Weekly Commodity Update: By Ole Hansen (Head of Commodity Strategy, Saxo Bank)
September was generally a strong month for riskier assets such as commodities following the announcement of additional quantitative easing measures from the US Federal Reserve Bank and the Bank of Japan plus the European Central Bank’s clear statement to do whatever it takes to save the Euro. Speculative investors in currency futures turned their net dollar exposure from long to short as it continued to weaken, especially against the euro and this weakness also helped lend a hand to the euro’s rally. Looking ahead some raised focus on China in the coming weeks can be expected as they finally pencil in the date for their 18th Party Congress on November 8 when the strategy for the next five years will be presented.
Overall sector performance: The Commodities with a cyclical nature such as industrial metals performed the strongest as the extra stimuli once again raised hopes that demand would begin to show signs of improvement despite the headwinds from global economic data which continued to disappoint. Precious metals also did very well as the money press and low interest rates for longer support the sector, not least silver and platinum. Crude oil is headed for the strongest quarter this year, despite losing ground in September, resulting in the energy sector ranking third place amongst all commodity sectors, primarily supported by a strong rally in natural gas and gasoline.
The agriculture sector and especially grains ran into some heavy selling as all the supportive news following a difficult US and Russian growing season was priced in and attention turned towards the coming crop season in South America and Australia.
Natural gas and silver outperformed: On the individual energy commodity level natural gas had a strong month as the continued switch from coal to natural gas has seen increased demand, which in turn is helping to bring storage levels back in line with seasonal averages for the amount of gas stored in underground caverns across the US. Silver and gold were also strong performers, both putting in their best quarterly performance in more than two years as quantitative easing saw the return of hedge fund buying.
Correction hits corn and soybeans: At the other end of the scale was corn and soybeans which both reversed some of their strong gains from July and August as the hype surrounding the dismal US and Russian crop season faded and speculative positions was scaled back as attention turned to the outlook for South American and Australian summer crops while favourable US weather has helped winter crop planting get under way. Wheat did relatively better supported by speculation about when rather than if Russia, the world’s third biggest exporter, will be forced to restrict exports. A US government report which confirmed the low stock levels did return some support and could indicate that the correction is running out of steam.
Gold emerging stronger following correction: Following a period of sideways trading gold was in need of a correction in order to test the underlying strength of the month-long rally. This test occurred mid-week when a combination of quarter-end selling by producers and short selling by day traders fishing for stops gave enough supply to push it back below 1,750 support, at which point frenzied stop loss and option related selling by high frequency and algorithmic funds drove it to a low of 1,737 USD/oz. But as seen on previous such occasions buy orders were lined up and the recovery has been pretty impressive. We have once again set our sights on the resistance area between 1,790 and 1,802 which now stands in the way for a renewed attempt on the 2011 high of 1,921.
Crude oil undecided: Following a recent sell-off in crude oil (which hurt WTI more than Brent) on continued above seasonal stock build in the US, price action has stabilised. Brent crude is currently trading around the important 200-day moving average after reaching a two-month low in the previous week. Weak economic fundamentals have once again been outweighed by geo-political worries as both Israel and Iran put their case to the UN general assembly this past week. While Iran continues to claim that it’s nuclear ambition is purely for civilian purposes, Israel told the assembly that an Iranian nuclear bomb could be built by next year and that action to prevent such a situation was being considered. The rebound in oil was also helped by a fairly positive reception of the Spanish budget for 2013 which, for a short period at least, helped general risk sentiment in the market and thus weakened the dollar.
From a technical perspective the 200-day moving average is currently at 112 USD/barrel (co-inciding with the average price of Brent crude year to date) and is the level to keep an eye on, as seen below.
