Trade tensions trigger retreat across commodities
Global trade tensions helped trigger a broad-based retreat across key commodities. The risk of an escalating tit-for-tat trade war could hurt global growth forecasts and subsequently, demand for raw materials. Industrial metals slumped to a 12-week low, oil drifted lower as the focus turned to rising supply focus while profit taking hit key crops following the recent weather related surge.
Crude oil traded near the lower end of the range that has emerged since January. While receiving a great deal of directional input from the ebbs and flows of the stock market, a continued elevated bullish sentiment among speculative traders is being supported by robust global demand.
However, crude is simultaneously challenged by rising non-opec supply and now also the above-mentioned trade tensions.
Gold also went looking for support after failing for a second time in two weeks to break above resistance at $1340/oz. Additional weakness was seen ahead and after Friday’s strong US jobs report and after hopes of easing tensions between the US and North Korea helped send the yen lower against the dollar. A May meeting between Trump and Kim Jong Un could be the breakthrough needed to ease nuclear tensions on the Korean peninsula.
Strong non-opec oil production growth looks set to challenge Opec and Russia’s ability to maintain price stability, at least in the short-term. In its latest Short Term Energy Outlook the EIA sees US oil production averaging 10.7 million barrels/day in 2018, an increase of 1.4 million barrels/day from 2017. The IEA added to the unease when they said in their Oil 2018 report that oil production growth from the United States, Brazil, Canada and Norway would more than meet global oil demand growth through 2020.
In the week to February 27, hedge funds increased the combined long oil bet in WTI and Brent for the first time in five weeks by 36,000 lots to 1 million lots. This after cutting it by a total of 133,000 lots during the previous four weeks. The dwindling short base led to another rise in the long/short ratio to a record 12.6. This highlights a continued downside risk to oil should the technical and/or fundamental outlook turn less favourable.
The EIA continues to raise 2018 non-opec supply growth while keeping demand growth steady. Monthly reports from Opec and IEA are due this coming week on March 14 and 15.
Given the recent resilience among speculative investors they are unlikely to worry about a deeper correction as long as prices stay above $61/b on Brent crude oil and $57.50/b on WTI crude. These levels represent the 38.2 per cent correction of the June to January rally and while above the current price action, will be viewed only as a weak correction within a strong uptrend.
For now WTI crude oil has settled into a $60 to $65 range with outside market events providing most of the input for daily price swings. A close below $60/b carries the risk of an extension to the mentioned key level at $57.50/b.
Gold has settled into a 40 dollar range between $1300/oz. and $1340/oz. with the negative impact of the recent rise in US real yields being offset by the positive impact of a stronger Japanese yen. Increased stock market volatility has also played its part in recent gold gyrations. Trump’s initial tariff announcement
INDUSTRIAL METALS SLUMPED TO A 12-WEEK LOW, OIL DRIFTED LOWER AS THE FOCUS TURNED TO RISING SUPPLY FOCUS WHILE PROFIT TAKING HIT KEY CROPS FOLLOWING THE RECENT WEATHER RELATED SURGE
sent stocks lower and gold higher only to weaken again as the stock market recovered when a watered down version was announced.
US real yields — the yield you will earn after inflation — have almost doubled since the beginning of the year. Offsetting this negative development for gold has been the weaker dollar, especially against the Japanese yen.
Adding to the mix was Friday’s jobs report, the last before the March 21 Federal Open Market Committee meeting. A Goldilocks report showing strong job growth and lacklustre inflation left the door wide open for a sixth rate hike and potentially also a hiking of the forward guidance.
The previous rate hikes in this current cycle which began in December 2015 have so far triggered a repeat pattern of gold weakening ahead of a FOMC meeting only to rise strongly once the rate hike was announced.