Commodities have recovered strongly during the last couple of weeks after the June washout where speculative positions were reduced across the board. All the major commodity indexes are back in black having recorded solid gains over the last two weeks with increases seen across most sectors.
Just like other asset classes the commodity space is keeping a close eye on developments on either side of the Atlantic. The European debt crisis is still full on with politicians and central bankers fighting hard to avoid contagion towards other countries like Italy which came under significant speculative attacks early in the week. In the US the government is struggling to pass a law that will raise the debt ceiling with failure carrying the risk of downgrades and default. In the middle of this the Euro and the dollar is fighting it out with no clear winner emerging as of yet.
Oil: Half of the 60 million barrels of crude that the International Energy Agency was going to release from its strategic reserves has now reached the market and if the intention was to bring prices down it has so far been a failure. The price of Brent crude at 116 is almost unchanged from the levels before the release with bottlenecks still existing due to lost Libyan high quality oil. WTI is lower but as Brent is the benchmark for oil transaction it's really the one that counts.
Forward prices have stayed relatively firm as the main worry is still one of reduced spare capacity as increased demand from emerging economies in the months and years ahead continues to put strains on producers to keep up.
The price of Brent crude has been averaging 111.40 so far this year which is 39 percent higher than during 2010. This increase combined with higher food prices has impacted struggling households across the western world leading to reduced economic activity with the risk of additional rises reducing activity even further.
With the Libyan crisis still unresolved it remains to be seen whether the IEA will release more oil once the initial 60 million barrels has reached the market. The decision will be made 30 days after the initial announcement, which will be by Friday next week, so some speculation about this will help drive the market in the days ahead. Brent crude for September delivery is currently trading in a 114 to 120 dollar range with focus also firmly on the economic developments either side of the Atlantic.
Gold and silver: Gold made a new record high this week in several currencies as it benefitted from macro-economic news on both sides of the Atlantic. The worsening debt situation in Europe, the possibility of another round of monetary stimulus in the US combined with a possible credit rating downgrade have all been playing into the hands of gold bulls. During the last few months the gold space has become less crowded with investors having pulled money out of gold. This is now helping gold back to record territory with investors coming back despite it being a time of year with traditionally low physical demand.
On the back of a nine-day winning streak I would expect some near-term consolidation with $1,550 providing support and 1,600 the resistance. As long as the macro environment stays friendly towards gold there is no reason why the year long rally cannot continue. Should we manage to break above 1,600 it could set off towards the upper end of the trading channel, currently around 1,680. Silver also benefitted from the gold rally as it sits well below the highs reached in April. It has outperformed gold by some margin this week but is currently stuck in a $6 range with $40 providing some resistance.
Grain: The significant sell off in grain markets during late June and early July came to an abrupt end with fundamentals such as hot temperatures and increased exports driving prices higher. The sell off was extended by speculators pulling out of the market in a hurry, causing a dramatic drop in long positions held by Hedge Funds and large investors.
Rice: Rough rice traded in Chicago has rallied more than 13 percent during the last month on the back of reduced US crops combined with uncertainties about the intentions of the new Thai government with regard to its rice policy. Thailand, the world's largest exporter, could implement a minimum price to its farmers which would trigger higher export prices and thereby higher world prices. Meanwhile, in the US crop projections for this season have been reduced to 6 million tonnes from 7.55 million tonnes last year as dry weather in Texas and floods elsewhere have cut production.
Sugar: The price of sugar has stabilised around the 30 dollars per pound mark, after having rallied 47 percent from the May low. The market has been struggling to deal with expectations of the first fall in Brazil's sugar production in a decade. Bad weather has hurt the sugar cane crop leading to expectations for a 2.2 million tonne drop in sugar output to 32.4 million tonnes. This should keep supplies tight during Q3 which is also reflected in the forward prices.
Natural gas: The important 4 dollar level was tested again last week before a sharp bounce pulled it back towards mid range. The market is caught between expectations for a rapid growth of inventories this summer and the prospects for above average temperatures across two-thirds of the US, which could trigger higher consumption.
Cotton: The price of cotton dropped further this week as weather concerns in the US were offset by favourably global growing conditions which should help a rebound in global production from the depressed levels of the 2010/11 season. Production from China and India, two main producers, is expected to more than offset lost US output.
(Ole S Hansen, Senior Client Advisor at Saxo Bank)
© The Peninsula 2011
