By Ole Hansen, Head of Commodity Strategy
The commodity sector started the first week of June with pockets of strength emerging following a troubled May where all sectors recorded losses, led by weakness across industrial metals and the energy sectors, driven by recession fears, a stronger dollar, the US debt ceiling standoff and doubts about the short-term direction of US rates, and growing evidence the Chinese economic recovery is sputtering.
 Ole Hansen |
The Bloomberg Commodity Total Return Index traded close to unchanged in the week after suffering a 5.6% decline during May, with gains across precious and industrial metals being offset by losses in energy, led by a near 11% drop in natural gas. The metal sectors bounced after metals from gold to copper managed to bounce from key support levels with the dollar weakness mentioned helping to improve sentiment.
Copper was heading for its first weekly gain in seven weeks after initially finding a bid despite continued weakness in Chinese economic data before receiving an additional boost on reports the government is working on new measures to support the property market. The renminbi reached a one-week high on the news and given its current elevated correlation with copper it helped further improve sentiment. Meanwhile, gold attracted fresh demand after finding support ahead of $1950 with the subsequent recovery being supported by lower US Treasury yields and weaker dollar after the debt ceiling deal was passed and the market once again priced in an increased prospect for rate cuts before yearend.
Uranium stocks surge on US nuclear bill
Uranium stocks surged around the world on Thursday after the US Senate Environment and Public Works Committee advanced a bill that would fast-track the deployment of a new fleet of advanced nuclear reactors. It would direct the U.S. Nuclear Regulatory Commission to examine its processes for licensing nuclear power plants and study whether the guidelines could be modified to quickly approve advanced nuclear reactors.
In particular, the bill calls for hastening approvals of next-generation reactors to be built at former industrial of commercial facilities and directs the NRC to coordinate efforts between the U.S. and other countries seeking to develop nuclear power and to help train nuclear safety regulators abroad. The Global X Uranium ETF trades up 10% since Tuesday while Canada’s Cameco Corp , one of the world’s largest global producers and refiner, added 12.4% to reach a 12-year high.
OPEC+ tries to regain control over prices
Crude oil prices remain anchored near a cycle low with Brent crude having been hovering around $75 per barrel for the past month. The main driver continues to be concerns about the global growth and demand outlook not only in China – the world’s biggest importer – but also the US and other key consuming regions. This focus has led to selling in the crude oil market from macroeconomic-focused funds seeking a hedge against such a slowdown.
Inadvertently, the market is once again on a collision course with some of the major producers, led by Saudi Arabia, who have yet to see any price supportive impact of the April 2 production cut. Ahead of the OPEC+ meeting on June 4, the temperature has been rising, with the Saudi Energy Minister having become very vocal in his attack on speculators.
OPEC+ wants to show unity but with Russia continuing to sell discounted crude to China and India, two of Saudi Arabia’s major customers, the weekend meeting may spring a surprise or two. Overall, while some additional initiatives to support prices can be announced, we do not expect they will include additional production cuts. The reasons are several but most importantly another cut would a) move market share away from the major Golf producers of Saudi Arabia, UAE and Kuwait to others both inside and outside of OPEC, b) come to soon after the April cut announcement which only come into effect last month and which has yet to be fully felt, and c) OPEC’s own projections still point to a price supportive tightening market into the second half.
In addition, the “buy-side” interest across five major crude oil and fuel futures contracts have fallen to the lowest level in more than ten years. And despite seeing a 12% increase to 384k contracts in the latest reporting week to May 23, driven by an increase in the Brent net long and short covering in gas oil, the total remains 43% lower compared with this time last year. Inadvertently, a situation that is now likely to provide some added tailwind through the rebuilding of long positions once the technical and/or fundamental outlook becomes more price friendly.
OPEC’s crude oil production fell by an average of 500,000 barrels per day last month according to a production survey carried out by Bloomberg. As expected, the major Middle East producers with quota all cut production in line with what had been promised at the early April announcement, but the impact was being reduced by rises from producers trailing their quotas and those without saw production increase. Overall, total production was reduced to 28.26 million barrels per day, a 15-month low.
For now, Brent crude oil remains rangebound and stuck in the $70’s, and to change that while sending a signal a low has been established in the market, the psychological $80 level needs to be challenged and broken first.
Weaker dollar and China property support package lifts copper
Copper prices in New York and London were heading for their first weekly gain in seven weeks, the rally being an extension of technical developments the previous week that pointed to -re-emerging support. Despite another set of disappointing economic data from China, the market took comfort from the fact prices managed to bounce regardless. A bounce that accelerated towards the end of the week following the approval of the US debt ceiling package and not least following news the Chinese government was working on a new basket of measures to support the property market, a key source of demand for copper in the world's largest consumer of the metal. The yuan jumped the most in two months and given its current correlation (inserted chart below) to copper it provided some additional tailwind.
Gold trades higher as headwinds from May subside
Gold returned to challenge resistance above $1980 before another strong US job report helped drive some profit taking ahead of the weekend. Still the yellow metal was on track to record its best week since April. The passing of the debt ceiling bill in the US Senate helped removed a dark cloud that had been hanging over the market throughout most of May, given its impact on the dollar and yields, both rising during May to provide headwinds while forcing speculators to trim bets on higher prices in the futures market.
The bill could see US growth take a small hit and together with US economic data released on Thursday showing some progress on getting inflation under control, it helped reignite expectations for rate cuts before year end. Key support has now been confirmed around $1950 while resistance remains at $1984, the 21-day moving average ahead of $2000.
