WCU: Grains surging as energy and metal momentum fade

Ole Hansen

Head of Commodity Strategy

Summary:  Weekly commodity update focusing on the strong start to 2021 but also emerging signs that the strong momentum may soon yield to a period of consolidation, especially across energy and industrial metals. The grain market remains bid as the fundamental outlook continues to strengthen.


The strong momentum seen across most commodities in recent months continued into the second week of January, albeit at a slowing pace. The main exception being the grain sector which spiked higher after a government report lowered supply while raising demand by more than expected. Overall, however, the sector continues to focus on multiple tailwinds from tightening supply, a global market flushed with cash driving speculation across markets and increased demand for inflation hedges, and not least the prospect for a vaccine-led recovery in global demand as well as ongoing weather worries.

All of this during a time when the pandemic is still raging across many countries, especially in winter-hit regions across the northern hemisphere where the prospect for improvement - vaccine or not – is unlikely to occur until warmer weather arrives in March and April. While the rally may pause until the vaccine rollout gathers momentum, the market will have to rely on continued investment demand being strong enough to keep markets supported during the coming months when the negative impact of lockdowns and reduced mobility will be the greatest.

Absent from the list of supportive drivers this past week has been the dollar and bond yields which have both risen ahead of President-elect Joe Biden’s announcement of a $1.9 trillion Covid-19 relief package. It was rising yields and dollar short covering that helped drive the latest correction in gold and silver. The plan received a muted response given the prospect for a dwindled down package due to the potential lack of support from key individual Democrat and independent Senators.

U.S. long-end bond yields have risen sharply after the Democrats secured a Senate majority and together with the current vaccine rollout it temporarily raised concerns that the Federal Reserve would raise rates sooner than expected. These worries, however, were shot down in flames after Fed Chair Powell said the FOMC will not raise interest rates unless they see troubling signs of inflation. Another hint that central banks around the world are prepared to let inflation run higher before acting in order to support growth and job creation.

This is a catch-22 for precious metals as mounting inflation expectations are inadvertently driving the dollar higher in response to rising yields. Despite this, we remain bullish and based on our forecast for gold to reach $2200/oz, silver’s high beta should encourage continued outperformance with the gold-silver ratio heading towards the low 60’s during 2021, thereby driving the price of silver towards $35/oz.

With these developments in mind, gold may spend some time calibrating to recent movements in dollar and yields before eventually start climbing again. Following early January weakness, gold has settled into a relatively tight range around $1850/oz and mostly above its 200-day moving average, currently at $1843/oz. In order to clear the path for a recovery, gold now needs to break above $1865/oz while trendline support can be found at $1820/oz.

Source: Saxo Group

Grains: The six-month long bull market in crops received a fresh boost this week after the World Agriculture Supply and Demand (WASDE) report from the U.S. Government lowered the outlook from already-reduced expectations. The combination of cuts to U.S. corn and soybean production, and estimates for more exports helped support prices with both crops surging to fresh seven-year highs.

The US Department of Agriculture (USDA) pegged the 2020/21 domestic soybean ending stocks outlook at 140 million bushels, down 77% from the 610 million bushels projected in August, and corn ending stocks at 1.552 billion bushels, the lowest since 2013 and down more than 50% since the June projection. The USDA also lowered its forecast for upcoming harvests in key export countries Brazil and Argentina.

In addition to this, we have seen wheat prices jump after Russia said its new wheat export tax that, together with export curbs, shall be introduced on February 15 will rise even further in efforts to cool domestic food prices. This combination helped drive Chicago wheat prices to a fresh six-year high.

The rally in agriculture commodities led by grains and oil seeds has to a certain extent occurred while the market focus has been elsewhere. But the continued surge, which has seen the Bloomberg Agriculture Index rise by more than 40% during the past six months, has started to bring back worries about the impact on economies and inflation.

    Source: Saxo Group

    Crude oil’s impressive rally since the first vaccine announcements in early November is showing signs of running out of a steam. After reaching $57.5/b on the back of Saudi Arabia’s unilateral and surprising 1 million barrel/day production cuts in February and March, the attention has once again returned to the pandemic and its continued negative impact on mobility and with that, the demand for fuel products. Somewhat offsetting this disruption has been the frigid cold weather situation in Asia which has seen the price for spot LNG cargoes temporarily surge off the chart, thereby boosting replacement demand for distillate products such as diesel.

    Adding fuel to the latest run up in prices was the confirmation last week of Joe Biden as the next president. The prospect for an inflationary stimulus package to support the recovery has given the price of oil a non-quantifiable boost from investors and speculators seeking protection against reflation and with that the prospect for a weaker dollar. Crude oil, together with gold and copper, are three of the most liquid commodity markets and with this in mind, the reflation demand often tends to be concentrated in these markets.

    From a current fundamental perspective, we remain skeptical about crude oil’s ability to forge much higher at this stage. Given how far the price has travelled since early November, a correction back to $49/b would only be considered as a weak correction within a strong uptrend. We see Brent crude oil trading steady in the low-to-mid-50’s during the coming months until the point where fundamentals are strong enough to support an extension, initially towards $60/b and later in the year towards $65/b.

    Source: Saxo Group

    Quarterly Outlook

    01 /

    • Macro Outlook: The US rate cut cycle has begun

      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...
    • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

      Quarterly Outlook

      Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

      Althea Spinozzi

      Head of Fixed Income Strategy

    • Equity Outlook: Will lower rates lift all boats in equities?

      Quarterly Outlook

      Equity Outlook: Will lower rates lift all boats in equities?

      Peter Garnry

      Chief Investment Strategist

      After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
    • FX Outlook: USD in limbo amid political and policy jitters

      Quarterly Outlook

      FX Outlook: USD in limbo amid political and policy jitters

      Charu Chanana

      Chief Investment Strategist

      As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
    • Commodity Outlook: Gold and silver continue to shine bright

      Quarterly Outlook

      Commodity Outlook: Gold and silver continue to shine bright

      Ole Hansen

      Head of Commodity Strategy

    • FX: Risk-on currencies to surge against havens

      Quarterly Outlook

      FX: Risk-on currencies to surge against havens

      Charu Chanana

      Chief Investment Strategist

      Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
    • Equities: Are we blowing bubbles again

      Quarterly Outlook

      Equities: Are we blowing bubbles again

      Peter Garnry

      Chief Investment Strategist

      Explore key trends and opportunities in European equities and electrification theme as market dynami...
    • Macro: Sandcastle economics

      Quarterly Outlook

      Macro: Sandcastle economics

      Peter Garnry

      Chief Investment Strategist

      Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
    • Bonds: What to do until inflation stabilises

      Quarterly Outlook

      Bonds: What to do until inflation stabilises

      Althea Spinozzi

      Head of Fixed Income Strategy

      Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
    • Commodities: Energy and grains in focus as metals pause

      Quarterly Outlook

      Commodities: Energy and grains in focus as metals pause

      Ole Hansen

      Head of Commodity Strategy

      Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

    Disclaimer

    The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

    Please read our disclaimers:
    Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
    Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)


    Business Hills Park – Building 4,
    4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

    Contact Saxo

    Select region

    UAE
    UAE

    Trade responsibly
    All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

    Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

    The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

    The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.