Head of Commodity Strategy
Summary: Commodities suffered a fresh setback this past week with all sectors except industrial metals losing ground amid ample supply, mild weather, and muted risk appetite after traders ended up pricing a further delay in the timing of the first US rate cut. On an individual level, the mild winter across the northern hemisphere continues to weigh on natural gas prices, especially in the US where a price slump continues. The primary sector driving the negative performance so far this year continues to be the grains sector with three-year lows seen in corn and soybeans this past week. Meanwhile a strong week for industrial metals ahead of the reopening of markets in China next week.
Commodities suffered a fresh setback this past week with all sectors except industrial metals losing ground amid ample supply, mild weather, and muted risk appetite after traders ended up pricing a further delay in the timing of the first US rate cut. Overall, the Bloomberg Commodity Total Return index, stuck within a relative tight trading range for the past two months, traded lower by around 1.3% with the year-to-date losses rising to 2.4%. This, however, excludes under-pressure natural gas – the index trading close to unchanged on the year.
On an individual level, the mild winter across the northern hemisphere continues to weigh on natural gas prices, especially in the US where the Henry Hub futures contract slumped by more than 11% this past week to levels last seen during Covid shutdowns in 2020. The contract lost further altitude after the EIA reported a weekly inventory draw of just 49 billion cubic feet, some 100 bcf less than the five-year average, and with winter demand slowing, the surplus relative to the long-term average climbed to 15.9%, leaving ample supplies in underground storage facilities ahead of the injection season which normally starts around April.
The primary sector driving the negative performance so far this year continues to be the grains sector which during the past year has lost more than 22% with three-year lows seen in corn and soybeans this past week when the slump extended after the USDA, at its annual Outlook Forum, gave forecasts for US 2024 planting and 2024/25 ending stocks. Despite lower acreage allocations to corn and wheat, the report nevertheless showed a sharp rise in ending stocks for all three major crops, driven by increased export competition from South America to China for corn and soybeans, as well as forecast for bumper wheat crops in Russia and Europe this coming season. US soybeans stocks were forecast to expand by 38% to a five-year high, corn 16.6% to a 1988 high while wheat stocks was forecast to rise 16.9% to a four-year high. Overall, the Bloomberg Grains index slumped to a fresh three-year low with year-on-year losses reaching 32% in wheat, 26.5% in corn and 9% in soybeans.
The WisdomTree Grains, a UCITS eligible exchange traded commodity (ETC) designed to track the Bloomberg Grains Subindex Total Return, split between soybeans (36.5%), corn (35.2%, CBT Wheat (17.3%) and KCB Wheat (11%).
The metals sector traded mixed with gold suffering a setback following a hotter-than-expected US inflation print, only to recover some of its poise after retail sales failed to meet expectations. Silver, meanwhile, was heading for its best performance relative to gold since December, supported by a strong bounce across the industrial metal sector ahead of the reopening of China following their prolonged Lunar New Year holiday.
Natural gas aside, the rest of the energy sector traded mixed with recent strong gains in refined fuel contracts deflating a bit while crude oil traded near unchanged on the week, but still nearer the upper end of the relatively tight range it’s been in this year. We maintain the view that Brent is likely to stay range bound around $80 per barrel with WTI doing the same around $76, based on the assumption that a geopolitical risk premium will struggle to build amid limited risk of the current crisis in the Middle East spreading to key production areas, while support will be provided by extended OPEC+ production cuts and a general improvement in risk appetite as we approach an incoming US rate cutting cycle.
We maintain a bullish outlook for gold and silver, but as we have highlighted on several occasions in recent months, both metals are likely to remain stuck until we get a better understanding about the delivery of future US rate cuts. Until the first cut is delivered, the market may at times run ahead of itself, in the process building up rate cut expectations to levels that leave prices vulnerable to a correction. With that in mind, the short-term direction of gold and silver will continue to be dictated by incoming economic data and their impact on the dollar, yields and not least rate cut expectations.
One key focus remains the short-term rates market which has gone from pricing in more than six 25 basis points US rate cuts this year to less than four, while bets on the timing of the first cut have moved out to June, potentially leaving a very narrow window available for rate cuts. This is based on the assumption that the FOMC is unlikely to cut rates near the November US Presidential election in order to avoid being accused of showing favoritism towards the incumbent president.
Having broken below key support in the $2005-10 area, the market is currently engaged in a battle between selling from short-term momentum strategies and continued physical demand – supporting a soft floor – from central banks and retail investors, primarily in the Middle East, India and not least China’s middle class attempting to preserve their dwindling fortunes caused by the property market crisis and one of the world’s worst performing stock markets as well as the weakening yuan. Ahead of the Chinese New Year holiday this week, the World Gold Council reported wholesale gold demand in China had seen its strongest January ever with 271 tons bought while the PBoC reported the 15th consecutive gold purchase in January, adding 10 tons to their gold reserves lifting the total to 2,245 tons.
The fact that silver has managed to perform better than gold during a week of weakness highlights its dual role as an investment and industrial metal. Strength across industrial metals not only helped prevent silver from slipping below key support in the 22 per ounce area, it also ended up supporting a strong short covering bounce that saw the gold-silver ratio slump to a December low near 87 ounces of silver to one ounce of gold, from a recent peak near 92.
In the short-term, gold needs to reestablish support in the $2000 area while silver will be looking towards next week’s reopening of the Chinese markets to see whether the industrial metal sector can build on recent gains to support an attempt by silver to challenge key resistance at 23.32, the late January peak as well as the 200-day moving average.
Spot Silver (XAGUSD)
As mentioned, the industrial metal sector staged a strong comeback during a week that initially saw the Bloomberg Industrial Metal index slump to a September 2022 low before rising on growing optimism ahead of the reopening of the Chinese markets following their prolonged Lunar New Year holiday. Construction is expected to ramp up in the world’s biggest metals consumer in coming weeks, with the seasonal winter lull drawing to an end. For now, the recovery has primarily been driven by short covering from speculators, not least in HG copper futures where hedge funds and CTAs in the week to February 6 had increased their net short position six-fold to 20,500 contracts.
Overall, copper remains rangebound with China growth concerns being offset by speculation that the Chinese government will have to do more to support an ailing economy, and not least the prospect for a tightening market outlook as the green transformation continues to gather momentum and miners cut their production forecasts as they face harder-to-mine deposits, rising costs, water restrictions and increased scrutiny of new permits.
At the current price around $3.80, the HG copper futures contract trades near the center of a range that was established between the July 2022 low at $3.13 per pound and the January 2023 high at $4.355 per pound. We expect this rangebound trading behavior to continue until the expected supply tightness become more visible, especially during the second half of the year.
High Grade Copper future
Commodities articles:
15 Feb 2024: US rate cut delay drives gold below $2000
13 Feb 2024: Video: What is driving Cocoa's sweet price
9 Feb 2024: Commodity weekly: Refined product strength lifts crude
9 Feb 2024: Podcast: Year of the metals
7 Feb 2024: Crude oil supported by tightening fuel outlook
6 Feb 2024: Gold and silver turn defensive on reduced Fed rate-cut optimism
2 Feb 2024: Commodity weekly: Tight supply adds fuel to uranium and cocoa rally
1 Feb 2024: Commodities: January performance and ETF flows
30 Jan 2024: Gold and silver look to FOMC for direction
29 Jan 2024: Video: Unpacking the reasons behind soaring coffee prices
26 Jan 2024: Commodity weekly: Back in black supported by China stimulus
25 Jan 2024: Grains up on short covering; softs supported by tight supply
24 Jan 2024: Disruption risks drive specs into Brent; distorted EIA report up next
23 Jan 2024: Silver and copper in focus after recent declines
19 Jan 2024: Commodity weekly: Middle East, US rates, Bitcoin ETFs & Freight rates
17 Jan 2024: Natural gas focus switch from cold to milder weather ahead
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
Previous "Commitment of Traders" articles
5 Feb 2024: COT: Speculators chase false crude break; grain short extends further
29 Jan 2024: COT: Squeeze risks after funds sold into rising commodity markets
22 Jan 2024: COT: Commodities short-selling on the rise amid China woes and Fed caution
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 under owned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
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