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11 June 2023

Oil storage data surprises market with build-up

By Ole S Hansen

A promising week for the energy sector reversed as the weekly storage data once again surprised the market by showing a much bigger build-up in inventories than expected. US stocks can now supply the country for a whole month which is four days longer compared to the same time last year.

The contango price between spot and six month forward moved sharply lower during the week implying that the market is beginning to see an impact from the recent Opec output cuts. However, with OECD inventories standing at a 10-year high it will take time to burn off.

The future curve is implying that crude prices will stabilise above $50 by August and stay in a $10 range the next 14 months. A sharp upward reversal is therefore no longer expected as economic data points towards a long sustained slowdown in global activity.

The inauguration of Barack Obama was the highlight of the week and the whole world was waiting to hear about his plans for turning around the US economy.

His comments, however, did not have much of an impact as financial markets worried about the renewed fragility of the banking sector and deepening worries about the global economic outlook. Fear of a return to the November gloom is uppermost in investors' minds.

Also, the eagerly awaited data from Cushing, the Nymex WTI Crude delivery point showed an increase to 33.2 million barrels and is now getting dangerously close to being full. One commentator said: "We're at the point where you can't swing a cat without hitting a barrel of crude oil at Cushing".

Technically, crude for March delivery trades in a $38 to $45 range defined by the contract low and 20-day moving average. A break below $38 could signal renewed weakness towards $32.40 which is the old low for both the January and the February contract. Likewise, a break above $45 will target $50 and ultimately $54.

Nowhere is the rapid decline in global activity more visible than in the ever increasing stock piles of base metals. This week we saw aluminium prices fall to their lowest level in almost six years as stocks in London Metal Exchange warehouses jumped once again.

Aluminium together with natural gas are the worst performing commodities so far this year being down by 14.5 per cent and 18 per cent respectively.

The news from the world's largest miner BHP Billiton that they will slash 6,000 jobs and close one mine in Australia had little impact. Given the incredible deterioration in demand for base metals, particularly in Europe and the United States it is expected that stocks will continue to rise despite output cuts.

High Grade Copper for March delivery had a bad week on the back of swelling stockpiles and a weekly close below $141 will increase the risk of a re-visit of the 2008 low at $125.50. The market has been supported by the Obama promise but it will take months before an eventual impact. Selling into rallies seems like the best strategy for now.

Gold had a quiet week until it finally broke above 200-day moving average on the February contract. The deteriorating global economic outlook and near-zero interest rates continues to attract new investors into exchange traded funds (ETFs). Latest figures on physical gold held by ETF's showed an increase to 819 metric tonnes or the equivalent of four months of global mine production. The December high at $892 is now the only obstruction ahead of $900 and $940 beyond that. A weaker dollar is probably needed for that to happen but for now safe haven buyers are in the driving seat.

Cocoa futures on NYB-ICE rallied strongly during the week as focus once again returned to the Ivory Coast where low supply from the worlds' largest producer continues to support prices. The West African country supplies about 40 per cent of the world's cocoa but the current harvest has been disappointing with arrivals about 30 per cent below last season's level.

As we move closer to the end of the main harvest period this should continue to support prices. The cocoa future for March delivery is currently meeting trend line resistance at $2,645 but a break should re establish momentum and a move towards $3,000 is a possibility.

- The author is Manager for Futures and Fixed Income at Saxo Bank