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02 October 2023

Energy sector sees light at the end of the tunnel

The rise in crude oil price has to some extent been due to a narrowing contango. (AP)

By Ole S Hansen

Commodity markets had a good week with the CRB Commodity index bouncing six per cent from the important $200 (Dh734) level primarily on the back of a recovery in oil markets.

The general news from the global economy is still not pointing to any recovery with stock markets continuing to make new lows. It has been a particular bad week for US data and any hopes of seeing a near-term bottom in the housing market has proved premature. The price of US lumber has suffered as a consequence and the lumber future in Chicago is now the worst performing commodity in 2009 being down by 27 per cent.

An interesting observation is the yen, which has finally begun to weaken after having risen strongly against most other currencies over the past six months. This will either indicate that risk appetite is returning given the yen's status as a safe haven currency or more likely the mere fact that investors are losing confidence in the yen given the severe recession that Japan is heading for.

As we wrote last week the early signs of a recovery in crude oil prices were beginning to show and the price action this week continued to improve. It is expected that Opec will cut again in March to eliminate the floating storage of up to 60 million barrels, which in turn should begin to reduce onshore crude stock. The current expectation for global demand is a reduction of 1.5 million barrels per day, which compare to

already implemented Opec cuts of 4.2 mbd. Based on those assumptions it is now expected that prices will stabilise and slowly recover.

The price rise this week has to some extent been due to a narrowing contango, which has led to buying of the near month contracts thereby supporting the spot month of April WTI crude. On that basis the average forecast for 2009 has not moved much higher than last week as it now sits just above $50 for the remainder of the year.

It is probably worth mentioning the US Oil Fund, the biggest oil Exchange Traded Fund (ETF) as it has attracted a lot of headlines recently. It tracks the spot month of WTI crude and currently holds more than 90,000 lots of April WTI futures, the equivalent of 90 million barrels. The pressure on the spot month ahead of their roll date has lead to others already rolling into May or even June. They have become a victim of their own success and their three months performance is dismal. Any large redemption from disappointed investors could grab headlines and lead to some selling pressure on the front month.

Technically the down trend from November was broken on Thursday and resistance is now located at 50-day moving average at $45.50 followed by $48 before the important $50 level comes into play. Support is located at $41.50 before the April future low at $37.12.

What a difference a week makes could be the intro for describing gold. After the euphoria that took gold for April delivery to a high of $1002.2 last Friday, this week has seen heavy selling and it only found support ahead of the January high at $931.3. The main driver recently has been the relentless buying of gold ETFs of which the biggest holds more than 1,000 tonnes. It only took four days of no new inflows to spook the market enough to see selling take over.

With the traditional elements of the gold market such as jewellery demand being very weak, continued flow into these quasi-physical gold investments is required to maintain the momentum. We advise caution near term and will follow the ETF story closely. If you are a dollar-based investor you would surely be disappointed that despite all the bullish news and massive flows into ETF and futures we have still not managed to break through the $1,034 high from 2008.

Any further weakness below $931 could see losses back to important support at $892. Given the very long position in the market the risk has turned to the downside and only continued stock market weakness and or weaker dollar could support prices. On the upside a move above $980 is needed to neutralise the recent selling and only a decisive break above $1,000 could change the negative short term scenario.

Silver lost more than 10 per cent during the week on the same (lack of) liquidity issues that up until last week had it sitting at the top of the performance table for 2009. Silver is particularly risky on any setback as focus will return to the lack of demand from the industry.

The high jump of the week belongs to sugar, which moved several places up the performance table. We saw a strong rally that took the May contract on New York Board of Trade up to levels seen last October. New reports are indicating a record decline in sugar supply for 2009, which in turn could lead to a supply deficit of 10.4 tonnes.

The world's largest producer Brazil is struggling as the financial crisis hampers new investments and India, the world's largest consumer, is forecast to become a net importer. Technically any setback towards $13.63 is a now a buying opportunity with an initial target $14.20.

The author is a commodity analyst with Saxo Bank