WCU: Commodities focus on Trump

The combination of a stronger dollar and tightening global liquidity conditions has supported a move by many investors towards markets offering strong liquidity and thus a certain amount of protection. The US stock and bond markets both tick that box and so long as we do not see any contagion into the US market, there is still room to be optimistic that the global economy will avoid the slowdown currently being priced in. 

Industrial metals led the slump despite China vowing to protect its economy should the US decide, as expected, to move ahead with plans to expand tariffs. Crude oil remains rangebound as the focus continues to switch between supply and demand, both of which could be negatively impacted by current developments. 

Gold showed signs of stabilising with speculators holding a record short becoming tentative buyers for the first time since June. Silver and platinum, meanwhile, both fell foul to lower liquidity concerns and their industrial metal link. Silver dropped to $14/oz, a 2-1/2 year low against the greenback and a 23-year low against gold while platinum’s discount to gold expanded to a fresh record of $420/oz.

On supply

Production surveys from both Bloomberg and Platts this week showed how Opec so far had been able to offset a beginning slowdown in production from Iran. With most of the increased being contributed by one-off increases, especially from Libya, the outlook still points to a period where Opec’s total production is likely to drop as the Iranian slowdown accelerates. On that basis and until hard data or monthly surveys from Opec and IEA begin to show demand softness, the upside risk is likely to be viewed as the direction offering the least resistance. 

On demand

Rising oil prices due to the short-term impact of US sanctions may, however, create a medium-term challenge for demand growth. This as emerging markets, the main source of demand growth, suffer from a perfect storm of rising oil prices and weaker currencies.  While Brent crude trades well below the $110/b average seen between 2011 and 2014, some key oil-consuming nations are seeing prices in their local currencies at or even above that level.

Another event which has could begin to receive some attention would be an emerging slowdown in demand from China’s strategic petroleum reserves (SPR) purchase programme. A recent update from Bloomberg’s intelligence unit estimated that China's SPR purchases have accounted for about a third of annual global oil demand growth since 2016. 

A slowdown of this magnitude would go a long way to offset the potential drop in supply from Iran. Such a development, together with the already heightened risks to overall demand going into 2019, could force a rethink of the medium-term price outlook and eventually help send the price back down to $70/b – hence our call for the market to remain rangebound for now. 

Gold has stabilised around $1,200/oz as it begins to show signs of resilience following the 200 dollar drop since April.  In the week to August 28, funds bought gold for the first time in 11 weeks but the 9,000-lot reduction was still small compared with the 143,000 lots sold since June. We conclude, as mentioned in recent updates, that a bigger move is needed before short sellers start to worry.

The US-China trade war and its currency impact remains a key focus in the market. President Trump’s threat to impose tariffs on an extra $200bn in Chinese imports will undoubtedly be met by retaliatory measures from China. With no relief yet in sight for EM countries, the risk of contagion to the US stock market, however safe, is likely to increase.

In order to see a strong recovery in gold a combination of US stock market and dollar weakness is needed. Following Friday’s strong US job report for August the FOMC remains on track to hike interest rates two more times this year with the next coming at the September 26 meeting. 

With or without these developments, a break above $1,220/oz as per the chart below is likely to attract some additional buying but whether it will be strong enough the get the short-covering wheel to accelerate remains to be seen.

Energy-related events next week

‍● Sept 11: EIA’s Short Term Energy Outlook
‍● Sept 11: Opec and non-Opec Joint Technical Committee meeting
‍● Sept 12: EIA’s Weekly Petroleum Status Report
‍● Sept 12: Opec’s Monthly Oil Market Report
‍● Sept 13: IEA’s monthly Oil Market Report
‍● Sept 14: Weekly Commitments of Traders reports from ICE and CFTC