Metals lead broad gains as commodities sector reaches 15-month high

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.

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