Log in Open account
Australia

WCU: Fortress energy joins metals to record a weekly loss

Commodities 10 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  Energy prices showed some weakness this week despite supportive headlines, while soft commodities and precious metals led the sector to a third consecutive week of losses.

Commodities traded lower for a third consecutive week with metals both industrial and precious, as well as with soft commodities, on the receiving end of investor selling. Fortress energy also showed signs of weakness with crude oil, as highlighted last week, being hit by technical selling despite the news flow being predominantly price-friendly. 

Apart from the recent dollar strength, which reduced the appeal of metals during the latter part of April, it was the slowdown in manufacturing activity in both US and China that did most of the damage to growth-dependent commodities such as copper (a conductor of heat and electricity) and palladium (catalytic converters). 

The drop in the US ISM manufacturing index for April was particularly aggressive as it moved to the lowest level since October 2016. At 52.8, it remains in expansionary territory above 50, but broad-based declines in new orders, new export orders and production highlight the risk of a further cooling.
Bloomberg Commodity Index
The price of pork in Chicago resumed its rally with the potential risk of a significant, African swine fever-derived herd reduction in China raising demand for US exports. The size of the reduction in China has been put as high as 134 million herds by the US Department of Agriculture, the equivalent to US’ entire annual output. Apart from the damaging impact on rising meat prices, a reduction on such a dramatic scale is also going to negatively impact demand for feed such as corn and especially soybeans, which hit a six-month low during the week. 

Apart from fundamentals that help determine the long-term direction of commodities, speculators hold a major sway over short-term price movements. The table below shows how hedge funds, measured in number of futures contracts, are positioned across the major futures markets. The table, which is based on data from the Commitments of Traders report, is released every Friday by the US CFTC with data covering the week up until the previous Tuesday.

The latest report shows how hedge funds increasingly have been focusing on energy and livestock for price gains while net-short positions have been rising across metals with platinum group metals being the exception. Most of the selling, however, continues to be concentrated in grains and soft commodities such as sugar and coffee. 
Fund positioning
US farmers are currently struggling with too much stock left over from several years of strong production. So far, the spring weather prospects have not done much to dent the outlook for the coming season despite heavy rainfall and cold weather delaying the planting. These developments, together with the US-China trade war and the aforementioned slowdown in Chinese demand, have all helped drive a significant amount of selling across the sector. 

It is worth keeping in mind that hedge funds are very disciplined when it comes to maintaining and expanding positions – long or short - while momentum supports the direction. They are, however, also often the first movers once the technical and/or fundamental outlook changes. This means that once a market direction shifts, hedge funds are often those holding the largest potentially unsound positions at either the highs or lows. These situations have led some to use the term “dumb money”, but one shouldn’t forget that these funds’ disciplined approach to trading benefits them throughout the periods in between such major directional shifts.

Traders will be watching weekly US planting progress reports, released on Mondays after the Chicago close. Any delay in corn and wheat planting could trigger increased acreage switching towards later planted soybeans. In addition the USDA will release its monthly supply and demand estimates report on May 10. 

Soybeans remain troubled by the sharp, trade war-related slowdown in Chinese demand. Adding insult to injury, there is now the possibility that a trade deal might not boost demand given the deterioration in the outlook for Chinese feed buyers. 
Soybeans
Source: Saxo Bank
The combination of months of speculative crude oil buying and a sell signal on the weekly crude oil charts helped trigger the first weekly reversal in six. Tightening fundamentals led by multiple voluntary and involuntary supply disruptions (from Venezuela, Iran and now also Russia following the pipeline contamination scandal) nevertheless gave way to selling with traders responding to the negative technical price action.

US waivers granted to eight buyers of Iranian crude oil last November expired this week, but the market had concluded that Washington would struggle to bring down Iranian exports to zero. US crude oil production estimates, meanwhile, hit a new record of 12.3 million barrels/day, an astonishing 1.7 million b/d year-on-year increase, while inventories jumped to 471 million barrels, a 21-month high. 

With Saudi Arabia unlikely to provide extra barrels before being needed the short-term risks still point to higher prices. In the short term however, the battle between strong supportive fundamentals and a short-term deterioration in the technical outlook will be the focus. A break below the 200-day moving average on WTI crude oil at $61.5/b could see the market target the first major retracement level at $57.3/b. Even if that level is reached, however, it would still only reflect a weak correction within a strong uptrend. 
Crude oil
Source: Saxo Bank
Copper was down more than 3% on the week to record its biggest weekly drop since November. The price hit a 10-week low of $2.772/lb, close to its 200-day moving average before finding support after Chile’s Codelco (the world’s largest producer) said that demand was strong. The forecast for tight supply, the continued move towards electrification as well as infrastructure projects are likely to provide long-term support for copper. In the short term, however, the focus will primarily be on finding support with $2.717 representing a key line in the sand.

It was not a good week for gold either with the metal failing to build on its relatively strong performance the previous week when it managed to rally despite headwinds from a stronger dollar and US equities trading at record levels. The short-covering rally that followed the first failed attempt to break below $1,275/oz was reversed as dollar strength resumed and the latest Federal Open Market Committee meeting turned out to be less dovish than expected. 

The market has priced in at least one rate cut in 2019. Instead of entertaining that idea, however, Federal Reserve chair Powell sounded more upbeat at the central bank’s latest meetings, signalling to investors that the Fed is not ready to turn determinedly dovish just yet.
Just like the strong Q1 GDP the previous Friday surprisingly sent gold higher the same thing occurred following the monthly US job report which also proved to be on the strong side. Both signs that the selling interest remains muted and for now it points towards continued consolidation with a weaker dollar and/or stocks required to attract renewed safe-haven and diversification demand. 
Gold
Source: Saxo Bank

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
    Read full article
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

    Read full article
  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
    Read full article
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
    Read full article
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

    Read full article
  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
    Read full article
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
    Read full article
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
    Read full article
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
    Read full article
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
    Read full article
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia
Products & pricing
Asset Management
    Platforms
    Accounts & service
    General
    Other
    Legal

    Trading can result in losses. Please ensure you understand the risks.

    The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

    Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

    Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

    Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

    The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

    Please click here to view our full disclaimer.