Commodity markets have been suffering as a consequence of the European debt crisis with all sectors apart from gold and silver showing a negative return over the last month.

The Reuters Jefferies CRB index is down more than six per cent over the last month with sugar and WTI crude oil being the biggest losers. Chinese demand for base metals and oil, which has been a very important driver of prices this past year, could begin to ease. Traders are concerned that Beijing's efforts to prevent a bubble or overheating of the Chinese economy would reduce demand over the coming months.

In WTI Crude, the gap between current reality and future expectations continues to widen resulting in the six-month Contango to widen out beyond $10 (Dh36.73). The premium that July trades above the soon-to-expire June contract on WTI rose well above $4 this week as inventories at Cushing, the delivery point for WTI crude rose to 37 million barrels, the highest number ever recorded. This is the steepest Contango seen since the collapse in prices early last year.

This distortion of the spot month can also be seen in the spread against Brent crude which historically trades below WTI. However, over the last month, we have seen Brent trade up to a premium of $5.5. The forward curve is still telling us another story than what the front month is indicating. The average price from July and 12 months forward trades around $80.60 which is down from $88 a month ago but is still much higher than current prices.

Increased crude flows

The increased crude flow into Cushing has primarily been due to high import flow from both the US Gulf Coast and Canada. Historically we are entering the time of year where consumption begins to pick up, and once proof of that is seen, the discount to Brent would begin to disappear. For now though, oil tankers and storage facilities are again being rented to buy cheap spot crude in order to sell it at the much higher forward prices.

Technically, WTI Crude for June delivery broke the uptrend from July 2008 this week below $75 and went looking for support which is located just below $70. With the June contract expiring next Thursday, the technical picture will be a bit confusing early on as July is trading some $4 above. However, having seen the collapse of the June [trading], the worry is that any lack of reduction in inventories or continued escalation of the European problem could send prices lower again.

Gold continued its relentless drive higher this week being spurred on by euro-generated panic buying as Europeans bought it as a hedge against a declining euro. Euro gold reached the €1,000 (Dh4,539) milestone this week, a 32 per cent rise on the year. Also, speculation that the European bail-out could lead to higher inflation has supported prices. A new record high at €1,250 was reached before profit taking emerged.

The strengthening dollar has so far not had any major impact on the rally but some commentators have begun to question the scope for additional gains. For now, though the market psychology is geared towards further gain, the combination of fear and momentum can easily drive prices beyond what can be expected.

Liquidation of gold, silver

Short term, however, the ongoing sell-off in other commodities could force a number of leveraged traders to liquidate profitable positions in gold and silver in order to meet margin calls on loss-making positions elsewhere. Look for support between $1,210 and $1,200 followed by $1,185.

High-grade copper finished lower for the third week as traders are being spooked by the European and Chinese situations which could hamper the global economy and curb demand for industrial metals. The dollar's relentless move higher has also removed the incentive to hold commodities as an alternative asset. The uptrend as defined by the previous three lows gives support just above $300 on the near-month contract while resistance is firm at $325. A break below support would signal a move down towards the February low at $286.

Global inventories of wheat, rice and corn are on track to rise for the third year in a row, reducing for now, previous fears about the world's ability to feed an ever increasing population. Favourable weather conditions among the important crop producing nations has now offset the consecutive years of crop failure that lasted up until 2007.

- The author is Senior Manager for CFD and Listed products with Saxo Bank. The views expressed are his own