By Ole Hansen, Head of Commodity Strategy at Saxo

Ole Hansen

The month of March kicked off with continued and broad weakness after China and the US, the world’s two biggest commodity consuming nations, both delivered price softening news. Sentiment received a further setback after steep losses in two small US lenders – helping drive the S&P 500 index to a two-month low. The Bloomberg Commodity index, which tracks a broad basket of commodity futures spread evenly across energy, metals and agriculture, trades down 1.7% on the month and 7% on the year, with losses this month being led by energy and industrial metals.

Crude oil remains rangebound despite headwinds stacking up

The crude oil market remains rangebound with rising demand in Asia so far managing to offset darkening clouds elsewhere, especially in the US where Fed Chair Powell combatant performance on Capitol Hill this past week showed his willingness to risk a recession to bring inflation under control. While data points to a strong recovery in demand from a reopening China, the market was left disappointed after the government published the weakest growth target in decades. In addition, concerns about a banking crisis, however small, kept the risk appetite on the low side.

Overall, these on balance price negative developments, have not been enough to force the market lower and out of the ranges that have prevailed since late November. In the short-term, the macroeconomic focus is likely to override any oil market developments, unless they have a material impact on prevailing supply and demand balances. Having broken the mini uptrend within the prevailing range, Brent may in the short term be exposed to further weakness, not least driven by long liquidation from funds who in recent weeks increased their net long to a 15-month high at 286k lots or 286 million barrels. At the same time, the gross short has continued to collapse – reaching a 12 year low at just 22k lots in the week to February 28.

Gold finds support in the numbers

Gold and silver took a tumble mid-week when Fed Chair Powell, in his prepared remarks to Congress, said the Fed was prepared to increase the pace of rate hikes and to a higher-than-expected level should incoming data continued to show strength. Having failed to challenge resistance at $1864, gold tumbled before once again finding support ahead of $1800. Meanwhile, silver resumed its week-long slump, hitting a four-month low before finding some renewed buying interest around the $20 level. Relative weakness since late December has seen the gold-silver ratio surge higher from 75 (ounces of silver to one ounce of gold) to a six-month high at 91, a 21% underperformance, and it highlights the short-term challenge silver will be facing to attract fresh demand.

In the short-term, with Powell signalling an incredible data dependency, the focus now turns to incoming US data with the first being Friday’s job report, a number which on balance eased the pressure on the Federal Reserve to increase the size of its next rate hike, pencilled in for March 22. Given the level of elevated rate hike expectation currently priced in, any weakness in incoming data may now trigger a stronger positive response than otherwise warranted.