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: Tight supply adds fuel to uranium and cocoa rally
Ole Hansen
Head of Commodity Strategy
Summary: The commodities sector gave back some of its recent strong gains this past week with losses being driven by industrial metals - as the boost from the recent cut in China’s reserve ratio faded - and energy, as talks of a ceasefire in Gaza deflated the geopolitical risk premium. Precious metals, meanwhile, received an initial boost from a sharp fall in US Treasury yields driven by fresh concerns over US regional banks and their exposure to commercial real estate, before pairing back gains following another strong US job report raising doubts about the timing of the first rate cut. Highflying commodities of the week were cocoa, hitting a 46 year high and uranium as the supply outlook for both continues to tighten.
The commodities sector gave back some of its recent strong gains this past week with losses being driven by industrial metals – as the boost from the recent cut in China’s reserve ratio faded – and energy, as talks of a ceasefire in Gaza deflated the geopolitical risk premium. Precious metals, meanwhile, received an initial boost from a sharp fall in US Treasury yields driven by fresh concerns over US regional banks and their exposure to commercial real estate, and following the US Federal Reserve’s signal that the next move in rates would be lower, albeit perhaps not as soon as the market had hoped for, not least following another very strong US job report for January which showed a big rise in new jobs and rising wages.
Overall, the Bloomberg Commodity Total Return Index (BCOM), which tracks a basket of 24 major commodity futures spread across energy, metals and agricultural, trades down around 1.6% on the week and 1% on the year. Among those commodities that are included in the BCOM index, the top performers are cocoa, cotton and wheat, while the bottom five are all related to the energy sector.
Cocoa breaks $5000 per ton for the first time since 1977
The agriculture sector trades mixed with the grains sector showing continued signs of stabilizing, with the biggest short positions held by speculators across six grain and soy contracts since 2019 also providing some emerging support. The softs sector, by far the best performing sector during the last twelve months, traded higher for a fourth week, reaching a ten-year high in the process. The latest strength is supported by a parabolic rise in cocoa, surging above $5000 per ton for the first time since 1977. Cocoa prices have now more than doubled during the past year, driven by low supplies from Ivory Coast and Ghana, the world’s two biggest producers. The current season which began in October has so far, due to dry weather conditions, seen arrivals to ports in Ivory Coast trail last year by around 36%, with the latest bout of drought potentially hurting next season's bigger main crop, thereby keeping the world in a prolonged deficit.
Uranium sector strength on growing global acceptance
The top performer this past week was spot uranium, which rose strongly after Kazatomprom, the world's top producer, cut their 2024 production guidance as expected by 14.2%, due to limited access to sulphuric acid which is used as the leaching agent to dissolve the uranium oxides from the ore, allowing for the recovery of uranium. During the past year, spot uranium has more than doubled to reach a 16-year high above $100 per pound as the sector goes through a strong revival following years in the doldrum. Nuclear power is seeing a growing global acceptance with major economies embracing nuclear energy as part of the green-energy transition.
With demand on the rise, prices have surged on supply risks, including lower production guidance from producers and geopolitical tensions affecting uranium-producing countries. In addition, the emergence of and growing popularity of investment vehicles holding physical uranium on behalf of investors, have also contributed to the current tightness, in the process supporting the spot price as well as a the stock market performance of mining companies, reactor builders and fuel makers.
While the focus in terms of delivering strong returns has been on the tech-heavy Nasdaq 100 and its 12-month gain of around 35%, the Global X Uranium ETF, a $3 billion market cap ETF that tracks a basket of companies involved in uranium mining and the production of nuclear components, has returned close to 40% during this time. The Sprott Physical Uranium Trust, which holds all its assets in physical uranium trades up 93% during the past year and since its inception a couple of years ago it has grown to become a $6.2 billion titan. Together with London-based Yellow Cake Plc, their rapid growth has probably been adding fuel to the rally by further tightening spot market availability.
Table highlighting some of the biggest and most popular investments in uranium
Choppy price action in crude oil continues
The major crude oil futures gave back most of their recent strong gains amid talks of a Gaza ceasefire reducing the geopolitical temperature. The fall was further strengthened by selling from wrong-footed traders who bought the recent technical break above $75.50 in WTI and $80.50 in Brent, only to be forced to adjust once prices broke back below. Overall, in the past few months, and since Houthi rebels began attacking ships in the Red Sea, traders have been dealing with a lot of ‘noise’ in the market resulting in very choppy trading conditions as prices continue to ebb and flow with the news from the Middle East.
Meanwhile, diesel prices in London and New York also traded lower after rallying strongly last month amid logistical challenges in the Red Sea where Houthi attacks have forced the redirection of shipments to Europe, forcing them onto longer voyage times, and hence higher freight costs. In addition, the mid-January US cold ‘bomb’ drove a demand spike while recent drone attacks on Russian energy facilities have also increased supply concerns. Overall, the Ny Harbor ULSD and London Gas Oil futures contracts both maintain a year-to-date gain around 10% while WTI and Brent trade higher by less than 4%.
We maintain the view that, unless a serious and very unlikely supply disruption occurs in the Middle East, both WTI and Brent will likely remain range bound around $75 in WTI and $80 in Brent with no single trigger being strong enough to change the dynamics of a market that has divided its focus between growth worries, especially in China, the world’s top importer, as well as rising non-OPEC+ production, OPEC+ cuts – now expected to be extended beyond the first quarter – and geopolitical risks. On top of this, we may see risk appetite ebb and flow in line with changes in the expected pace of US rate cuts. In the short-term, WTI will be facing strong resistance ahead of $80 and Brent ahead of $85.
Gold remains stuck on rate cut delay
The precious metals sector started February on a firm footing after spending most of January consolidating the strong gains seen during Q4 last year when gold rose 11.4% and silver 7.2%. The small losses seen in both metals last month was mostly driven by a stronger dollar and the market taking a raincheck on the timing, pace, and depth of incoming rate cuts. This past week, however, gold has risen towards key resistance around $2067, supported by a drop in the dollar and after US regional bank concerns resurfaced amid losses in commercial real estate helping drive US Treasury yields sharply lower.
The latest Federal Reserve meeting described an uncertain path toward rate cuts in 2024 after Fed Chair Powell emphasized the need for more evidence that inflation is heading toward its 2% year-over-year target – a level that has already been reached using shorter time horizons – while also taking the strong labor market into consideration. However, a weaker than expected weekly jobless claims helped reignite expectations for a March rate cut, before deflating completely following a very strong January US job report which showed strength in both job creation and wages. US 10-year US Treasury yields paired back an earlier slump but stayed lower on the week around 4% while the dollar was heading for an unchanged week.
According to the World Gold Council (WGC), total gold demand hit a record of 4,899 tons in 2023, supported by strong demand in the over-the-counter market, as well as from sustained central-bank buying – the People’s Bank of China has been a continually active buyer, accounting for close to one-quarter of all central bank purchases. The WGC expects gold demand to expand again in 2024 as the US Federal Reserve moves toward cutting interest rates, potentially lifting demand from ETF investors who have been net sellers since 2022.
While we maintain our bullish outlook for gold and silver, seeing them reach $2300 and $28 respectively this year, both precious metals are likely to remain stuck in the short-term until we get a better understanding about the timing, pace and depth of future US and EU 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.
Commodities articles:
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
30 Nov 2023: Precious metals take top spot for a second month
23 Nov 2023: A nervous crude oil market awaits OPEC's next move
23 Nov 2023: Podcast: Will Santa deliver another golden gift
22 Nov 2023: Will gold and silver see another Santa rally?
17 Nov 2023: Commodity weekly: Crude overshoots; silver the comeback kid
Previous "Commitment of Traders" articles
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
20 Nov 2023: COT: Crude selling slows, grains in demand
14 Nov 2023: COT: Crude long slumps; agriculture sector in demand
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