 Ole Hansen |
By Ole Hansen, Head of Commodity Strategy at Saxo
The commodities sector has reverted to a small gain during the first two weeks of trading with strong gains in energy, and to a lesser extent softs and precious metals being offset by losses across industrial metals and the grains sector. The focus in the market remains firmly on the macroeconomic landscape where concerns about an economic slowdown, not least in China, the world’s top consumer of raw materials, are being offset by expectations that the People’s Bank of China (PBoC) may lower rates soon. In addition, several major central banks – led by the Federal Reserve – remain on track to embark on an aggressive rate cut cycle sometime in the coming months.
In addition, geopolitical risks associated with Houthi attacks on ships in the Red Sea continue to attract a great deal of attention, in the process diverting the focus in energy markets away from a current weak demand outlook. During the past couple of weeks, Brent and WTI crude oil futures have gyrated within narrow ranges, before breaking higher on Friday after the US and UK launched airstrikes against Houthi rebels in Yemen, in the process driving the geopolitical risk premium even higher.
Crude oil rises on a not yet realised supply threat
The crude oil market, in a downtrend since October, began the year consolidating within a narrow range - in Brent between $75 and $79 - as the tug-of-war between demand and supply concerns continued to create choppy but overall directionless price action. This stalemate, however, showed signs of changing with Brent making attempts to break above $80 and WTI above $75 after the US and UK launched airstrikes against Houthi rebels in Yemen, in retaliation for numerous attacks on ships in the Red Sea which have impacted normal flows of energy and goods north through the Suez Canal. In turn, the cost of shipping a container from China to Rotterdam since early December has surged from around $1400 to above $4500 dollars as the rerouting of ships leads to longer journey times and delays. An example of this is Tesla, which recently announced it would halt production for two weeks at its giga factory in Berlin due to lack of components, initially reducing production by 5000 to 7000 cars.
However, while supply disruptions are still an unrealised threat, the physical market is showing signs of actual weakness, to a certain extent reducing the geopolitical risk impact. An example of weaker demand fundamentals was signalled by Saudi Aramco after it lowered the premium it charged Asian customers for deliveries in February to the lowest level since November 2021, following a weakening of spot differentials for Middle Eastern crudes due to weak Chinese demand and rising supply from non-OPEC producers.
Having seen both Brent and WTI breaking the downtrends in place since late September, both crude benchmarks may see additional momentum buying, driving up the risk premium to levels that looks unsustainable unless a real disruption occurs to supplies from key Middle East producers. Potentially adding fuel to the rally are once again speculators – such as hedge funds and CTAs – who started 2024 with the smallest WTI and Brent net long in recent memory, not least due to the biggest gross short since 2016 have been supporting the rally through short covering. In the short-term, as per the chart below, the next key level of resistance in Brent can be found around $82, a break above which could trigger an additional technical reaction towards $85.
Overall, we see Brent crude oil remain rangebound around $80 per barrel during the first quarter with the very weak positioning, OPEC+ production restraint, and incoming rate cuts potentially leaving the risk/reward skewed slightly to the upside. The biggest downside risk is a disunited OPEC+ leading to a collapse in the current agreement to keep production down, and the upside from a major geopolitical event disrupting the flow of crude oil and gas from the Middle East.
Gold higher on haven demand with stronger US inflation print being ignored
Hours after a stronger-than-expected US inflation print for December helped send gold prices lower, but not through key support in the $2010 area, bullion prices rose strongly after the US-led airstrikes on Houthis triggered a fresh round of safe haven demand. In addition, the market was supported by movements in bond yields and short-term interest rates which concluded that firmer inflation would not derail the prospect of a precious metals-supportive cut in interest rates, perhaps as soon as March.
This past week, Saxo’s strategy team released their Q1 2024 outlook titled “What happened to the future?”. In the commodities section, we outlined the reasons why we believe 2024 could become the “Year of the metals” with focus on gold, silver, platinum and copper. In precious metals, we believe the prospect for lower real yields and lower funding costs as central bank rate cuts will drive a revival in demand from interest rate-sensitive investors. Adding to these developments a fragmented world supporting continued demand from central banks and haven demand from others, the potential for a fresh record remains on the cards.
In the short term, gold's ability to hold above key support in the $2015 area, thereby preventing additional long liquidation from funds which started the year with an elevated long position, has given bulls renewed belief in higher prices with focus now on resistance at $2088, the December 28 high.
