Head of Commodity Strategy
Key points
Despite an end of month wobble, the Bloomberg Commodity Total Return index was heading for a third monthly gain with all sectors except energy making positive contributions, highlighting an asset class that increasingly has been firing on all cylinders, read sectors, amid the outlook for tightening supply supporting key commodities from copper, aluminium and silver to several food commodities from cocoa, coffee and now also wheat. Meanwhile, a succession of fresh record highs in gold has yet to deter demand from central banks and investors around the world, seeking a hedge against sticky inflation, a rising global debt pile and multiple geopolitical uncertainties.
US and especially EU gas prices jumped with the Dutch TTF benchmark hitting a year high in response to unplanned outages in Norway, renewed concerns about the remaining supplies from Russia, and not least the prospect for increased competition for LNG from Asia where extreme weather is putting pressure on Asian power markets. Staying with energy, Brent trades down around 4% on the month, near key psychological support at USD 80, and it has now lost more than half the strong gains seen between December and early April. A recent weakness in refinery margins and weaker time spreads in both WTI and Brent suggesting oil demand has hit a soft patch following a strong first quarter.
However, despite the current softness we still see demand picking up in the coming months amid seasonal strong demand in the Middle East and Asia towards cooling, as well as the US summer holiday driving season, and strong demand for jet fuel. All eyes now on the 2 June OPEC+ meeting and how the group will respond to prices trading close to USD 80 instead of USD 90, a price level preferred by most members.
We view the 75-dollar in Brent as a major line in the sand below which OPEC+ would likely step up their efforts to support prices, especially considering an outlook for global demand growth rising above trend this year. With that in mind, it would not be a surprise should the group signal an extension of the current cuts until year-end, in the belief that demand will recover before then.
Brent crude oil, first futures month continued (daily)
Copper suffered a sharp setback after the recent surge to record highs in London and New York further deterred demand from physical buyers. Not least in China, the world’s top consumer of copper, where data for weeks has been telling a story about demand softness that financial traders thoroughly ignored amid the bullish price momentum, and the long-term focus on supply struggling to meet strong demand towards the electrification of the world. Recently the mentioning of AI and an anticipated demand for power to run a growing number of data centres supporting AI, helped attract new investors into copper, some perhaps not fully understanding how commodities work.
Commodities are spot products where the price is determined by the prevailing balance between supply and demand, not what that balance may look like in six or twelve months’ time. The recent copper squeeze in the High Grade Copper future traded in New York occurred after physical traders sold into a rising premium between the High Grade copper price in New York and the LME price in London. However, as the spread due to speculative demand for HG futures continued to dislocate, short sellers were eventually forced to buy back their short positions, thereby triggering a dislocation which is only now getting worked back to normal levels.
The break below USD 4.75 per pound on the High Grade contract signals a short-term loss of momentum potentially leading to a period of consolidation while speculators adjust elevated long positions, both in London and New York, and the focus returns to current fundamental developments, not least in China where copper stocks monitored by the Shanghai Futures Exchange continue a counter-seasonal rise, hitting 322,000 tons, well above the 130,000 tons seasonal average. A development that signals ample supply while challenging the bullish conviction held by traders and investors who - rightfully in our opinion – expect higher prices in the future.
High Grade Copper, first futures month continued (daily), including SHFE stock levels
In precious metals, the spotlight has shone the strongest on silver this past month, especially following its technical breakout above USD 30, a level that had offered resistance on several occasions since 2020, and now support. Gold meanwhile shows signs of settling into a wide range while awaiting further clues regarding the timing and depth of US rate cuts, currently reduced to just one this year, and not until December after the US Presidential election.
Silver’s credentials as a semi-industrial metal have served it very well during the past month when gold extended its gains to fresh record while copper led the industrial metal sector higher. From an investment perspective, silver trades well below its USD 50 record from April 2011, and as such is an easier choice for some than gold which continues to reach fresh record highs. Increased demand for copper in the coming years from the electrification of the world and worries about mining companies being able to meet that demand growth has driven copper to a record high this month before temporarily in our opinion hitting the buffer.
Looking at silver some of the same supply / demand dynamics can be seen, adding an additional layer of support. Most recently the price, as mentioned, finally broke above USD 30, and it helped trigger fresh buying from momentum-focused traders. Geopolitics play a minor role when it comes to silver as opposed to gold where central banks in order to de-dollarize their reserves have been hoovering up gold in record amounts since Russia invaded Ukraine, an action that led to the freezing of Russia’s assets abroad.
Silver tends to be more volatile than gold and its relation can be traded through the gold-silver ratio which recently slumped to an August 2021 low at 72.70 ounces of silver to one ounce of gold, down from a January high above 92. It shows that while silver most of the time travels in the same direction as gold, it often happens at a much faster pace, both up and down. The biggest short-term risk to silver is a change in the technical and/or fundamental outlook which may trigger aggressive long liquidation from speculators.
Spot silver, weekly
The grains sector remains on track to record a 6.5% gain this month, thereby extending a succession of monthly gains to three, with gains being driven primarily by surging wheat prices in Chicago and Paris. Both rallying strongly since hitting a multi-year low back in March. That low point concluded an almost two-year decline that saw prices fall by close to 60% from a record high, reached in May 2022 following the Russian invasion of Ukraine.
While the price declines seen during this time were triggered by two good harvest years, not least in Russia, the world’s top exporter, the recent bounce has been driven by fresh weather concerns, not only in Russia but also in key production regions in Europe and Ukraine which is heading for its driest May on record.
The biggest boost to prices has been led by a dramatic downgrade to the production outlook in Russia where drought and frost have reduced this year’s crop from an estimated 93 million tons last month to 82 million tons currently. To put this into perspective, Egypt one of the world’s top buyers of wheat last year imported around 11 million tons, so in just one month the production outlook in Russia has been lowered by that number.
Weather maps covering southern Russia and Ukraine will be watched closely in the coming weeks for signs of an improvement, but so far they still point to dryness. It is however still too early to sound the alarm bells given the current outlook for a good crop season in the US, and a potential improvement in Russia, but overall global stock levels of wheat may fall to a nine-year low in the coming season, and it highlights how increasingly volatile weather developments may impact the production of key food commodities from wheat, coffee, cocoa, olive oil and orange juice.
Recent commodity articles:
27 May 2024: COT: Gold and crude see increased demand as dollar longs plummet
24 May 2024: Commodity weekly: agriculture surges, metals fall on fading rate cut hopes
23 May 2024: Podcast: 2024 is heavy metals
22 May 2024: Crude oil struggles near two-month low
17 May 2024: Commodity weekly: Metals lead broad gains
16 May 2024: Gold and silver rally as soft US data fuels market optimism
15 May 2024: Copper soars to record high, platinum breaks out
14 May 2024: COT: Crude long slump; grain purchases surge
8 May 2024: Fund selling exacerbates softening crude outlook
8 May 2024: Grains see bumpy start to 2024 crop year
6 May 2024: COT: Commodities correction spurs muted selling response
3 May 2024: Commodity weekly: Grains boost, correction in softs and energy
2 May 2024: Copper's momentum-fueled rally halts amid weakening fundamentals
29 April 2024: COT: Gold bulls stand firm despite recent correction
26 April 2024: Commodity weekly: Sticky inflation and adverse weather focus
23 April 2024: What drives the gold and silver correction ?
22 April 2024: COT: Declining momentum may signal shift toward consolidation
19 April 2024: Commodity weekly focus on copper, gold, crude and diesel
17 April 2024: Copper rally extends to near two year high
16 April 2024: Crude oil's risk premium ebbs and flows
15 April 2024:COT: Hedge funds propel multiple commodities positions beyond one-year highs
12 April 2024: Gold and silver surge at odds with other market developments
10 April 2024: Record breaking gold highlights silver and platinum's potential
8 April 2024:COT: Speculative interest in metals and energy gain momentum
5 April 2024: Commodity market sees broad gains, enjoying best week in nine months
4 April 2024: What's next as gold reaches USD 2,300
3 April 2024: Q2 Outlook: Is the correction over?
3 April 2024: Cocoa: A 50% farmgate price boost a step in the right direction
2 Apr 2024:COT: Gold and crude longs maintained amid strong underlying support
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
