Macro: Sandcastle economics
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Metals lead broad gains as commodities sector reaches 15-month high
Ole Hansen
Head of Commodity Strategy
Key points
- The Bloomberg Commodity TR index hits 15-month high with most sectors trading up on the month
- Crude oil hovering near bottom of range while natural gas sees improved fundamentals
- A copper squeeze, a platinum breakout and silver at 11-year closing high the highlights from a busy week in metals
- Fundamental support returning to grains, forcing the sharpest retreat of short positions since 2017
The current commodity sector rally, which kicked off with gold’s solid move higher back in March, continues to gather momentum, and this past week the Bloomberg Commodity Total Return index reached a 15-month high, thereby strengthening the technical outlook while indicating a breakout of its year-long sideways trading pattern. The index which tracks the performance of 24 major futures contracts split almost evenly between energy, metals and agriculture trades up 8.6% so far this year, with strong and broad gains across metals, both precious and recently also industrial metals being the main engine, followed by energy and now also the grains sector which trades up by around 10% this past month.
Saxo’s “Year of the metals” theme, highlighted in our Q1 outlook continues to unfold with our preferred metals being gold, silver, copper, and now also platinum showing strong gains. In our Q2 outlook, titled “Is the correction over” we highlighted some of the reasons why the commodity sector following a year-long consolidation phase, was gearing up for a rebound. Considering the fact some of the bullish triggers mentioned in the two outlooks have yet to materialise, the recent strong gains are quite impressive, and highlights a sector being supported by investment demand for metals, a tightening supply outlook for key commodities, price supportive weather developments, and not least the prospect for rate cuts later this year combined with sticky inflation supporting demand from investors seeking a hedge against inflation.
Returning to the action seen so far this month, the main focus remains on the metals sector, especially copper’s short-covering surge to a record high in New York, a technical breakout in platinum in response to forecasts pointing to a second annual supply deficit, and silver which is once again trading close to a very key technical level around USD 30 per ounce, a break above which may signal additional gains and outperformance relative to gold. Earlier this week we wrote about these developments, for copper and platinum here, as well as gold and silver here.
Strong gains across the grains sector, especially wheat, has seen the sector begin to recover after hitting a three-year low back in March. The sector is the best performing sector so far this month, supported by drought and frost damage to the Russian wheat crop, delayed corn planting in the US and major damage to the soybean crop in Southern Brazil following flooding. Developments that have all helped change the sentiment, forcing hedge funds to cut a combined record short position in wheat, corn and soybeans at the fastest pace since 2017.
Crude near bottom of range while natural gas recovers
Overall, the crude oil market has settled into a tight range near the bottom of what we expect to be the current range. This following a late April sell-off after the market concluded the Middle East conflict would likely have a very limited, if any, impact on supply and falling refinery margins pointed to tepid demand. In addition, OPEC+ have struggled to bring production in line with their targets amid continued overproduction from several key producers as well as robust production from members without a quota. With the price of Brent crude hovering below USD 90, a level quietly being targeted by Saudi Arabia and others, the upcoming OPEC+ meeting is likely to result in a rollover of current production cuts. Prices have now stabilised following the biggest flush out of speculative longs since March 2023, and from here we see the peak summer demand period underpin prices in the coming months.
Instead, the aforementioned strength in energy this past few weeks has been driven by recovering natural gas prices in the US where the Henry Hub benchmark futures trades near a three-month high at USD 2.5 per MMBtu after hitting a four-low back in Q1 when the market was troubled by a mild winter reducing demand and record production. Responding to weak prices, several US natural gas producers recently announced temporary production cut backs, and the medicine is now slowly starting to work with the overhang of gas in stocks being lowered towards the long-term average. In addition, LNG exports, an increasingly important source of demand has recovered with supply to Freeport in Texas, a top three exporting terminal, rising to the highest since January following a number of outages.
Short-squeeze drives New York copper to record
An unprecedented short squeeze helped drive copper prices in New York to an all-time high this week while the two other major futures markets in London and Shanghai reluctantly followed suit. The long-term investment case for copper continues to grow amid the prospect for rising demand towards the electrification of the world and a mining sector struggling to increase capacity to meet that demand. Establishing a new mine is incredible expensive and can easily take more than ten years from discovery to first metal, hence the reason why miners are more interested in growing through acquisitions and consolidation rather than through investments into new projects. The latest example being BHP Group’s so far futile attempt to acquire Anglo American.
However, while the long-term outlook for copper looks very supportive we have yet to see any clear evidence of physical tightness, with forward curves in contango, elevated stock levels in China and most recently a collapse in the premium Chinese buyers pay for imports. Developments that shows the latest rally being mostly driven by speculators, primarily in the COMEX High Grade contract, preferred by financial and speculative traders, while the LME contract tends to be the reference price used by producers and consumers in the physical market.
As HG copper rose relatively faster than LME arbitrage trades sold HG and bought LME but the continued rally eventually forced short sellers to cover and a squeeze followed, driving the HG price to a record premium to LME. After hitting a record high at 5.12 per pound the July HG contract has retraced lower to USD 4.94 per pound, and based on an LME price at USD 10,450 per tons the price in New York could drop further to USD 4.74 in order to get back in line.
Overall, we maintain a bullish outlook for copper as it will need to rise further to attract increase production, so any near-term weakness will likely be met by fresh demand from traders and investors. Given how far copper has travelled in a relatively short period of time, the contract can retrace all the way back to USD 4.56 or even USD 4.40 per pound without disturbing the bullish setup.
Platinum, in a down trend for the past three years finally broke higher with USD 1033 now likely to offer support ahead of USD 1015. The technical breakout was triggered by the prospect of a rising supply deficit this year and the next. In their quarterly outlook, the World Platinum Investment Council (WPIC) recently wrote “In the first quarter of 2024, the platinum market recorded a deficit of 369 koz, while for the full year a 476 koz deficit is forecast, which follows an 851 koz deficit in 2023”. Platinum has for a while been struggling amid the mentioned rangebound behaviour, resulting in the net position held by money managers gyration around neutral, potentially now adding some additional upward momentum from speculators adding exposure.
Gold maintains a solid buy-on-dip interest which has resulted in a so far very shallow correction after prices hit a record high last month. Going forward, the question is whether the current momentum is strong enough to force prices higher to a fresh record. We believe some patience is called for, not least considering the investors may need more time to adjust and adapt to current high price levels. This includes central banks, major buyers since 2022 and whether their political motivation to buy bullion lifts their willingness to pay record prices. In addition, as mentioned, it is also worth keeping an eye on silver which could create fresh tailwind on a break above the USD 30 area.
Silver has, just like gold, gone through a month-long period of consolidation before a surging industrial metal sector supported the latest bounce back towards an absolute key area of resistance between USD 29.85 and USD 30.00. Having already recorded the highest close in 11 years, a break could potentially set in motion an additional reaction from momentum following funds, currently holding a relatively small net long futures position. The gold-silver ratio, which measures the relative strength between the two metals, trades around 80.5 ounces of silver to one ounce of gold, down from a January peak above 92, yet still above support at 78.50 and not least 76.
Recent commodity articles:
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
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