Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
Commodity weekly: Energy sector gains counterbalance metal consolidation
Ole Hansen
Head of Commodity Strategy
Key points:
- The Bloomberg commodity index trades flat this month following a three-month run of gains with rising softs and energy prices being offset by a consolidating metal sector and renewed weakness in grains.
- The macroeconomic landscape remains mixed with falling US yields and rising rate cut hopes offsetting a stronger dollar.
- Crude bounce continues supported by rising diesel prices amid hot weather demand, and hedge funds rebuilding longs.
- Gold’s shallow correction points to continued buy-on-dip activity despite the temporary absence of the People’s Bank of China.
The commodities sector continues to consolidate following three months of gains, with individual performances this month turning more mixed, overall leaving the Bloomberg Commodity Index close to flat on the month, with gains in softs and especially energy being offset by an overdue consolidation phase in metals and renewed weakness in grains. On an individual basis, cocoa has resumed its rally on continued tight supply concerns, while natural gas prices in the US have staged a comeback amid production restraints and robust hot weather-related demand from consumers, not only in the US but also abroad via LNG.
The macroeconomic landscape remains mixed as well, with concerns about growth in China being offset by an accelerating growth outlook elsewhere. Trade sanctions against China are also adding an additional layer of uncertainty at a time when the market is looking for rate cuts to stimulate growth in the major economies. The prospect of US rate cuts and a recent decline in US Treasury yields amid softer economic data, including inflation, have helped offset the negative impact of a stronger dollar, with the Bloomberg Dollar Index heading for its highest weekly close in eight months, primarily driven by political worries in Europe driving down the euro and a major unwind of MXN carry trades.
Countering the mentioned dollar rise has been a renewed drop in bond yields amid softer US economic data and signs that inflation continues to moderate. Overall, developments that have supported a 30 basis points drop in US 10-year Treasury yields while traders seem comfortable projecting at least two rate cuts this year, despite the Federal Reserve at its recent FOMC meeting lowering their projection to just one 25 basis point cut before year-end.
Crude oil supported by renewed diesel strength
Crude oil trades higher following an early June price slump that was driven by aggressive hedge funds selling amid fading geopolitical risks and the OPEC+ alliance announcing plans to gradually unwind last year’s extra voluntary output cuts, starting October, but contingent on prevailing market conditions. In addition, weak diesel stock levels and increased demand for cooling have lifted refinery margins to a two-month high.
This past week, monthly oil market reports from OPEC and the International Energy Agency highlighted a widening gap in their outlooks for 2024 and 2025 demand growth. While OPEC has stubbornly held onto an expected increase of around 2.2 million barrels per day this year, the IEA has continued to downgrade its forecast, currently below 1 million barrels per day. OPEC, meanwhile, maintained forecasts for strengthening oil demand in the second half amid continued economic growth in China and other emerging economies, saying the OPEC+ alliance will need to pump 2.7 mb/d more in the third quarter, thereby leaving ample room for the announced rollback of production cuts.
It is very clear that the direction of crude oil prices in the coming months will very much depend on which forecast is the correct one; we suspect the correct figure is somewhere in the middle, but with half the year gone already, it is quite extraordinary to see such a wide gap between two organisations that should have the same amount of data and information available. In the weeks ahead, we will also be watching hedge funds' activity after they recently cut their combined net long below 200 million barrels, a level that has only been seen twice in the past 12 years, and which on both occasions triggered a period of buying and price recovery.
Consolidation continues across key metals
The precious and industrial metal sectors are currently undergoing a period of consolidation, primarily led by copper, which last month surged to levels currently not being justified by the short-term fundamental outlook, not least in China, where stock levels remain elevated to the point that buyers can pick up imports at a discount to local prices. Copper strength and subsequent weakness have also been a major driver behind silver’s outsized moves relative to gold, first to the upside, where the break above USD 30 triggered a strong response from momentum buyers, only to undergo a 12% top-to-bottom correction.
Gold recently lost altitude after data showed the People's Bank of China, after 18 months of non-stop buying, paused their purchases in May. China, a major driver of the gold rally in the past year, is in our opinion nowhere near done buying gold, but the pause also highlights they are human, balking at the prospect of paying record prices. Also, the recent attention paid to Chinese private buying has likely thrust them into a spotlight they normally avoid. Overall, gold is still consolidating, and the news will likely prolong that phase, but overall, the long-term bullish outlook has not changed.
So far, the correction has once again turned out to be relatively shallow, with support around USD 2275 still a major line in the sand, and one that continues to attract buy-on-dip activity. The mentioned dollar strength, which normally should weigh on precious metal prices, has so far not materialised, the reason being the strength is driven by euro weakness after the French president shocked investors by calling a snap vote after his party suffered a crushing defeat in European parliamentary elections. The market fears a repeat defeat to the far-right party could trigger a debt crisis, potentially adding support to gold from worried investors.
Geographical concentration supports softs amid dry weather concerns
The geographical concentration of key food commodities from cocoa and coffee to oranges raises the risk of big price movements when production fails to meet demand, primarily due to unfortunate increased weather volatility, not least across the southern hemisphere where some of the mentioned commodities are produced. During the past twelve months, cocoa has rallied by almost 300% amid concerns about tight supply following a troubled growing season in West Africa. Coffee production, which for Robusta depends on Vietnam and for Arabica on Brazil as primary suppliers, is currently suffering from tight supply, driving up year-on-year prices for Robusta by 56% and Arabica by 41%. The frozen orange juice futures contract, which primarily derives supply from Florida, has, despite a recent setback, doubled during the past year amid outbreaks of citrus greening disease, tree damages dating back to 2022 hurricanes, labour shortages, and overall a structural decline which has seen production from the Sunshine State decline by more than 90% during the past 20 years.
Recent commodity articles:
13 June 2024: Oil prices steady amid divergent OPEC and IEA demand projections
10 June 2024: COT: Brent long cut to ten-year low; metals left exposed to end of week slump
3 June 2024: COT: Crude length added before OPEC+ meeting; gold and copper see profit-taking
31 May 2024: Commodity weekly: Strong month despite late decline in crude and fuel
27 May 2024: COT: Gold and crude see increased demand as dollar longs plummet
24 May 2024: Commodity weekly: agriculture surges, metals fall on fading rate cut hopes
23 May 2024: Podcast: 2024 is heavy metals
22 May 2024: Crude oil struggles near two-month low
17 May 2024: Commodity weekly: Metals lead broad gains
16 May 2024: Gold and silver rally as soft US data fuels market optimism
15 May 2024: Copper soars to record high, platinum breaks out
14 May 2024: COT: Crude long slump; grain purchases surge
8 May 2024: Fund selling exacerbates softening crude outlook
8 May 2024: Grains see bumpy start to 2024 crop year
6 May 2024: COT: Commodities correction spurs muted selling response
3 May 2024: Commodity weekly: Grains boost, correction in softs and energy
2 May 2024: Copper's momentum-fueled rally halts amid weakening fundamentals
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