally since the March low has been driven by a forceful combination of increased Chinese demand, a speculative surge and most recently coronavirus disruptions to supply from Chile and Peru, the world’s two largest producers. The latter explaining why copper, at least in the short term, can trade above pre-pandemic levels.

Latest developments:

HG Copper took aim at $3/lb during the Asian session thereby continuing its impressive run of gains that has taken it to the highest in more than two year and well above January’s pre-pandemic level. On top of the support being provided by virus-related supply disruptions from the world’s two largest producers in South America, the market now also has to deal with the risk of strikes. This after workers at an Antofagasta mine in Chile have rejected a final offer while another operation will conclude voting today on whether to accept a final offer.

Precious metals trade higher this Monday, inspired by a the general risk on that has driving stocks higher and the dollar lower. On top of this some safe have demand due to a continued surge in virus cases and US-China trade and political tensions. Adding to this copper’s impressive run of gains which has given silver a fresh boost. The price is once again challenging resistance at $19/oz while the XAUXAG ratio has dropped to 95.50. A break below the June low at 94.50 could be the trigger that signals a move in the spot price towards $20/oz.

Agriculture

Funds spent another week scrambling to adjust grain positions to a potential more friendly price outlook. Corn was bought for a second week and the net-short has now more than halved to 142k lots. The turnaround since June has been let by a pick-up in ethanol demand and most recently the surprise June 30 announcement that U.S. farmers had planted less corn than previously expected.

The wheat net-short was trimmed by 14% to 33.5k lots just before the price surged above $5/bu in response to concerns about shrinking crop production estimates in countries from France and Russia to Argentina.

Soft commodities had a mixed week with sugar being bought despite trading rangebound around 12 cents/lb. The cocoa short jumped by 90% to 21k lots, a ten-month high, as the pandemic continued to sap demand for both cocoa and coffee.

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

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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


What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

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.

Dollar Bears Hanging in There

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

Hedge funds and other large speculators were small net sellers of dollars against ten IMM currency futures and the Dollar Index in the week to July 7. Despite broad dollar weakness, which saw the Dollar index lower by 0.5%, the short only increased by 2% to $15.5 billion.

Mixed flows saw speculators buy EUR, GBP, CAD and AUD while selling JPY and MXN.

Leveraged fund positions in bonds, stocks and VIX

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


What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

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.

Commodities Weekly: Gold Pops, Oil Drops as Covid-19 Maintain its Grip

An index tracking the performance of leading commodities reached a four-month high this week with the sector being supported by gains among industrial metals and grains, most noticeably wheat and copper.

Gold meanwhile made a small but nevertheless very important move higher to the highest level since 2011 above $1800/oz. However, the Bloomberg Commodity Index, which tracks a basket of major commodities in energy, metals and agriculture, weakened ahead of the weekend as the market grew increasingly nervous about the surging coronavirus cases around the world.

In the U.S., where the three biggest fuel-consuming states are all seeing a surge in cases, real-time indicators are suggesting that consumers are changing their behavior again. In Europe, we are beginning to see signs of an acceleration in new cases, with countries such as Portugal and Bulgaria paving the way for a potential resurgence with tourism beginning to pick up over the next two months.

The risk appetite seen up until now this month was led by an eight-day government-supported buying frenzy in Chinese stocks and fresh record highs in the technology-heavy Nasdaq 100 index. With margin debt from Chinese speculators hitting levels last seen during the 2014 to 2015 doubling of the CSI 300 and subsequent 40% collapse, the government and state media stepped in with actions and warnings to stem the buying.

Grain

Grain traders are looking ahead to Friday’s ‘World Agriculture Demand & Supply’ (WASDE) from the U.S. Department of Agriculture for confirmation that the recent 10% rallies in corn and wheat can be sustained. Short covering has been the main driver, with demand for corn having been triggered by the recent lowering of the US planted acreage. The Chicago wheat future leapt to its highest price in more than two months as the latest crop estimates in major exporting countries such as Argentina, France and Russia raised questions about the level of global supply.

Spot gold

Gold finally broke above $1800/oz, thereby succeeding in what it failed to do on two previous occasions, most recently in 2012. At the same time, with silver breaking resistance at $18.40/oz, the paths towards higher prices have now opened up. The break could signal an extension for gold towards the 2011 record high at $1920/oz while silver, for now, has found resistance at $19/oz ahead of the next level at $19.65/oz.

Apart from virus-related worries adding support, another major development supporting the latest move higher has been recent movements in U.S. yields. While the nominal yield on ten-year notes remain anchored in a relatively tight range, we have seen breakeven yields, an expression of inflation, move higher leading to a drop in real yields to the current -0.8%. These developments basically highlight what a U.S. market with yield-curve control would look like heading into a rising inflation scenario.

Rising inflation expectations leading to lower real yields combined with the potential for a weaker dollar are some of the key drivers we believe will continue to support precious metals during the coming months. Adding to this, rising political tensions within the U.S. ahead of the November election and outside with China.

Gold is heading for a fifth weekly gain and, in the short-term, its ability to attract additional momentum above $1800/oz holds the key. Weakness below that level could raise the risk of another correction but, overall, our bullish outlook has not changed with the record high from 2011 at $1921/oz being the next key level to focus on – a view shared by Goldman Sachs, which sees the price hitting $2000 within the next 12 months.

The combination of rising gold and industrial metal prices should continue to support a relative stronger performance by silver. Its current relative value against gold at 97 ounces of silver to one ounce of gold remains historical low and on that basis we could see continued gold strength leading to a lowering of the gold-silver ratio, initially towards the 90 level

Oil

WTI and Brent crude oil both traded lower following several unsuccessful attempts during the past few weeks to break resistance at $41/b and $44/b respectively. Crude oil stocks in the U.S. remain close to record levels with the market now worrying that the virus surge in Texas, California and Florida, the three biggest fuel-consuming states, could slow the recent recovery in demand.

Adding to the supply gloom was news that Libya that the civil-war torn country signaled the potential restart of crude exports. This following months of almost zero production compared with 1.1 million barrels/day last December.

The International Energy Agency (IEA) in their latest ‘Oil Market Report’ sounded upbeat given the recent recovery in demand and OPEC+’s successful efforts to curb supply. However, the recent strong growth in Covid-19 cases has cast a shadow over the outlook, thereby putting at risk the market anticipation of a transformation in the oil market from a substantial surplus in 1H to a deficit in 2H.

A development that led to the IEA to finish off by a warning that the large, and in some countries accelerating, number of Covid-19 cases is a disturbing reminder that the pandemic is not under control and the risk to their market outlook is almost certainly to the downside.

While this week’s range in Brent crude has been close to the narrowest since last September, these latest developments still support our Q3 view: that Brent is likely to remain stuck within a mid-30’s to mid-40’s range.

Copper

HG copper’s impressive 45% rally from the March low has almost taken it back to the January peak at $2.886/lb. What is particularly impressive about copper’s run higher is that it has reached levels that were last seen just before China officially announced to the world they had a coronavirus problem. Since then, global economic growth has collapsed while unemployment has surged.

Copper has nevertheless managed to rally due to three developments. The pandemic has raised expectations for increased demand from infrastructure projects, especially in China. This is something we are however yet to see confirmed through a pick up in the stock market value of construction companies. Adding to this is strong speculative buying, not only on the exchanges in New York and London but most likely also in China given the mentioned surge in risk appetite. The biggest impact however has been a cut in supplies from Chile, the world’s biggest supplier, after thousands of miners have fallen ill with the virus.

While momentum is strong, we are increasingly skeptical about copper’s ability to rally further. The RSI, at its most overbought level since November 2016, is calling for a pullback to somewhere between $2.75/lb and $2.65/lb. The short-term focus in order to determine the next move will be on the behavior of speculators continued appetite for risk and supply developments in Chile.

Boxed in Crude Oil Looking for a Break

What is our trading focus?

OILUKSEP20 – Brent Crude Oil (September)
OILUSAUG20 – WTI Crude Oil (August)
XOP:arcx – Oil & Gas Exploration & Production
XLE:arcx – Energy Select Sector SPDR Fund (Large-cap US energy stocks)


Crude oil has gone increasingly stale during the past week as opposing forces keep the market locked in a relative tight range. Three days in a row the August WTI crude oil contract has settled within a 2 tick range, with most of the daily price action taking its cue from movements in the U.S. stock market. The wall of resistance the market has struggle to break above is $41/b, the low on Friday March 6 from where the market gaped lower in response to Saudi Arabia’s short-lived price war and just before global demand collapsed.

Almost seven months after the Covid-19 became known outside of China several countries are considering the reintroduction of virus-control measures as the number of infected remains out of control. Not least in the U.S. where the three biggest fuel consuming states are struggling with a rising number of infected and deaths. With OPEC+ production cuts looking solid the market is instead focusing on and worried about the demand impact from the current infection surge.

The U.S. Independent holiday weekend normally signals the beginning of the summer driving season when refineries run flat out to meet demand for gasoline. So far the pick up has failed to emerge with GasBuddy estimating that demand during the holiday weekend was down by more than 22% compared with last year.

WTI crude oil is currently stuck in a tight $41/b to $37/b range and even tighter if focusing on the shown trendline which is currently providing support at $40/b.

Later today at 14:30 GMT the U.S. Energy Information Administration will publish its ‘Weekly Petroleum Status Report’. The American Petroleum Institute in their weekly update last night raised the prospects for a bigger-than-expected rise in crude oil stocks while seeing a small reduction in gasoline stocks.

The market is likely to be focusing on the implied demand for gasoline and distillates as renewed weakness could lead to a price damaging continued counter seasonal rise in fuel stocks.

As per usual I will post the result and market reaction on my Twitter handle @ole_s_hansen.

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

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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

Synchronized Breakouts in Gold and Silver

However, the intense focus on the $1800 level in recent weeks may trigger some sooner-than-expected exhaustion with short term tactical positions already positioned for a break. On that basis, while we see further upside, today’s price action could end up being critical for the short-term direction of both metals.

What is our trading focus?

XAUUSD – Spot gold
XAGUSD – Spot silver
XAUXAG – Gold-Silver ratio
GLD:arcx – SPDR Gold Shares ETF
GDX:arcx – VanEck Gold Miners ETF


Spot gold has broken above $1800/oz thereby succeeding what it failed to do on two previous occasions, most recently in 2012. With silver at the same time breaking resistance at $18.40/oz the path towards higher prices have now opened up. The break could now signal an extension for gold towards the 2011 record high at $1920/oz while silver could take aim at the next level of resistance just below $19/oz followed by $19.65/oz.

NOTE: The intense focus on $1800/oz in gold in recent weeks may risk triggering some exhaustion in the market. The anticipated break and overriding bullish market sentiment may have already attracted an army of short-term tactical long positions. If the break, measured on today’s closing price, fails to attract fresh momentum buying we may see some profit-taking emerge. Overall however we see no reason why additional gains can not be achieved over the coming weeks and months. But an interesting day lies ahead no doubt.

The single biggest input that has driven the latest move higher has been the recent developments in U.S. yields. While the yield on ten-year notes remains anchored in a relatively tight range, we have seen breakeven yields, an expression of inflation, move higher leading to a drop in real yields to the current -0.8%. These developments basically highlight what a U.S. market with yield-curve control would look like into a rising inflation scenario.

This below chart remains our favorite when it comes to deciphering what moves gold. It highlights the importance of keeping track of the U.S. economy through developments in yields, especially real yields which shows the expected return an investor will receive holding a U.S. ten-year bonds once inflation (breakeven) has been subtracted.

While EM physical demand remains very weak due to Covid-19 lockdowns and recession, the demand for “paper” gold has more than offset those declines. Total holdings in bullion-backed ETF’s has reached 104 million ounces, up 25% so far this year. Hedge funds meanwhile have returned to the buy-side after cutting their net-long in COMEX gold futures to a one-year low. During the past three weeks – up until June 30 – they increased their net-long by 5.4 million ounces (54k lots) to 18 million ounces, some 37% below the February peak.

The break above $1800/oz, the highs that got rejected in 2011 and 2012 would from a technical perspective support a move to the 2011 record high at $1920/oz.

Silver

Silver which reached a $50/oz record high in 2011 has been on a downward trend against gold since 2016. The weakness as seen through the XAUXAG ratio culminated in March when it hit a record 125 (silver ounces to one ounce of gold). Since then silver has managed to claw back most of those losses but the current level at 98 remains well above the three-year average around 80.

However, the combination of a rally in both gold and industrial metals should provide the support needed for the metal to reclaim some lost ground. For now the break above $18.40/oz could signal an initial move to $18.95/oz followed by the 2019 high at $19.65/oz.

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

 

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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

Robust Commodity Buying Despite Mixed Price Action

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

This summary highlights futures positions and changes made by speculators such as hedge funds and CTA’s across 24 major commodity futures up until last Tuesday, June 30. During the week, appetite for risk across other asset classes temporarily received a knock with the S&P 500 trading softer while the dollar and bonds rose.

The performance across 24 major commodity futures were mixed with the Bloomberg Commodity Index rising 0.4%. The energy sector saw weaker oil and higher natural gas prices. The metal sector was generally bid with the exception of platinum while the agriculture sector finally received a bid led by corn, coffee and cotton.

Despite the mixed price action hedge funds overall increases bullish bets by 28% to 810k lots with buying seen in 18 out of the 24 commodity futures tracked in this.

Energy

Crude oil was bought despite trading lower by around 3% during the week. The combined net-long in Brent and WTI crude oil rose by 16.8k lots to 583.4k lots,a five-month high. Brent crude oil, which has been lacking the accumulation seen in WTI since the March low, was in demand with the net long rising by 6% on a combination of longs being added and short positions being cut.

The price collapse in natural gas to a multi-decade low on June 26 helped attract profit taking on short positions and fresh buying. Overall the combined net-long of four Henry Hub related swap and futures contract rose by one-quarter to 124k lots.

Metals

Gold was bought for a third week, albeit at a much reduced rate than the previous two weeks. Overall the net long rose by 2% to 180k lots, a nine-week high, but still some 105k lots below the February peak. Silver’s continued roller coaster ride attracted both buyers and sellers, but with the net overall rising by 22% to 36k lots.

The copper net long jumped by 59% to reach 27.7k lots, a two-year high, after the metal continued to rally in response to rising virus related supply concerns from mines in South America.

Agriculture

Buyers finally returned in earnest to corn after the U.S. Department of Agriculture on June 30 estimated plantings would decline about 5 million acres below what farmers told the government they intended to plant in March. The elevated net short was reduced by 27% to 202k lots. Short covering supported coffee with the 3% rally driving an 8% reduction in the net short to 25k lots.

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

 

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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

First Week of Dollar Buying in Six

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

This summary highlights futures positions and changes made by speculators such as hedge funds and CTA’s across forex, bonds and stocks up until last Tuesday, June 30. During the week appetite for risk temporarily received a knock with the S&P 500 trading softer while the dollar and bonds rose.

Note: The data was released on Monday instead of Friday due to the U.S. federal holiday.

The dollar strengthened against all ten IMM currency futures while the Dollar Index rose by 0.8%. In response to these developments, speculators cut bearish dollar bets by 16% to $15.1 billion, the first week of dollar buying in six.

Most of the action was concentrated in EURUSD with the net long seeing a 16% reduction (€2.4 billion) from a two year high. Other smaller but still noticeable changes were long liquidation in the Japanese yen and additional short selling of the British pound.

The Aussie dollar, having rallied by more than 25% since the March low saw further short-covering with speculators being the least bearish in more than two years.

Leveraged fund positions in bonds, stocks and VIX

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

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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

Gold Bulls Risk Delayed Gratification in Q3

The Covid-19 pandemic’s impact on the global economy will become increasingly apparent during the third quarter. While the Q2 was mostly about putting out fires and preventing a total collapse of the global economy, the repair work now begins in earnest. Since April, the economic impact of months of lockdowns had been painted over by a massive rally in global stock markets. However, support from the Fed (wall of liquidity), TINA (there is no alternative) and FOMO (fear of missing out) has started to show cracks.

The belief that we can and will return to normal within a few quarters will most likely turn out to be wrong, not least considering the often-embarrassing shortfalls in key supplies some rich countries experienced during the early stages of the pandemic. As our CIO Steen Jacobsen writes in the intro, we fear that Covid-19 may speed up the deglobalisation process that started with the US-China trade war, while also signaling the death of free markets as the primary driver of economies.

It is with these developments in mind that we take a look at what may lie in store for key commodities during the coming months. This period is likely to see low to negative growth, rising levels of debt and eventually rising inflation driven by the growing cost of national self-sufficiency.

Gold remains the only key commodity to show a positive return so far in 2020.

Following April’s rollercoaster ride it has settled into a range around $1700/oz. Gold’s ability to frustrate, then eventually reward, the patient investor is likely to be on full display during the third quarter. Multiple positive tailwinds are currently being offset by what we believe will be a short-lived decline in inflation.

We maintain our bullish outlook for silver, and for gold now that its premium to silver has narrowed. There are several reasons to believe that gold will make a move to at least $1800/oz in 2020, followed by a fresh record high in the coming years:

  • Gold acts as a hedge against central banks’ monetisation of financial markets
  • Unprecedented government stimulus and the political need for higher inflation to support debt levels
  • The inevitable introduction of yield controls in the US, forcing real yields lower
  • A rising global savings glut at a time of negative real interest rates and an unsustainably high stock market valuation
  • Raised geopolitical tensions on the Covid-19 blame game, ahead of the US November elections

The lack of momentum since April and the disinflationary environment currently playing out have driven a 55% reduction in bullish gold futures bets since the early 2020 peak. A positive change in the fundamental or technical outlook are likely to force traders off the fence and back into the market. This development could also see gold break higher.

Silver’s record cheapness to gold helped drive a strong recovery in late Q2.

Our bullish outlook for gold will take silver higher. But given its often-volatile behavior, and the current growth outlook, we think silver may struggle to recover more ground versus gold. The gold-silver ratio, a key measure of relative strength, may in a best possible scenario reach 95 ounces of silver to one ounce of gold. A major second wave of the pandemic, however, may see it weaken back towards 110 – reflecting a 10% underperformance from current levels.

HG Copper’s recent recovery to pre-pandemic levels will challenge the metal’s ability to reach higher ground in Q3. A recovery in Chinese demand combined with supply disruptions at mines in South America were the triggers that finally forced speculators back into long positions following the break above $2.50/lb. The risk of a second wave – especially in the US and China, the world’s two biggest consumers – may force a rethink and we see no further upside during the coming quarter.

The outlook for crude oil demand remains challenged by the not-yet-under-control Covid-19 pandemic. While OPEC+ have made a gigantic effort to support the global market through record production cuts and high compliance, the potential for crude oil to reclaim further ground will be limited during the second half of 2020.

Cross-border travel restrictions by land and air remain in place around the world, and with millions of workers unlikely to get their jobs back anytime soon any recovery in oil demand may prove slower than expected. Even at this early stage, some are starting to speculate whether global demand reached a peak in 2019 from where it will begin to decline.

Going forward, we are likely to see a collective change in how we as humans and countries behave and interact with each other. Some of these changes in preferences and behaviour could create lasting changes in global energy consumption:

  • Video conferences to substitute domestic and international business travel
  • Working from home becoming an accepted alternative to the office
  • Supporting alternative means of transportation such as biking where possible
  • Consumers cutting number of international holidays for “staycations”
  • National self-sufficiency and deglobalisation increasing demand for domestic services and goods
  • Preference for online shopping rather than shopping centres

A second wave will not generate a repeated demand shock similar to the one witnessed during April. Most countries will instead opt to keep as much of their economy open as possible, given that the economic fallout would be even worse. The collapse back in April, however, still highlights oil’s ability to overshoot. While we expect the price of Brent to recover back to a $50 to $60/b range in late 2020 or early 2021, the short-term outlook points toward consolidation, with the price potentially spending most of the third quarter within a $35/b to $45/b range.

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

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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

Gold, Silver, Crude Oil and Grains

What is our trading focus?

XAUUSD – Spot gold
XAGUSD – Spot silver
XAUXAG – Gold-Silver ratio
COPPERUSSEP20 – HG Copper
OILUSAUG20 – WTI Crude oil
CORNSEP20 – CBOT Corn


Gold

Gold has reached another new high for the cycle with $1800/oz now within striking distance, a level that the futures contract (GCQ0) has already reached. The market capped its best quarter in four years as the WHO warned that the worst of the pandemic is still to come. The break higher looks intact as long as the daily closes remain north of 1,745-1,750 area. Gold will continue to look for direction either from new policy measures aimed to force inflation higher or negative real rates more negative or some more participation from the US dollar and other commodities, especially silver.

Silver

Silver has outperformed gold this week with the XAUXAG ratio falling below 98 (ounces of silver to one ounce of gold). With copper racing higher to reach $2.75/lb. on virus related supply worries and firming Chinese demand, silver’s short-term upside potentials could be better than golds. Especially on a break above the March high and trend line resistance around $18.40/oz.

Crude Oil

Crude oil trades higher, but within the established range, after the American Petroleum Institute reported a bigger-than-expected stockpile drop last week of 8.2 million barrels. If repeated by the EIA in their weekly report today at 14:30 GMT it may offer some additional support to a market currently worried by the demand impact from renewed lockdowns and the surging number of virus cases in the U.S.

Also supporting the price was the monthly production report from the Energy Information Administration which found that U.S. production dropped by 5.3% in April to 12 million barrels/day. Thereby confirming the slowdown seen in the weekly estimates reported every Thursday in the mentioned inventory report.

A monthly OPEC oil production survey carried out by Reuters found the group collectively cut production to the lowest in two decades last month. The additional deep cuts promised and delivered by Saudi Arabia and other Gulf Arab members helped push the groups compliance above 100%.

We maintain the view that crude oil is likely to remain range-bound while the market tries to figure out the demand impact from renewed virus cases. Weak demand from motorists during the key holiday demand season may pose a threat to the current stability. Not least considering the pressure on OPEC+ to deliver a prolonged and economic painful production cut extension beyond July.

Chart source: Saxo Group

Looking ahead to the inventory report the market, apart from looking for a drop in crude stocks, will be looking for signs of renewed weakness in gasoline and diesel consumption, just as the July 4th holiday signals the beginning of the U.S. summer driving season. As per usual I will post results and charts on my Twitter @Ole_S_Hansen

U.S. grain markets led by corn and soybeans rallied strongly on Wednesday after a government report showed a bigger-than-expected reduction in the planted acreage. Corn jumped 4% after surveys over-estimated the U.S. acreage by the largest amount since at least 2005. U.S. farmers entered the fields this spring at a time of peak uncertainty with low prices, poor outlook and the pandemic raging. As a result they reduced the corn acreage to 92 million acres (95.1 expected) and soybeans to 83.8 from 84.8 expected.

A separate USDA report however showed that domestic quarterly grain stocks were bigger than expected. Primarily due to lower ethanol linked demand for corn and reduced soybean exports to China during the lockdown.

Corn’s dramatic turnaround from a $3.15/bu low on Monday to a $3.45/bu high today could force continued buying from funds holding an elevated short position. Support now at $3.39/bu.
For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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

Commodity Weekly: NatGas Slumps, Copper Jumps as Virus Maintain its Grip

Gold continues to challenge a multi-year high, crude oil looks range-bound, copper firm on virus related supply disruptions while too much natural gas has driven the price to a 25-year low.

The commodity market looks set to finish Q2, or the recovery quarter, with strong gains in energy and metals. Overall, however, the Bloomberg Commodity Index which tracks a basket of key commodity futures has only managed a small return relative to other markets. The reason being is the drag from agriculture commodities, some of which have been weighed down by ample stocks and reduced demand from consumers in lockdown.

However, as we end what has been a very volatile and at times troubling first-half, driven by the worst pandemic-related slump in global growth since WW2, the outlook for the second-half remains somewhat troubling. The pandemic remains out of control in several regions while the renewed surge across the U.S. and the recent scare in Beijing all highlight the risk this invisible enemy is still posing.

More forward-looking assets like equities, some of which have returned to pre-COVID levels, can look beyond the short-term risks and price in a recovery supported by a wall of money from central banks. Commodities do not have this luxury as they are spot assets which depend on supply and demand. This means that financial investors can control the price for a certain period of time but if the underlying fundamentals fail to catch up a reversal often happens.

Some commodities, such as crude oil and fuel products, have now reached levels where the price may need support from continued improvement in underlying fundamentals to run higher. However, with virus cases continuing to rise some concerns may emerge that could limit the upside.

Natural gas

NG hit a 25-year low after the Energy Information Administration (EIA) reported a bigger-than-expected weekly jump in U.S. inventories. Some of the dynamics that have driven the recent weakness are similar to those that drove crude oil prices sharply lower back in March. Global gas prices have slumped in recent months on a combination of a mild winter leaving too much gas in storage ahead of the pandemic which further cut demand from industrial users.

The biggest risk is the potential for stockpiles in underground caverns hitting capacity before winter demand returns to draw stocks back out. If things continue on the current path we are likely to see even lower prices over the coming weeks and ultimately the only cure may end up being forced production cuts similar to what U.S. shale oil producers experienced recently.

Weak global prices as reflected by the benchmarks in Europe (Dutch TTF) and Asia (Japan/Korea) have reduced the ability for exporters to make money when taking transportation and the liquefaction process into account. As a result, U.S. exports have halved since the late-December peak.

Crude oil’s latest run up

Crude is in it’s the highest levels since March 8 – when Saudi Arabia initiated its short-lived price war – has paused. Instead of focusing on the successful efforts by OPEC+ to support the market through lower supply, the market has instead, for now, turned its attention to risks that a renewed spike in COVID-19 cases may slow the process towards a further recovery in global demand.

Especially in the U.S. where several states, including Texas – the center of the U.S. oil industry – have halted their re-openings after infections jumped and authorities in Houston, Texas, said the ICU wards have reached capacity. In the meantime, U.S. stocks of crude oil continue to surge – reaching a new record of 541 million barrels to which can be added the 19 million barrels that have temporarily been deposited in government-controlled storage facilities.

For that to change much now hinges on the level of gasoline demand during the U.S. summer driving season from July to September. A period during which crude stocks are normally run down as demand from refineries pick up. The latest virus surge may see an even bigger contraction in miles travelled than the 15% year-on-year decline predicted by the American Automobile Association.

The OPEC+ group of producers have been doing a fantastic job in cutting production, highlighted by Russia’s 40% drop in exports from its western ports expected next month. But for the agreement to remain successful, the group also need to see light at the end of the tunnel with regards to when the taps can be turned back on. While we do not expect a repeat of the draconian lockdown measures seen recently, a flare up of new virus cases may further postpone the timing of when production can be raised, thereby potentially challenging the resolve of the group.

We maintain the view, as mentioned in our soon to be published Q3 outlook, that Brent crude oil will most likely trade within a mid-30’s to mid-40’s range during the coming weeks and potentially months.

Gold

Gold finally managed to break higher to reach a fresh 8-year high at $1780/oz, thereby getting tantalisingly close to the next key area of contention around $1800/oz. An area that between 2011 and 2012 proved to be a major battle ground and one that the bulls eventually lost when gold began its year-long slump towards $1050/oz.

While gold suffered a setback, it did not challenge support below at $1745/oz. A weekly close above $1765/oz and increased participation on the long side from hedge funds, who had cut longs by 50% in recent months, may send a positive technical signal to the market.

Source: Saxo Group

The current outlook remains overwhelmingly gold friendly and that’s also why the metal is likely not to go in a straight line. Instead, it will frustrate and at times challenge the resolve among many traders with short-term trading strategies. Our positive view on gold is, however, well known and in recent updates we have highlighted the reasons for this.

Instead, lets focus on why this past week’s attempt struggled almost as soon as the break had occurred. Silver’s inability to break above $18/oz despite the tailwind from gold helped trigger some weakness across these two metals from sellers of recently establish longs, especially in silver. The gold-silver ratio spiked back above 101 while platinum, another metal that often enjoys gold’s tailwind, saw its discount to gold reach a record $970/oz. In order for the rally to have legs we need to see demand for the minor metals pick up as well.

Copper

Copper is an example of a metal that initially suffered only to rally strongly on virus-related developments. The market tanked back in March when the pandemic spread across the world and cut demand. Since then the focus on global stimulus measures, projects and improved demand in top consumer China have supported the price.

More recently the supply side has received increased attention with many mines in South America operating skeleton staff to combat the pandemic.

As a result, the price of High Grade Copper challenged a four-month high on Friday while LME Copper reached the psychological important $6000/t level. Both contracts have now managed to recover more than 75% of the January to March losses with further upside not being ruled out with governments anxiously looking for projects to boost their economies.

Source: Saxo Group
Source: Saxo Group

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

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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

Gold’s Upside Attempt Being Scuppered by Silver

What is our trading focus?

XAUUSD – Spot gold
XAGUSD – Spot silver
XAUXAG – Gold-Silver ratio
GLD – SPDR Gold Shares ETF
GDX – VanEck Gold Miners ETF


Gold’s break to a fresh 8 year high has been missing one key ingredient for it to proper challenge the next key resistance at $1800/oz. Silver’s inability to break above $18/oz despite the tailwind from gold has triggered some weakness across these two metals from sellers of recently establish longs, especially in silver. The gold-silver ratio has spiked back above 101 while platinum, another metal that often enjoys gold’s tailwind, has seen its discount to gold temporarily reach $970/oz.

The underlying fundamentals have not changed and we still see gold trade higher to challenge $1800/oz and beyond. But in order for the rally to have legs we need to see demand for the minor metals pick up as well. That has clearly not happened yet according the latest move.

Silver’s failure with support from gold to build a base above $18/oz has triggered profit taking. (Char source: Saxo Group)
Silver’s failure with support from gold to build a base above $18/oz has triggered profit taking. (Char source: Saxo Group)
As a result traders have for now abandoned attempts to push gold higher to $1800/oz (Chart source: Saxo Group)
As a result traders have for now abandoned attempts to push gold higher to $1800/oz (Chart source: Saxo Group)
Platinum often enjoys some ‘catching up’ buying from relative value players. So far that has not happened with the discount to gold instead reaching a fresh record at $971/oz. (Chart source: Saxo Group)
Platinum often enjoys some ‘catching up’ buying from relative value players. So far that has not happened with the discount to gold instead reaching a fresh record at $971/oz. (Chart source: Saxo Group)

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 Oil Headwinds on Virus and Technicals

What is our trading focus?

OILUKAUG20 – Brent Crude Oil (August)
OILUSAUG20 – WTI Crude Oil (August)
XOP – Oil & Gas Exploration & Production
XLE – Energy Select Sector SPDR Fund (Large-cap US energy stocks)


Crude oil’s latest run up to the highest levels since March 8 – when Saudi Arabia initiated its short-lived price war – has paused. Instead of focusing on the OPEC+ successful efforts to support the market through lower supply, the market has instead, for now, turned its attention to today’s U.S. stockpiles report and concerns that a renewed spike in COVID-19 may slow the process towards a further recovery in global demand. This ahead of the peak season for gasoline demand during the annual holiday season.

Since the April low WTI crude oil has been trading within a rising wedge formation, currently between $42.20/b and $37.70/b. The resistance level also ties in with the price required to close the gap that opened up following the March 8 price war declaration. On Tuesday the price temporarily retraced more than 50% of the January to April sell-off but failed to close above. At this stage we view the short-term risk as being skewed towards a high volume breakout of the lower trend line than a continuation.

Source: Saxo bank
Source: Saxo bank

Media Reports

Several media reports from the past couple of days have also begun to sow some doubt about how much longer the rising demand-led rally narrative can be sustained. A renewed surge in COVID-19 cases in the U.S., an out of control situation in other countries combined with the recent scare in Beijing all very clearly highlighting that the invisible enemy has not yet been defeated. And while governments will use lockdowns measures as a very last resort due to the destructive impact on already reeling economies, these developments may still impact how we collectively behave in the public space.

Reuters report that China is likely to see a slowdown in the record pace of crude oil imports witnessed during the second quarter. Strong demand from independent refineries are likely to slow on a combination of storage facilities filling up with cheap crude oil, the recent rally in Brent crude oil back above $40/b and not least the prospect for fuel demand, following the latest outbreak in Beijing, being exposed to a second wave of lockdowns.

If confirmed the slowdown in demand is going to occur just as the current OPEC+ deal to curb production expires. A prolonged period of keeping production low are likely to challenge to the individual resolve of members of the group, some of which are desperate to increase production and revenues.

In the U.S. meanwhile the WSJ reports that refineries are struggling to make ends meet due to weak margins. The so-called 321 crack spread which reflects the profitability of refining three barrels of WTI crude oil into two barrels of gasoline and one barrel of ULSD (ultra-low-sulfur diesel) currently trades around $13/b, almost one-third below the seasonal average price. Weak profitability due to weak demand could drive lower output in order to avoid a further spike in fuel stocks.

The consequence being lower demand for crude oil and with that rising stock levels, not least considering the prospect of U.S. oil producers beginning to increase production. A development that can only be solved either by lower crude oil prices and/or stronger demand. The latter potentially not happening anytime soon with the pandemic refusing to loosen its grip. The article finish with this warning from Energy Aspect: “If summer fuel demand falls short of expectations, refiners will sell crude they bought in anticipation of a recovery”.

Finally the impact of a slower-than-expected pickup in demand is also being felt in India. Just like China, refineries have taken advantage of low prices and during April filled their tanks. While a pickup in fuel demand is expected over the coming months the pandemic’s grip on the economy cannot be ignored and may slow that process and with that demand from one of the world’s top importers.

Later today at 14:30 GMT the U.S. Energy Information Administration will publish its “Weekly Petroleum Status Report” or in short, its stockpile report. The American Petroleum Institute last night published a mixed report with crude oil stocks rising to another record while product stocks both fell.

While crude oil is expected climb and reach a new record around 540 million barrels, the market will also be looking for a rebound in production. This following last week’s big 0.6 million barrel/day drop, that was partly due to the passage of Tropical Storm Cristobal, which forced a lot of producers to shut output in the Gulf of Mexico.

Staying on the refinery subject the market, apart from looking for a drop in gasoline and distillate stocks will also be expecting another pickup in demand for both fuels. Last week the implied demand (4-week average) for gasoline and distillates trailed the five-year average by 1.5 million barrels/day and 0.7 million barrels/day respectively.

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 Bought, WTI Sold as COVID-19 Worries Return

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

This summary highlights futures positions and changes made by speculators such as hedge funds and CTA’s across 24 major commodity futures up until last Tuesday, June 16. During a week where appetite for risk temporarily received a knock amid worries around a re-acceleration of COVID-19 cases and continued uncertainty around the speed of the U.S. and the global recovery.

The S&P 500 ended the reporting week down 2.4% while the yield on U.S. ten-year notes reversed lower to their established 0.6% to 0.8% range. Speculators almost doubled their dollar short despite seeing the Dollar Index rise by 0.7% while the Bloomberg Commodity Index lost 1.5% with all but five of the 24 futures contracts tracked in this update being sold. Overall the net-long was cut by 8% with the biggest reductions seen in WTI crude oil, natural gas, copper, wheat and coffee while gold, corn and sugar attracted fresh buying and short-covering.

Energy

WTI crude oil’s ten week run of rising long bets paused with speculators cutting their net long by 27k lots to 354k. This during a week where U.S. petroleum inventories reached a fresh record. It was however a relative small reduction considering the 255k lots funds had added since early April. With the net long in Brent holding steady at 185k lots traders are likely to have concluded that the recent weakness was nothing more than a long overdue correction and not a reversal.

Also a sign that the market, at least for now, assumes that rising COVID-19 cases or a second wave will not be met with the same draconian lockdown measures seen back in March. Thereby supporting the narrative of a continued recovery in demand and with that higher prices. If the momentum can be carried into this week, the market is likely once again to focus on closing the price gaps ($41.05 on WTI and $45.18 on Brent) left open following the Saudi price war declaration back on March 8.

Bullish natural gas bets were cut by 41% as the price suffered a near 9% loss with demand cuts from milder weather and a pandemic related drop in LNG exports weighing on the market.

Metals

Buyers returned to gold for the first time in four weeks with the net long at 143k lots still close to a one-year low. It was one of the few commodities benefiting from the temporary risk off that hit other markets during the week. With GCc1 ending last week at $1753/oz, the second highest weekly close in this cycle, the stage has been set for a potential fresh attack from bulls over the coming weeks. Unless hedge funds have moved strategic long futures positions to the currently buoyant ETF market, a breakout is likely to force them back into the market after having halved bullish bets since February. Our latest thoughts on gold can be found in our Commodity Weekly from last Friday.

The risk off sentiment that benefited gold helped drive a 35% reduction in recently established copper longs. Silver meanwhile saw a 17% increase in bullish bets with the net at 28k lots still some 60% below the February peak.

During the coming week the market will be watching some key levels in order to gauge the strength of the latest attempt to break higher. Spot gold is this Monday morning at the current level ($1752/oz) on track to record its highest daily close since 2012. For a breakout to occur the price however needs to move above the May 18 high at $1765.50.

Silver meanwhile has yet to break any significant levels with a break above $18.50/oz needed for it to attract enough momentum to potentially challenge the 2019 and Feb-20 highs. Also watch the gold-silver ratio for relative strength between the two metals. Following the recent silver weakness which saw the ratio move from 94.5 to back above 100 it is trading lower to to 98 (ounces of silver to one of ounce of gold) this Monday.

Agriculture

Buyers returned to corn for the first time in three months as the slow price recovery seen since early April finally started to yield short-covering and fresh buying. A rising global stock pile of wheat helped drive the price of CBOT wheat back below $5/bushel and the net-short above 30k lots to a 13 month high.

Cocoa and coffee meanwhile are showing no signs of the V-shaped recovery shown via the strong performance in stocks and general appetite for risk. Coffee has dropped below $1/lb in its longest slump in 10 months as a record Brazilian production and a weak Brazilian real meet muted demand from out of home demand through restaurants and coffee shops. Demand for cocoa, which is closely linked with GDP growth has dropped to a two-month low amid mounting worries that the slowdown will hurt demand. Last week both saw increased selling from funds with the cocoa position switching back to a net short while bearish coffee bets reached the highest since last November.

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

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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

Natural Gas Stocks on Route to Challenge Capacity

What is our trading focus?

NATGASUSJUL20 – Natural Gas, front month
NGV0 – Natural Gas, October 2020
NGX0 – Natural Gas, November 2020


Global natural gas prices continue to struggle with an overhang of supply weighing on the market. Following a prolonged period of below normal demand, US and global inventories have built to a seasonal high level. The recent mild winter across the Northern Hemisphere was followed by the Covid-19 pandemic, both reducing demand from consumers during the winter and more recently from industrial users during the lockdown period.

While crude oil has been sent on the road to recovery on a combination of OPEC+ production cuts and a revival in global demand, natural gas prices in the U.S. and Europe may stay under pressure during the coming months as stock piles continue their seasonal build, potentially towards capacity.

U.S. natural gas futures for delivery in July trade just above support at $1.60/MMBtu ahead of the March low at $1.52/MMBtu. Without a strong pickup in demand due to warmer weather or increased industrial demand, the short-term risks point to lower prices still.

Later today at 14:30 GMT, the weekly inventory report from the U.S. Energy Information Administration is expected to show a stock build last week of 84 billion cubic feet (bcf), just slightly below the five-year average for this week at 87 bcf. A build of this size will bring total gas in storage to 2.9 trillion cubic feet (tcf), some 18% above the five-year average. The charts below show the developments which have led to the current weak price action.

While consumption has been hurt by weaker industrial demand during the pandemic, production has also suffered a setback due to the rapid reduction in U.S. shale oil production. Unfortunately a rising venue for demand, i.e. exports of LNG, has also seen a sharp reversal with lower gas prices across the world reducing the profitability of exporting LNG when taking the cost of transportation and liquefaction into account.

Source: Bloomberg and Saxo Group

Just like WTI crude oil briefly collapsed into negative territory back in April when Cushing, the delivery hub was close to hitting capacity, the current trajectory of natural gas in storage highlights the challenge the market may face over the coming months. Following the seasonal path of stock builds, natural gas in storage is currently on route and at risk of hitting capacity before end October 2020 when the winter withdrawal season kicks in. The risk of forced production shut ins are likely to keep the price under pressure during the coming weeks, unless a prolonged heatwave arrives to lift demand for cooling.

One way to track the potential stress in the market is by following the spread between the October (NGV0) and November (NGX0) futures. The spread is pricing the transition from injection to withdrawal and currently it is trading at a very elevated -41 cents/MMBtu. A year ago the same spread for 2019 traded at -8 cents before expiring close to flat last September.

Source: Saxo Group

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 Weekly: Crude Oil Consolidates on Fresh Virus Concerns

A sense of déjà vu emerged across markets this past week with some behaving like they did back in Q1 when the Covid-19 pandemic sent asset prices sharply lower. Since April, the economic impact of months of lockdowns had been painted over by a massive rally in global stock markets. The support, however, from the Fed (wall of liquidity), TINA (there is no alternative) and FOMA (fear of missing out) showed its first cracks this week.

Despite a very dovish message from the U.S. Federal Reserve, markets have returned to risk-off mode with the dollar reclaiming some lost ground and the S&P 500 index on Thursday experiencing its biggest drop since March 6. Treasury yields were heading toward all-time lows thereby supporting gold while crude oil’s somewhat speculatively fueled rally came to halt after the price had run ahead of current fundamentals.

The combination of the U.S. Federal Reserve seeing a long road to recovery and the World Bank confirming the deepest global recession since WW2, and not least the risk of a second wave building in the U.S. and some other countries, has all but confirmed that the much touted V-shaped recovery is going to be very difficult to achieve.

Crude Oil

The outlook for demand for key commodities, not least energy, remains challenged by the not yet under control Covid-19 pandemic. While the situation in Europe, with the exception of the U.K., and China among others has improved, globally it is still worsening with a record number new cases being reported – mostly in the Americas and South Asia.

There are more and more indications that a possible second ware of the pandemic could be taking hold in some U.S. states and that was the key driver behind the latest market developments. Not least considering that most countries experiencing a second wave, including the U.S., are unlikely to adopt renewed lockdowns measures for fears of the economic impact.

These developments helped send crude oil sharply lower to record its first weekly drop since April. The risk of a second wave slowing the recovery in global demand will pose multiple challenges. Not least to the OPEC+ group of producers who just recently managed to agree a one-month production cut extension.

These cuts now translate into spare capacity which can be brought back when demand has recovered and the global overhang of stocks have been lowered. The group can for a period control supply, but not demand, and a weak recovery in demand may challenge the group’s resolve with the risk of quota cheating emerging.

The impact of Saudi Arabia’s ill-timed price war back in March continues to be felt in the U.S. where millions of extra barrels of imported oil from the Kingdom has helped send commercial stocks to a record high. While these flows will slow over the coming weeks, the positive impact on prices may not materialize for some time due to the combination of elevated gasoline and not least distillate stocks and the slow process with which demand continues to recover. Adding to this the risk that some shale oil producers may start to increase production as long forward prices remain around current levels.

Both WTI and Brent crude oil did not manage to close the gaps that were left open when the markets collapsed in early March after Saudi Arabia embarked on its short-lived price war. Instead, the market behavior following the agreement by OPEC+ members to extend the 9.7 million barrels/day production cut until end July, ended up signaling the beginning of an overdue correction/consolidation.

Hedge funds have been strong buyers of WTI crude since early March with the net-long reaching 380 million barrels in the week to June 2, the largest bullish bet on WTI crude oil since August 2018. While our longer-term bullish outlook hasn’t changed the next few months may look a bit more challenging with renewed Covid-19 outbreaks in the U.S. being the trigger that reduces the speculative position.

Precious metals

Gold’s inability, following the dovish FOMC meeting, to find a way through resistance above $1750/oz helped trigger some profit taking before renewed stock market and Covid-19 worries helped provide fresh support. While not offering any new initiatives, such as yield-curve control, the FOMC did provide a supportive outlook for gold. Official rates expected to be kept at zero through 2022 while robust monetary support will be provided through the continued buying of bonds.

We maintain our bullish outlook for silver and not least gold now that its premium to silver has narrowed. The main reasons why we expect to see a minimum move to $1800/oz in 2020 and a fresh record high over the coming years are:

  • Gold acts as a hedge against Central Bank monetization of the financial markets
  • Unprecedented government stimulus and political need for higher inflation to support debt levels
  • The inevitable introduction of yield controls in the US forcing real yields lower
  • A rising global savings glut at a time of negative real interest rates and unsustainably high stock market valuation
  • Raised geo-political tensions on Covid-19 blame game ahead of U.S. November elections
  • A weaker U.S. dollar

Base metals

HG Copper was only surpassed by gold this week as it raced higher to reach $2.71/lb, the highest level since January before drifting lower as virus focus returned. The recent break above $2.50/lb, a key level of support-turned-resistance, finally saw hedge funds join Chinese speculators and turn bullish on the metal. Apart from the fresh accumulation of speculative longs, the rally from the March nadir has been driven by improved industrial demand in China, virus-related supply disruptions in South America and more recently a steady decline in stocks held at exchange-monitored warehouses, both in London and not least in China

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

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by COT, part of Saxo Bank Group through RSS feeds on FX Empire

Crude Oil Demand; Gold Longs cut Again

Saxo Bank publishes two 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 below summary highlights futures positions and changes made by hedge funds across 24 major commodity futures up until last Tuesday, June 9. Appetite for risk remained high that week, not least following the better-than-expected US job report on June 5. The S&P 500 rallied 4.2%, the dollar index lost 1.4% while bond yields jumped. The Bloomberg Commodity Index climbed 1.5% with gains seen across all sectors with the exception of precious metals.

A mixed week in commodities which despite broad price gains did not yield much in terms of major position changes. Crude oil continued to be bought albeit at a much reduced pace, fuel products were sold on rising overhang of stocks while natural gas held steady. Precious metals remained out of favor with the gold and silver longs dropping further while enthusiasm for copper attracted strong buying. Grains, led by corn, continued to be sold while the sugar position flipped back to long. Thereby becoming vulnerable to profit taking after the rally’s main engine, crude oil, began looking exhausted.

Energy

Buying of crude oil slowed despite another week of strong gains for both WTI and Brent crude oil. WTI saw the smallest amount of buying in this cycle with bullish bets close to a two-year high. Elevated levels of fuel products in the U.S. drove a reduction in the gasoline (RBOB) net-long to a three-year low and a rise in the distillate (ULSD) short to a three-month high.

Metals

Gold selling extended into a third week with the net long falling by 9k lots to 127k lots, a one-year low and down 55% since the February peak. Copper meanwhile and as expected attracted additional buying following the technical break above $2.50/lb, a key level of support-turned-resistance since 2017. The near five-fold jump took the net-long to 14k lots, a 15-month high.

Agriculture

Ahead of Thursday’s global supply and demand outlook report from the US Department of Agriculture, the corn short had extended to 297k lots, a 13-month high and biggest seasonal short in at least 20 years. This despite a continued steady recovery in the price. The wheat short jumped by 88% ahead of the WASDE report which pinned global stocks next year at a record high. The soybeans long meanwhile more than doubled on increased Chinese buying.

The soft sector was mixed with the oil-related rally in sugar helped flip the position back to a net long while the Arabica coffee short more than doubled in response the deteriorating technical outlook.

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

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by COT, part of Saxo Bank Group through RSS feeds on FX Empire

Broad Dollar selling with Euro Long at Two-Year High

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

Hedge funds and other large speculators increased their dollar short against ten IMM currency futures and the Dollar Index by 22% to $8.5 billion, a seven-week high. The risk-on seen during the week supported fresh buying of the euro, reduction of yen longs while short positions in other pairs continued to be scaled back.

The change was led by the euro where the net-long reached 96k lots, the most bullish since May 2018. Adding to the rising dollar short was short covering in GBP, CAD, AUD and NZD. The Japanese yen meanwhile was sold with the net-long dropping to the lowest since March.

Leveraged fund positions in bonds, stocks and VIX

What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

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.

non-commercial

This article is provided by non-commercial, part of Saxo Bank Group through RSS feeds on FX Empire

Crude Oil Weakness Emerging Following OPEC+ Decision

What is our trading focus?

OILUKAUG20 – Brent Crude Oil (August)
OILUSJUL20 – WTI Crude Oil (July)
XOP:arcx – Oil & Gas Exploration & Production
XLE:arcx – Energy Select Sector SPDR Fund (Large-cap US energy stocks)


Crude oil’s behavior following the agreement by OPEC+ members to extend the 9.7 million barrels/day production cut until end July, could be signaling the beginning of an overdue consolidation phase. With WTI and Brent crude oil almost having closed the gaps established after the March 6 collapse, when Saudi Arabia began their price war, the question is how much further the price can climb without additional improvements in the fundamental outlook.

Challenging the current price is the risk of non-compliance from members of the OPEC+ group, the risk to demand from renewed flareups in Covid-19 cases and reports that US shale oil producers are already preparing to increase production. Adding to this the risk of how the OPEC+ group, now holding a vast amount of spare capacity, will manage to return supply to market without adding too much too soon.

The July WTI contract managed to retrace 50% of its Covid-19 and Saudi price war related sell-off to reach $40/b, now resistance. With support at $35/b the risk of a 10 to 15% correction has emerged. Hedge funds have been strong buyers of WTI crude since early March with the net-long reaching 380 million barrels in the week to June 2, the largest bullish bet on WTI crude oil since August 2018. While the prompt spread contango has almost disappeared, currently at 25 cents/b compared with $3.5/b on April 28, the temptation to book profit may also weigh on crude oil’s short-term outlook.

The outlook for demand remains challenged by the not yet under control Covid-19 pandemic. The WHO has warned about a ‘worsening’ virus situation worldwide, something that was repeated by Fauci, US leading infectious disease expert, yesterday when he said the pandemic is far from over. While the situation in Europe and China among others have improved, globally it is still worsening with a record 135,000 new cases reported on Sunday with almost 75% of the most recent cases coming from 10 countries – mostly Americas and South Asia.

Cross border travel restrictions by land and air remain in place around the world and with millions of workers unlikely to get their jobs back anytime soon, the recovery in demand may prove slower than expected. Some are even at this early stage beginning to speculate whether global demand reached a peak in 2019 from where it will begin to decline. Going forward we are likely to see a collective change in how we as humans behave and interact with each other. In the latest Covid-19 Report from Rystad Energy, publicly available here, they mentioned some of the changes in preferences and behavior that could create lasting changes in global energy consumption:

  • Video conferences to substitute domestic and international business meetings
  • Home office accepted to be both convenient and efficient
  • Biking to substitute car driving in cities opening up roads exclusively for bikes
  • Domestic holidays substituting international
  • Preference for domestic services and goods – security of supply back on the agenda
  • Preference for online shopping rather than shopping centers

Turning the attention back to the current markets we have two risk events on tap later today. At 14:30 GMT the EIA will publish its “Weekly Petroleum Status Report” while in the US, the FOMC meet to discuss the current economic outlook and will announce its latest decision at 18:00 GMT. This will be followed by Fed Chairman Powell’s statement and press conference where the market will try to figure out what policymakers could do next.

Last night the American Petroleum Institute surprised the market by reporting a 8.4 million barrel rise in US crude oil stocks, thereby contradicting surveys pointing to a near 2 million barrel decline. Something that is highlighting the still uneven and patchy road to rebalancing. Gasoline stocks are expected to fall as demand from motorists continue to improve, while the current Achilles heel, distillates which among other comprises diesel and jet fuel, may see another chart bursting rise to a fresh record.

Demand for products and crude oil production may end up attracting most of the interest in today’s report. Last week distillate supplied, a measure of consumption, collapsed to a 21-year low as demand for diesel and jet fuel remain patchy. Production in response to the recent surge in WTI is expected to find a plateau soon from where it will start to recover. As per usual I will post the result and charts on my Twitter profile @ole_s_hansen.

WTI and Copper Bought, Gold sold as Risk on Reigns

Saxo Bank publishes two 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 below summary highlights futures positions and changes made by hedge funds across 24 major commodity futures up until last Tuesday, June 2. A week where appetite for risk driven by stock market euphoria leading to hopes of a V-shaped recovery continued to be the dominant force.

The Bloomberg Commodity Index rose 0.7% with gains in energy, metals and grains being off-set by losses in softs and livestock. Speculators only made small changes to their positions with the net-long across 24 major commodity futures increasing by 2% to 545k lots. Buying of WTI crude oil, gas oil, copper and cotton being off-set by selling of gold, soybeans, corn and coffee.

Energy

Buying of WTI crude oil extended into a 9th week with funds adding 17k lots to bring the net-long to 380k lots or 380 million barrels, the highest since July 2018. Short sellers added small length for a second week thereby keeping the long/short ratio steady. The Brent crude oil net-long saw a small reduction as short-sellers added length for the first time since March. Despite dropping by almost 9% the natural gas long was kept close to unchanged with both long and short positions rising.

OPEC and its oil-producing allies agreed on Saturday to extend the group’s historic 9.7 million barrels/day production cut by one month to the end of July. As we highlighted in our latest update the risk of failure, despite concerns about non-compliance from a handful of producers, was limited given the need to support the price while lockdowns are eased and demand recover. A recovery that potentially risks being slower than the market expects due to the risk of second waves.

According to the latest weekly EIA report, demand for distillates in the US, which is mainly diesel, hit a 1999 low some 30% below the five-year average. Gasoline demand meanwhile has recovered but was 1.9 million barrels/day or 25% below the average for this time of year. With the deal having been all but priced in ahead of the meetings the risk to crude oil remains balanced. Speculative momentum may see both WTI and Brent take aim at closing the gaps to $41.05/b and $45.18/b respectively.

However much higher prices at this early stage in the recovery carries the risk of becoming self defeating as it invites back increased production from high cost producers, not least along the US shale patch. The market may soon also begin to focus on rising production after July from core OPEC members while Libya is showing signs of returning production.

Metals

The lack of short-term tactical opportunities together with the rising risk appetite seen across other asset classes, continued to cut interest in gold. Last week speculators cut bullish bets on COMEX gold futures by 8% to 137k lots, a one-year low. This during a time where demand for gold via bullion backed exchange-traded funds registered a new record with total holdings rising above 100 million ounces. Part of this development may be a product specific challenge that the futures contract currently faces.

The transatlantic disconnect that occurred between gold futures traded in New York and spot gold traded in London back in March left many market makers with heavy losses. This after the spot to futures spread, the so-called Exchange for physical or ETF, blew out thereby forcing cut backs and reduced risk appetite among market makers normally assuring a well functioning market place. These developments are likely to have led to some investors and traders instead focusing on bullion-backed ETFs.

The silver net-long held steady at 27k lots with the near 4% rally failing to attract fresh long positions. Potentially due to the fact that silver’s recent outperformance against gold reached its target as highlighted through the gold-silver ratio. Additional gains in silver may now require support from gold which struggled towards the end of week when a stronger than expected US job report sent real yields higher and gold lower.

HG Coppers continued recovery and flirtation with key resistance at $2.50/lb – that got broken on Thursday – finally saw the net switch to a long position for the first time since January. Dictated by the mentioned breakout funds are likely to add additional speculative length with the price now potentially taking aim at $2.60/lb.

Agriculture

The UN FAO’s Global Food Price Index reached the lowest monthly average since December 2018 last month. Covid19-related declines extended to a fourth month with all sub-indices with the exception of sugar seeing declines. A development which is also being replicated by the speculative exposure with hedge funds holding net-short positions in seven out of the ten grains and softs contracts tracked in this report.

Selling of corn continued with the net reaching a one-year high at 282k lots. This despite signs of a recovering price in response to increased ethanol-linked demand, The rising fuel cost theme also supported another week of short-covering in sugar. Hardest hit was Arabica coffee after the recent technical break below key support wiped out the remaining long with a net-short of 7k lots emerging.

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