By Ole S. Hansen (Head of Commodity Strategy, Saxo Bank)
A week of exceptional volatility culminated on Thursday with the shocking move by Switzerland’s central bank. The removal of the Swiss franc’s peg to the euro triggered an unbelievable rush of buy orders into the currency, pushing it as much 40 percent higher against the euro before settling back to a 19 percent gain. By then, however, the damage to market confidence had been done and a major risk-off move had swept across most asset classes, including commodities.
Precious metals saw the biggest gains of the week with both silver and gold dislocating further from the ongoing rise of the dollar. The Swiss move has been interpreted as a precursor for the full scale introduction of quantitative easing by the European Central Bank next Thursday. This, combined with another astonishing drop in government bond yields, had further reduced expectations for how aggressive the US Federal Reserve can be in hiking interest rates.
Overall, the Bloomberg Commodity Index was heading for a sixth consecutive weekly loss with the index hovering at levels not seen for the past 12 years. Industrial metals led by copper had their own mini crash while crude oil moved towards unchanged on the week but not before having experienced another week with extreme volatility.
The agriculture sector reached a three-month low as the outlook for ample supply triggered selling across key crops, such as soybeans, wheat and corn. A drop in beef prices back to September levels also help drive the sector lower.
Copper tumbled almost 9 percent on Tuesday after being hit by a double dose of bad news. First we had the technical break below $6,000/tonne on the London Metal Exchange which was followed by a global economic downgrade from the World Bank. The bank explicitly mentioned a slowdown in China as one of the reasons for the downgrade. This highlights copper’s vulnerability, as more than 40 percent of global output ends up in China.
The rout seen among other commodities during the past six months — not least in crude oil but also iron ore and some agriculture products — has now spread to industrial metals. This sector (just like crude oil) has seen supplies rise in response to the high prices that prevailed up until a few years ago.
Gold benefited both from the fallout from the Swiss move as well as raised expectations that a full-scale quantitative easing programme will be announced by the European Central Bank next Thursday. Adding to the mix is the continued uncertainty about the outcome of the Greek election on January 25 and collapsing bond yields. Gold has now climbed to nearly a four-month high.
The SPDR Gold Trust, the world largest gold-backed exchange-traded fund, said its holdings rose 1.35 percent to 717.2 tonnes Thursday, which is the biggest jump in holdings since August 2011. But the big winner at the moment is XAUEUR, which has risen 10 percent this month to its highest level since May 2013.
Once again the yellow metal has reconnected to its 200-day moving average where it spent most of the time trading last year. Having broken the October high at $1,255, only the 68.2 percent Fibonacci retracement of the July to November dollar-driven selloff at $1,264 stands in the way of a move to test trendline resistance at $1,300. Support is now the December high at $1,238 followed by $1,229.
After reaching another almost five-year low early on both Brent and WTI crude oil spent the rest of the week trading wildly with 10 percent price swings in both directions. As the week came to a close the price of both had moved back towards unchanged.
Conflicting news and data from the market means that the uncertainty is nowhere near over yet and at the moment the outlook for a sustained recovery may still be weeks or even months away. Opec highlighted the current problem in the market quite clearly in its monthly report released on Thursday. This saw less demand for Opec crude this year and also predicted that slumping crude oil prices will eventually curb growth in US supply.
The cartel sees 2015 demand for its crude falling to 28.8 million barrels per day, a decrease of 100,000 barrels compared to last month. This clearly highlight the market’s current obsession in focusing on oversupply with Opec alone according to its own projections will be producing at least one million barrels per day more than the global market require.
Putting all one’s eggs in a single basket and hoping for a reduction in US crude production is a very risky game at this stage. US production has just risen to the highest level since at least 1983. This has occurred during a time when the US rig count has seen a 12 percent reduction. While it shows that marginal producers are currently being hurt by the slump, we have yet to see a major impact on US shale producers’ ability to produce.
China, the world’s biggest importer of crude oil, increased imports by almost one million barrels per day during December as they continue to take advantage of lower prices to increase its strategic reserves.
The International Energy Agency in its monthly report Friday struck a slightly more optimistic tone by forecasting that a slowdown in non-Opec growth would trigger an increase in demand from Opec. The statement also said: “A price recovery, barring any major disruption, may not be imminent, but signs are mounting that the tide will turn”.
A major round of quantitative easing by the European Central Bank next week may also raise expectations for a quicker recovery in growth and thereby demand in Europe. This expectation also helped lift Brent crude back above the price of WTI crude after it briefly traded at a discount for the third time since 2010. Back then, increased US production combined with insufficient infrastructure to transport crude oil triggered a build up of inventories in the wrong places and prompted a dislocation between the two global benchmarks.
One of the major investment banks this week put out a bold call as it saw the potential of an end of Q1 price for Brent crude of $31/bbl. The reasoning is the ongoing failure of producers to respond to rising supplies and we agree that while crude oil can easily have some major recoveries we remain in an overall bear trend from which it is currently very difficult to escape.The Peninsula
