Weekly Commodity Update: Softs limping, Diesel boosts crude oil

Crude oil supported by tight fuel supply outlook

While crude oil has been mostly rangebound since July, the fuel product market has continued to tighten as supplies in Europe and the US have become increasingly scarce, thereby driving up refinery margins for gasoline and distillate products such as diesel, heating oil and jet fuel. The focus in terms of tightness remains the northern hemisphere product market where low stocks of diesel and heating oil continues to raise concerns. The market has been uprooted by the war in Ukraine and sanctions against Russia, a major supplier of refined products to Europe. In addition, the high cost for gas has supported increased switching activity from gas to other fuels, especially diesel and heating oil.

This tight market situation was recently made worse by the OPEC+ decision to cut production from next month. While the continued release of US (light sweet) crude from its strategic reserves will support production of gasoline, the OPEC+ production cuts will primarily be provided by Saudi Arabia, Kuwait and the UAE – all producers of the medium/heavy crude which yields the highest amount of distillate.

Gold nervously awaits the November 2 FOMC meeting.

Speculators and investors are likely to remain mostly side-lined until we get a clearer view on the thinking within the Federal Reserve, hence the importance of next week's FOMC meeting. According to the weekly Commitment of Traders reports, speculators in the futures market have been whipped around for the past few weeks, thereby reducing the willingness to aggressively enter the market until a clearer picture appears. The same goes for investors in bullion-backed ETFs, who have been net sellers on an almost continued basis since June. Overall total holdings have slumped to 2965 tons to a 30-month low, down 11% from the April peak.

After once again being rejected at the key $1615 support area, gold has a minimum need to break above $1735, thereby reversing a succession of lower highs, before an end to the month-long downtrend can be called. However, the path to that level remains littered with several smaller resistance levels, especially $1687 and $1700. For now and until such time momentum can be reestablished, watch yields, geopolitical developments and the dollar for directional inspiration. The latter traded higher following the ECB and BOJ meetings, thereby reducing support for commodities – especially gold where a high negative correlation has been established in recent weeks.

Earlier in the week, I joined hedge fund manager Erik Townsend on the widely listened to MacroVoices podcast for a rundown of the current developments across the commodity sector. Among the themes we discussed, were the reasons why we believe the sector will continue to do well over the coming years, despite darkening economic clouds gathering. Link to the replay here and on YouTube here.