Financial and commodity markets stabilised at the end of a week which was mostly spent waiting for the EU summit. Expectations for the summit’s outcome were so low that when EU leaders announced some new measures the market breathed a sigh of relief and rallied accordingly while the dollar sank thereby adding extra support to commodities. Whether this will turn into another 48 hour relief rally, just like those that have gone before, remains to be seen, with doubts still lingering - especially concerning with some of the measures facing hurdles in national parliaments.
Commodity markets moved higher with the broad based DJ-UBS commodity index rising by four percent with most of the gains stemming from the agriculture sector (+7.5%) and energy (+3%) not least due to a strong rally in natural gas and a decent bounce in Brent crude. The exceptional hot and dry weather in the US continues and this supports the price of crops and natural gas as the demand for cooling has triggered increased demand from power generators. Precious group metals palladium and platinum both fell to their lowest price levels this year as the outlook for these industrial metals is being adversely impacted by slowing economic activity.
Only rain can stop US crops from rising further
The dramatic rally in corn, wheat and soybeans during the last month has helped drive the DJ-UBS grains index up by 16 percent year to date, thereby outperforming all other sectors. As crop conditions continue to deteriorate the price of corn rose by one-quarter as the perfectly laid out plan with record acreage and expectations of a record crop began to look unachievable. Weather forecasts in the US, which hold the key to almost 90 percent of market performances, during this period of the planting season may help to halt the rally as some albeit limited amounts of rain is expected to fall in parts of the US Midwest next week thereby hopefully improving the prospects for crops.
Silver on a knife’s-edge
Silver has been on a downwards path since reaching nearly 50 dollars back in April 2011. Since this time several attempts to the upside have failed and been followed by subsequent retracements back to the 26.00 to 26.50 range which have provided solid support on several occasions during the past 18 months. Silver tends to track gold quite closely but as global economic activity has slowed so too has industrial demand for silver, which in turn has seen it underperform gold to the extent that the price correlation of the two metals has returned to its five-year average of 58 ounces of silver to one ounce of gold.
In the near term speculation about additional stimulus being provided by central banks and continued investment demand holds the key to silver’s performance given the uncertain economic outlook, strong mine production and the risk of a stronger dollar which tends to have an adverse impact on prices. Investment demand through Exchange Traded Products (ETP) has proven resilient despite lacklustre price performance with investors currently holding 575 million ounces compared with a record of 599 million in April 2011. Speculative investors, primarily hedge funds, have for now moved into other investments as they currently hold one of the smallest net-long positions in eight years.
On the chart above one can see that silver is balancing on a knife’s edge as it is once again tested the critical support level mentioned above with the added danger element being that the trend-line from 2008 can be found within the same area. A break below the September 2011 low at 26.07 could signal a possible extension as sell orders would flood the market and possibly take it one to two dollars lower while a rejection should give it enough confidence to retrace back towards resistance at 32.
With risk however being skewed to the downside traders have been positioning themselves through the use of options with out of the money put volatility rising strongly over the last week.
Gold almost unchanged year to date after bad quarter
Will gold add a twelfth consecutive year of positive price performance? With half of the year gone some work needs to be done in H2 in order to achieve another year of positive performance as it is currently up by only two percent following the worst quarterly loss in eight years. We still see gold recovering and having a go at the 1800 level later this year but just like silver is toying with critical support, so gold is too, - being currently just below the low 1500s. A clean out of weak longs cannot be ruled out before the market reasserts itself but for now we do not have many expectations for a break out of the 1525 to 1650 range that has generally prevailed for commodities during the last two trouble months.
Brent crude drives the attempted recovery
Oil prices stabilised this week but while trading mostly sideways Brent crude did better than WTI, which at one point dropped to an eight-month low, as several factors primarily supported the first resulting in the premium over WTI widening to 14 dollars from a recent low of 11 dollars. A strike among oil workers in Norway over pensions has reduced output by almost a quarter of a million barrels per day.
Elsewhere tensions between Turkey (NATO) and Syria are brewing while the sanctions against Iran are due to begin this weekend.
Peak in oil demand before peak in oil supply?
A report called “Oil: The Next Revolution” from the Harvard Kennedy School’s Belfer Center for Science and International affairs has received a lot of attention given its dramatic conclusion that world oil supply capacity will be growing much faster than consumption growth which potentially could lead to a glut of overproduction and a steep dip in oil prices. By 2020 the center estimates additional production could reach 17.6 million barrels per day compared with the current capacity of 93 mbd.
In order to achieve such production levels the price of oil has to stay above 70 dollars per barrel in order to maintain profitability from new sources such as oil from shale-rock formations, oil sands and deep water extraction. Most of the production growth will come from Iraq, the US, Canada and Brazil with the US especially standing out as it could become the world’s second-largest producer (after Saudi Arabia) and produce half of its own oil needs by the end of this decade.
These projections together with a continued rise in the world’s proven reserves (which according to BP is enough to last another 54 years) mean that discussions about peak oil supply could be replaced by peak demand as continued technological improvements and the move towards alternative energy could result in demand growth amongst emerging economies being potentially more than off-set by a reduction in OECD demand.
This projection, together with a continued rise in the world’s proven reserves (which according to BP are enough to last another 54 years) help nullify concerns about oil supply running out. Key contributory factors include continued technological improvements and the move towards alternative energy which will potentially result in demand growth amongst emerging economies being more than off-set by a reduction in OECD demand.