Head of Commodity Strategy
Summary: US natural gas prices slumped on Tuesday by the most in ten months, leaving a lot of traders scrambling to reduce their long exposure at a time where extreme weather developments in the US have seen a price supportive spike in demand as well as a major but temporary slump in production. Price movements and volatility that once again highlights why 'natty' needs to be treated with respect and a great deal of caution
US natural gas prices slumped on Tuesday by the most in ten months, leaving a lot of traders scrambling to reduce their long exposure at a time where extreme weather developments in the US have seen a price supportive spike in demand as well as a major slump in production. A polar vortex sending frigid temperatures across the US this past week has resulted in record demand for gas, the fuel of choice for power generators over coal as gas prices remain relatively low, thereby acceleration withdrawals from underground storage facilities. This follows a relatively mild December where withdrawals were lower than December 2022, amid weaker demand for heating and a strong increase in production relative to the prior year.
The below charts highlight some of the recent extremes, not least the sharp rise in heating degree days, a measurement designed to quantify the demand for energy needed to heat a building, but also how the winter ‘bomb’ has forced a temporary reduction in supply to a 13-month due primarily to freeze-offs, when low temperatures freeze wells and other equipment. Overall, these developments have led to a record demand for gas, the impact of which will become visible in the coming weeks when total inventories look set to show an accelerated drop, thereby reducing the current excess of stocks relative to the five-year average, currently at 11.8%.
From a trading perspective, the short-term direction of gold and silver will continue to be dictated by incoming economic data and their impact on the mentioned timing and pace of future rate cuts. A situation made clear on Monday when ECB’s Holzmann pushed back against the market’s current pricing of six quarter percent cuts by the European Central Bank this year, giving lingering inflation and geopolitical risks. However, by the time his comments were contradicted by Villeroy, another ECB member, who said that cuts are very likely in 2024 but the timing remains uncertain, the technical damage had already been done resulting in selling from recently established longs.
Commodity articles:
16 Jan 2024: Data dependent precious metals continue their bumpy ride
12 Jan 2024: Commodity weekly: geopolitical risks lift crude and gold prices
9 Jan 2024: Q1 Outlook – Year of the metals
5 Jan 2024: Commodity weekly: Bumpy start to 2024
4 Jan 2024: What to watch in crude oil as 2024 gets underway
4 Jan 2024: Podcast: Crude oil and gold in focus as a new year begins
21 Dec 2023: Weather, rates and unrest paint muddy picture for commodities in 2023
19 Dec 2023: Crude and gas pop on Red Sea Disruption Risks
14 Dec 2023: Fed's dovish tilt adds fresh fuel to precious metals
13 Dec 2023: Video - Why gold may enjoy a Santa rally for the 7th year in a row
12 Dec 2023: Video - Investing in Uranium
1 Dec 2023: Commodity weekly: Tight supply risks boost copper; OPEC+ struggles to control crude
30 Nov 2023: Precious metals take top spot for a second month
23 Nov 2023: A nervous crude oil market awaits OPEC's next move
23 Nov 2023: Podcast: Will Santa deliver another golden gift
22 Nov 2023: Will gold and silver see another Santa rally?
17 Nov 2023: Commodity weekly: Crude overshoots; silver the comeback kid
16 Nov 2023: Podcast: Silver comeback, watch OPEC as crude oil slides lower
16 Nov 2023: Crude oil weakness adds focus to upcoming OPEC meeting
15 Nov 2023: Soft CPI lifts gold and beaten down silver and platinum
12 Nov 2023: Copper supported by green transformation demand and peak rate speculation
10 Nov 2023: Commodity weekly: Crude oil risks overshooting the downside
Previous "Commitment of Traders" articles
15 Jan 2024: COT: Grains sector slump continues; Mideast risks lift crude demand
8 Jan 2024: COT: Weakest commodities conviction since 2015
18 Dec 2023:COT: Crude long hits 12-year low ahead of FOMC bounce
11 Dec 2023: COT: An underowned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
20 Nov 2023: COT: Crude selling slows, grains in demand
14 Nov 2023: COT: Crude long slumps; agriculture sector in demand
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.
