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29 March 2024

Calm before the storm for commodities trading

Ole Hansen

Published

Global markets are still in a strangle hold by the uncertainty about the future direction of major economies.

Macroeconomic releases being the short term driver with many not willing to enter into trades with a longer horizon while sentiment continues to shift between hot and cold.

The Reuters Jefferies CRB index which is unchanged over the past month and 3.5 per cent down on the year hides some major changes in the underlying with volatility in some markets at elevated levels.

The best performers have been sugar, corn and coffee while cocoa, natural gas and crude has been pulling the index in the opposite direction.

Investors who stayed loyal towards gold during the correction phase have been rewarded with a nine percent rally since the July lows.

This week we reached but failed to breach the old $1,265 record from June as some long overdue profit taking kicked in. 

During this recent rally it showed the longest track of gains for nearly 40 years and it is heading for its tenth annual increase.

The IMF Friday announced that Bangladesh had bought 10 tonnes of gold at a price of 1,259 bringing central bank purchases to a total of 222 tonnes since the 403 million tonnes sales program was announced a year ago.

An additional 88 tonnes has been sold to other parties leaving just 93 tonnes left with the proceeds being used to fund low-income countries.

Investment holdings in gold ETFs are back to record highs with total holdings exceeding 2,000 tonnes.

The driver behind the latest move higher can be found in the clouded economic outlook, very low global interest rate environment and a recent spike in the price of silver, which reached $20 per ounce, on the back of robust industrial demand. 

The trend is still pointing higher but it probably needs additional bad news to take it up into new territory.

The biggest threat near term is still the risk of large scale profit taking from ETF investors but given the current outlook that risk seems limited.

A break above 1,265 will initially target 1,280 while support is located at 1,218.

Oil

Crude oil continues to trade in an $11-wide range sitting just a few dollars below the average for 2010 at $77.50.

The weekly inventory data showed that US petroleum inventories rose to the highest level since 1990 putting some pressure on the front month contracts.

Opec left its forecast for oil demand growth unchanged for both 2010 and 2011 at one million barrels a day.

The forward curve or Contango has steepened recently with spot month being under relatively higher pressure due to the continued overhang of supply.

Some of this supply has come from crude moving on shore from floating storage. This has had an adverse impact on the price that operators can charge for shipping crude with the benchmark route from Saudi Arabia to Japan now only paying $8,500 per day, a ten-month low, compared to $20,000 a month ago.

The above mentioned widening of the Contango could actually help beleaguered owners of VLCCs (Very large crude carriers) as the combination of low tanker rates and higher forward prices of crude could trigger another round of buy and hold plays with VLCCs being used to store crude off shore.

Technically the current range looks set to prevail with some upside momentum currently in place after the lows was rejected once again recently. Look for support around 70.65 while resistance can found at 77.50 ahead of 80.00.

Corn & grain

The price of near month corn continue to recover relatively to wheat jumping to the highest level since October 2008 as attention turns to growing conditions in the US with recent heat wave in the Midwest having raised the risk that the corn crop might get hurt.

On Friday the US Department of Agriculture will update its yield and production forecast for corn and other crops and at the time of writing the worry is that heat wave has hurt crop more than the government will forecast.

Meanwhile Russia, still struggling to come to terms with the worst drought in half a century, announced that they would use state stock piles should prices continue to advance into 2011. Wheat production for 2010 is now expected to be between 60 and 65 million tonnes compared with a pre drought expectation of 97 million tonnes.

The export ban currently in place until end 2011 very much depend on the outcome of the winter wheat production which is currently being planted. The Russian agricultural ministry has indicated that a production between 85 and 90 million tonnes in 2011 is required to ensure sufficient domestic supply.

Near term price movements will very much depend on the outcome of the above mentioned US report on crop developments.

Sugar

Sugar has been the high jumper this past month rallying an astonishing 26 per cent as Brazil, the world’s largest producer, has experienced increase bottlenecks at its major ports due to adverse weather. Rain has delayed the loading of sugar, with more than 100 ships now waiting to load, causing tightness in the market as there are very few places where it otherwise would be available.

Humidity ruins the sweetener hence making loading very difficult while rainy conditions persist.

Copper

The recent advance of the price of copper came to a halt this week despite China imports rising by 11 per cent, the second monthly increase.

Worries about future demand from the world’s two largest consumers still lingers as US slowdown is well documented while worries about additional tightening in China keeps the market guessing about the future demand situation.

Reduced stockpiles at LME warehouses and in Shanghai has been the main driver behind the rally during the past couple of months.

The size of the Ivorian Cocoa crop has surprised to the upside and wrong footed the market. 

Cocoa & oranges

Being the largest producer of the cocoa bean news that the 2010-11 production might reach 1.3 million tonnes has been the main reason behind the 11 per cent drop in prices this past month. 

Finally growers of oranges in Florida will be keeping a close eye on tropical storm Igor which is approaching and if turning into a hurricane could damage citrus groves in the Sunshine State.

Futures prices have risen the most in eight months on the back of this risk. 

The writer is Senior Manager at Saxo Bank