Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Commodity weekly: Refined product strength lifts crude
Ole Hansen
Head of Commodity Strategy
Summary: The commodities sector continues to trade range bound with the Bloomberg Commodity Index hovering within a narrow 3.5% range since mid-December. During this period, strong gains in softs and energy have been offsetting losses across industrial metals and not least grains. In this update we take a close look at under-pressure natural gas, crude's bounceback supported by product strength, platinum and palladium price parity, gold in a prolonged stalemate, cocoa's parabolic rise, profit taking in uranium and finally a grains sector weighed down by ample supply.
- The commodities sector remains rangebound, with gains in softs and energy offsetting losses in industrial metals and grains.
- Geopolitical tensions in the Middle East and a potential delay in US rate cuts support some prices.
- Cocoa prices surge due to supply concerns, raising chocolate price fears.
- Uranium rally pauses after production updates from major players.
- Gold and silver stuck in stalemate, awaiting clarity on US rate cuts.
The commodities sector continues to trade range bound with the Bloomberg Commodity Index hovering within a narrow 3.5% range since mid-December. During this period, strong gains in softs and energy have been offsetting losses across industrial metals and not least grains. Markets have struggled for direction, with China’s latest attempt to underpin a struggling economy having a limited impact. Meanwhile, hopes for a ceasefire in Gaza continue to be quashed, adding to continued worries about stability in the Middle East where Iran backed rebels remain highly active across the region – not least in the Red Sea where commercial ships remain under attack. These latter developments have also supported a rally in refined products with diesel and gasoline among the best performing futures markets this past week.
In addition, the prospect of a March rate cut from the US Federal Reserve has all but disappeared as US economic data continues to surprise to the upside, thereby forcing the market to change its view on the timing, pace and depth of future US rate cuts.
Overall, the Bloomberg Commodity Total Return Index (BCOM), which tracks a basket of 24 major commodity futures spread across energy, metals and agricultural, traded close to unchanged on the week and down around 1.5% on the year. Besides cocoa which continued its parabolic rise, strong gains were seen across the refined product market as fuel cargoes avoid the Red Sea, thereby leaving millions of barrels stranded at sea for longer and reducing short-term availability.
Natural gas under pressure from high inventories and a mild winter
At the bottom of the table, we find natural gas futures in the US and Europe, both under continued pressure from a mild winter and robust production. US natural gas hit a September 2020 low this week with the Henry Hub future slumping below $2 per MMBtu as mild weather reduces demand for heating while slowing the pace of stock draws. The latest weekly storage change report showed a 75 billion cubic feet withdrawal, well below the 193 billion cubic feet five-year average withdrawal for this period. In Europe, the TTF benchmark contract fell 7% to €27 per MWh ($8.53/MMBtu) on a combination of fading winter (heating) demand, strong wind power generation and subdued industrial gas usage.Crude’s bounce-back supported by product strength and Middle East focus
Crude oil prices continue to gyrate while staying mostly rangebound with the directional input being driven by the alternating focus between demand concerns weighing on prices and support from a not yet and limited risk of a supply disruption in the Middle East, and OPEC’s efforts to support higher prices. The combination of these factors has, for the past few months, created a difficult trading environment with directional bets by speculators failing on several occasions, forcing trading positions, both long and short, to be adjusted on a regular basis, thereby creating moves that may not necessarily be supported by fundamentals.
Overall, we maintain the view Brent and WTI will probably remain rangebound, respectively around $80 and $75 per barrel during the first quarter but with disruption risks, OPEC+ production restraint, a tightening product market and incoming rate cuts potentially leaving the risk/reward skewed slightly to the upside. While the crude oil market remains rangebound, the fuel product market is showing some emerging strength with refinery margins, or so-called crack spreads, continuing to rise. Not least diesel prices which are being supported by global stock levels falling below their seasonal averages. Distillate supplies, which includes diesel, jet fuel and heating oil, have been disrupted by lower supply from Russia amid Ukrainian attacks on their refinery infrastructure and the attacks by Houthis on shipping vessels in the Red Sea and the Gulf of Aden.
Platinum briefly rises above palladium for first time in five years
Palladium, down 44% during the past year, hit an August 2018 low at $880 this past week with slowing demand driving continued speculative selling from hedge funds. Despite a significant drop last year, rising prices from 2018 to 2022 led to the automobile sector starting to replace the palladium in auto catalyzers with cheaper platinum. The adoption of electric vehicles, hurting the demand for diesel-driven vehicles, has further worsened the prospect for a metal that is predominantly produced in South Africa and Russia as part a basket with other metals, limiting producers’ ability to slow palladium output despite prices falling below their costs.
Platinum, meanwhile, trades down around 5% in the past twelve months and apart from the mentioned support from the automobile industry, platinum also derives support from its use in jewelry, as an investment metal through exchange-traded funds (ETFs) and other industries. These credentials have helped but not prevented platinum’s discount to gold hitting record levels around $1150 per ounce. But overall, these developments have seen the price difference between these two platinum group metals disappear for the first time in five years.
Gold in stalemate between physical demand and “paper” selling
We retain a bullish outlook for gold and silver, but for now, both metals are likely to remain stuck until we get a better understanding about the timing, pace and depth of future US 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.
The combination of a cautious Fed and recent economic data strength has seen the short-term rates market going from pricing in more than six 25 basis points US rate cuts this year to less than five, while bets on the first cut being delivered at the March 20 meeting has slumped to less than 20%. All these developments highlight just how volatile markets can be in the run-up to a change in monetary policy.
The fact gold has ‘only’ lost around 2.5% year-to-date despite the stronger dollar, a pickup in bond yields and reduced rate cut expectations is likely to have been driven by geopolitical concerns related to tensions in the Middle East, and not least continued strong demand for physical gold from central banks and China’s middle class attempting to preserve their dwindling fortunes caused by the property market crisis and one of the world’s worst performing stock markets as well as a weakening yuan. In addition, the market has managed to deal with so-called “paper” selling with year-to-date outflows of 60 tons from ETFs and almost 200 tons sold by hedge funds in the futures market last month.
As per the gold chart below, the market looks increasingly stuck with physical demand from central banks and retail demand in China and India, as well as Middle East concerns providing a soft floor under market around $2000.An upside break through $2065 looks difficult to achieve until we have a firmer idea about the mentioned timing, pace and depth of incoming US rate cuts. The fact that both gold and silver recovered following an algo-led selling reaction to Thursday’s stronger than expected US jobless claims print points to a market where the underlying demand remains firm.
Cocoa's parabolic rise continues as chocolate producers are caught short
Cocoa futures extended their parabolic surge this past week with a 20% gain driving the year-to-date gain of 44%. The March futures contract almost touched $6000 a ton on Friday, by far exceeding the previous $5000 per ton record from 1977. The ongoing surge has been driven by a worse-than-expected deficit in 2023-24, the third in a row, due to adverse developments in West Africa, the world’s top producing region due to a) harmful intense dry winds, possibly linked to a strong El Niño and b) pests and disease as farmers struggle to access expensive pesticides and fertilizers.
Arrivals of bags from cocoa farmers to ports in Ivory Coast are currently down by 40% on last year. With the mid-season crop after March now also looking challenged, it has raised concerns about the availability of cocoa to meet already agreed sales obligations, potentially leaving some of the major chocolate producers short changed, forcing them to enter the futures market to secure supplies.
While this surge in cocoa prices is unlikely to be felt by consumers buying chocolate hearts for Valentines’ Day and bunnies and eggs for Easter this year, the impact will be felt later this year and next, as cocoa costs typically take 6-12 months to filter through to consumers. However, with sugar prices also on the rise we should expect more expensive chocolate prices and perhaps another round of “Shrinkflation,” when manufacturers reduce the weight of their products to maintain a perception of unchanged prices.Ample supply and speculative selling weighing on grains sector
The grains sector suffered a further decline with the Bloomberg Grains Spot Index, which tracks the front month performance of six grains and oilseed contracts, falling to a three-year low as ample supply and speculator selling continue to weigh on prices. A sector loss of 1.6% this past week lifted the year-on-year loss to 19%, with the latest selling being led by wheat and corn.
This comes after a raft of monthly data from the US Department of Agriculture raised US ending stocks while sowing doubts about US wheat exports as Russia dumps prices in order to ship last year’s record crop. In addition, the report also showed an unfounded worry about a negative weather impact on South American production of soybeans and corn.
The latest Commitment of Traders report, covering the week to January 30, showed continued selling pressure from hedge funds with the net short across the grains and soy sector reaching 563,000 contracts, the strongest belief in falling prices since May 2019, with the nominal value of the corn and soybeans net short positions both exceeding $6 billion.
Uranium rally pauses following results from major producers
As we highlighted in our latest Commodity Weekly, the uranium market has been one of the top performing sectors during the past year – with the price of spot uranium rising to 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.
However, following the publication of quarterly results and 2024 production guidance from Kazatomprom and Cameco Corp, the world’s top producers, the price of spot uranium and mining stocks ran into a long overdue profit taking this past week. A recently announced production downgrade from Kazatomprom had already been priced in, leaving the company with limited further price upside. Cameco, meanwhile, traded lower after its adjusted earnings per share missed fourth quarter analyst estimates, and it kept its 2024 guidance in line with consensus. Cameco has locked up a large amount of its future sales at low fixed prices, meaning that a higher spot uranium price in the short term would be negative for the company, especially if production falls short – forcing it to meet its sales obligation by entering the spot market at higher prices.
In the short term, the price action may be exposed to selling from an army of recent nuclear converts disappointed by the market’s inability to continue higher in a straight line. As we highlighted previously, the emergence of, and growing popularity of, investment vehicles holding physical uranium on behalf of investors, have contributed to the current tightness, in the process supporting the spot price as well as the stock market performance of mining companies, reactor builders and fuel makers. The flows in and out of these investment vehicles will continue to help dictate the price, both up, and more recently down.
Commodities articles:
9 Feb 2024: Podcast: Year of the metals
7 Feb 2024: Crude oil supported by tightening fuel outlook
6 Feb 2024: Gold and silver turn defensive on reduced Fed rate-cut optimism
2 Feb 2024: Commodity weekly: Tight supply adds fuel to uranium and cocoa rally
1 Feb 2024: Commodities: January performance and ETF flows
30 Jan 2024: Gold and silver look to FOMC for direction
29 Jan 2024: Video: Unpacking the reasons behind soaring coffee prices
26 Jan 2024: Commodity weekly: Back in black supported by China stimulus
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
Previous "Commitment of Traders" articles
5 Feb 2024: COT: Speculators chase false crude break; grain short extends further
29 Jan 2024: COT: Squeeze risks after funds sold into rising commodity markets
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
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