By Ole S. Hansen: Head of Commodity Strategy
The gains were led by crude oil and metals, both industrial and precious. The agriculture sector rally paused following a recent run of gains driven by trade optimism. An indication that the market after pricing in a grains supportive light U.S. – China trade deal have now adopted a wait-and-see approach ahead of next month’s meeting between Trump and XI at the APAC gathering in Chile.
The gains in growth dependent commodities such as oil and industrial metals were particularly interesting as they occurred despite further signs of a slowing global economy led by Germany and South Korea. Instead it was supply developments that supported the market, with crude oil responding to a surprise weekly drop in U.S. stocks and emerging signs of slowing U.S. shale oil growth. Industrial metals reacted to social unrest in Chile, which cut supplies from the world’s biggest producer of copper. While nickel was bid as stocks at LME registered warehouses continued to drop ahead of the January 1 export ban of nickel ore from Indonesia.
Precious metals traded higher with the focus moving from faltering bonds to growth and geo-political concerns. The bond market rally which drove the June to August surge has paused. Most noticeably in European government bonds as the public revolt against negative yields continues to grow. Gold traded back above $1500/oz and silver above $18/oz as the market focused on economic data weakness and the prospect of another U.S. rate cut on October 30.
Gold’s range-bound trading behaviour around $1500/oz extended into an 11th week with the market in need of a spark to kick it back to life. Trading up by 17% year-to-date and with the GDX ETF tracking major miners up by 30% it is only natural to see some caution emerging ahead of year-end. Gone for now is the roaring bond engine, which back in June and August helped the yellow metal break above $1380/oz and outside of its multi-year range. But despite seeing bond yields stabilize following their rapid descent, U.S. stocks near a record high and the outline of a trade deal emerging, gold has managed to avoid a major correction as the underlying demand remains.
During a four-week period up until October 15 leveraged funds reduced bullish gold bets by one-quarter or 72 million ounces to 220 million. However, in doing so and given the limited price impact of these reductions the market has grown more optimistic about a renewed push to the upside. We maintain our $1550/oz year-end forecast with the potential for a weaker dollar, growth and political concerns providing the required support.
From a charting perspective gold remains in good health having so far avoided even a minor correction. Instead of challenging support at $1450/oz, the 38.2% retracement of the June to September rally, it is now attempting a break above the downtrend from the September high.
Crude oil remains stuck with WTI trading around $55/b and Brent around $60/b. While the short-term outlook has improved, the 2020 outlook remains challenging with the International Energy Agency looking for non-Opec supply to exceed demand, thereby putting pressure on the Opec+ group to cut even deeper.
In the short-term however, the market has found support from a surprise drop in U.S. crude stocks and expectations for a robust refinery activity to meet increased shipping demand for low sulphur fuel before IMO20 regulations begins next year. Current demand for crude oil and subsequent softening into 2020 can be seen in Brent crude oil with the June-2020 futures contract trading at a discount of $2.4/b to December-2019, the current front month.
How to address this price suppressing gap between supply and demand in 2020 is likely to be a major market focus ahead of the Opec+ group meeting in Vienna on December 6. At a time of slowing global growth and with that demand for oil, the group will find itself in a position of having to cut deeper or let the price drop further in order to force an accelerated slowdown in U.S. production growth.
We maintain the view from our Q4 outlook that Brent crude oil is likely to remain range-bound around $60/b ahead of year-end.