Head of Commodity Strategy
Summary: Crude oil and metals, both the industrial and precious kind helped drive a key commodity index to a one-month high. The rally in agriculture commodities paused with the market adopting a wait-and-see ahead of the expected light trade deal between the U.S. and China.
It has been a relatively quiet week in commodities with the different sectors trying to weigh the impact of several key developments such as the weaker dollar, rising equities, trade talks as well as Brexit developments. The IMF downgraded global growth to the lowest level since the global financial crisis while China, the world’s biggest consumer of raw materials, saw its Q3 GDP slow to 6%, the weakest since the early 1990’s.
A combination of a weak demand at home and lower exports due to the ongoing trade war with the U.S. has taken its toll on Chinese growth, although recent economic data point to signs of green shoots beginning to emerge.
The USD weakness was spearheaded by GBP and EUR strength. The potential for a Brexit deal helped drive Sterling to a five-month high while the euro, the favourite short among speculators, reached a seven-week high.
The potential for a mini-trade deal between the U.S. and China, which could be signed in November at the APEC summit in Chile, helped support those agriculture commodities that may receive a boost from increased Chinese demand.
In addition to the prospect for increased demand from China, key crop prices in the U.S. are now also being supported by the impact of the delayed planting season leading to a delayed harvest. The yet to be harvested crops of soybeans and corn may increasingly be left vulnerable to extreme cold and rain. Something that ultimately could lead to a price supportive reduction in output.
Gold’s rangebound trading behaviour around $1500/oz extended into an 11th week with the market in need of a spark to kick it back to life. Trading up by 17% year-to-date and with the GDX ETF tracking major miners up by 30% it is only natural to see some caution emerging ahead of year-end. Gone for now is the roaring bond engine, which back in June and August helped the yellow metal break above $1380/oz and outside of its multi-year range. But despite seeing bond yields stabilize following their rapid descent, U.S. stocks near a record high and the outline of a trade deal emerging, gold has managed to avoid a major correction as the underlying demand remains.
During a four-week period up until October 15 leveraged funds reduced bullish gold bets by one-quarter or 72 million ounces to 220 million. However, in doing so and given the limited price impact of these reductions the market has grown more optimistic about a renewed push to the upside. We maintain our $1550/oz year-end forecast with the potential for a weaker dollar, growth and political concerns providing the required support.
From a charting perspective gold remains in good health having so far avoided even a minor correction. Instead of challenging support at $1450/oz, the 38.2% retracement of the June to September rally, it is now attempting a break above the downtrend from the September high.
Crude oil remains stuck with WTI trading around $55/b and Brent around $60/b. While the short-term outlook has improved, the 2020 outlook remains challenging with the International Energy Agency looking for non-Opec supply to exceed demand, thereby putting pressure on the Opec+ group to cut even deeper.
In the short-term however, the market has found support from a surprise drop in U.S. crude stocks and expectations for a robust refinery activity to meet increased shipping demand for low sulphur fuel before IMO20 regulations begins next year. Current demand for crude oil and subsequent softening into 2020 can be seen in Brent crude oil with the June-2020 futures contract trading at a discount of $2.4/b to December-2019, the current front month.
How to address this price suppressing gap between supply and demand in 2020 is likely to be a major market focus ahead of the Opec+ group meeting in Vienna on December 6. At a time of slowing global growth and with that demand for oil, the group will find itself in a position of having to cut deeper or let the price drop further in order to force an accelerated slowdown in U.S. production growth.
We maintain the view from our Q4 outlook that Brent crude oil is likely to remain rangebound around $60/b ahead of yearend.
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Head of Commodity Strategy
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy
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