Commodity weekly: Geopolitical risks lift crude and gold prices

Crude oil rises on a not yet realised supply threat

The crude oil market, in a downtrend since October, began the year consolidating within a narrow range - in Brent between $75 and $79 - as the tug-of-war between demand and supply concerns continued to create choppy but overall directionless price action. This stalemate, however, showed signs of changing with Brent making attempts to break above $80 and WTI above $75 after the US and UK launched airstrikes against Houthi rebels in Yemen, in retaliation for numerous attacks on ships in the Red Sea which have impacted normal flows of energy and goods north through the Suez Canal. In turn, the cost of shipping a container from China to Rotterdam since early December has surged from around $1400 to above $4500 dollars as the rerouting of ships leads to longer journey times and delays. An example of this is Tesla, which recently announced it would halt production for two weeks at its giga factory in Berlin due to lack of components, initially reducing production by 5000 to 7000 cars.

However, while supply disruptions are still an unrealised threat, the physical market is showing signs of actual weakness, to a certain extent reducing the geopolitical risk impact. An example of weaker demand fundamentals was signalled by Saudi Aramco after it lowered the premium it charged Asian customers for deliveries in February to the lowest level since November 2021, following a weakening of spot differentials for Middle Eastern crudes due to weak Chinese demand and rising supply from non-OPEC producers.

Having seen both Brent and WTI breaking the downtrends in place since late September, both crude benchmarks may see additional momentum buying, driving up the risk premium to levels that looks unsustainable unless a real disruption occurs to supplies from key Middle East producers. Potentially adding fuel to the rally are once again speculators – such as hedge funds and CTAs – who started 2024 with the smallest WTI and Brent net long in recent memory, not least due to the biggest gross short since 2016 have been supporting the rally through short covering. In the short-term, as per the chart below, the next key level of resistance in Brent can be found around $82, a break above which could trigger an additional technical reaction towards $85.

Overall, we see Brent crude oil remain rangebound around $80 per barrel during the first quarter with the very weak positioning, OPEC+ production restraint, and incoming rate cuts potentially leaving the risk/reward skewed slightly to the upside. The biggest downside risk is a disunited OPEC+ leading to a collapse in the current agreement to keep production down, and the upside from a major geopolitical event disrupting the flow of crude oil and gas from the Middle East.

Under pressure grains sector hits fresh four-year low

The grains sector remains under pressure with the Bloomberg Grains index hitting a fresh four-year low. The sector has been under pressure for more than a year now amid ample supply following a robust 2023/24 Northern hemisphere production season, and after recent rains in Brazil lifted the prospect for soybeans production. On Friday, the market was looking to key reports from the US government on supply and demand, US and global stock levels as well as winter wheat acreage update, to shed further light on the current state of the sector. Ahead of the US and European planting season, the market will continue to focus on weather developments in South America and the dollar, given its impact on the competitiveness of US exports relative to crops sourced from other regions. 

According to the latest update from US CFTC covering speculators positioning in the futures market, the grains and soy net short (Six contracts) reached a 3-1/2-year high in the week to January 2. In the last ten-years speculators have only held a bigger end of year short positions on two occasions, the latest being 2017. Combining this with a recent increase in open interest, indicative of a substantial short builds in these contracts. Most of these short positions have been initiated in a narrow price range and are at a significant risk of getting caught offside should the technical and/or fundamental outlook suddenly change, or the above-mentioned government reports spring a bullish surprise.