Commodity rally resumes to trigger multiple breakouts
The commodity sector is showing renewed strength, and following a six-week period of consolidation, the Bloomberg Commodity index was on track for its best week in four months.
While individual news and developments supported all three sectors, the overall performance was also being supported by a surprise drop in US Treasury yields accompanied by a weaker dollar.
Several key commodities, including crude oil, copper and gold broke higher, thereby potentially signalling renewed momentum attracting fresh buying from speculators.
While the global number of new daily Covid-19 cases look set to hit record levels, the market has taken comfort from strong economic data from the world’s two biggest economies.
Crude oil was heading for its best week since early March and in the process both WTI and Brent crude oil broke out of their consolidation ranges.
Strong economic data from the US and China, the world’s biggest consumers, was enhanced by positive demand outlooks from Opec and the International Energy Agency. Despite shortterm Covid-19 related challenges, both increased their outlook for 2021 demand based on an expected strong pickup into the second half.
Production restraints from the Opec+ group of producers, has supported a rapid reduction in the massive overhang in global oil inventories that built up last year.
Together with vaccination campaigns gathering pace, these developments have raised the prospect for increased mobility and increased fuel demand into the second half.
The potential risks that may scupper fresh attempts to drive prices higher are the prospect for rising US production and the resumption in the Iranian nuclear negotiations driving a further increase in oil sales on top of what has already been registered since
Biden won the US Presidential election.
In addition, several nations, including India, are grappling with sharp rises in Covid-19 cases which could see the number of new global cases hit a new record soon.
Having broken out of the month-long consolidation range,
Brent will now be looking to build on this with the price potentially settling into a new range between $65 and $70 but probably not much higher until the current virus surge is brought under control, as the risk of spreading would challenge the elevated expectations for 2H demand growth.
Crude oil, copper and gold traders will be watching the weekly closes following multiple breakouts of recent ranges. Crude oil trades up more than 6 per cent on the week with the now levels of support being $65.50 in Brent and $62.25 in WTI.
Copper meanwhile has broken its recent consolidation range to trade above $4.14/lb and gold has recovered to break above $1,765/oz which is now support. Gold, the most interest rates and dollar sensitive commodity, rallied to challenge and eventually break resistance at $1,765/oz a key level that we have been highlighting in our latest updates.
While rates and the dollar sets the overall direction, it is clear the loss of momentum in recent months was a major reasons why money managers at the beginning of March had cut bullish futures bets by 85 per cent from the peak last February.
During the past month, however, buyers started to return and the recent rejection below $1,680 helped trigger a 53 per cent increase in the net long to 7.7 million ounces during the week to April 6.
A sustained break higher would significantly improve the technical outlook and potentially kickstart renewed momentum and with that demand from investors in both futures and exchange-traded funds.