The DJ-UBS commodity index has been trading slightly weaker over the last week and is currently showing a year-to-date performance of just 5 percent.
Gains in the energy sector, primarily gas oil, Brent crude and natural gas were off-set by losses in the two other sectors, especially agriculture while metals also saw some losses as the dollar regained some ground and the S&P 500 index dropped to pre-QE3 announcement levels. Within the agriculture sector sugar and Arabica coffee prices were hurt the most, both on supply friendly news.
Near-term upside price pressure exists in oil markets WTI crude’s discount to Brent remains elevated and has reached 23.50 dollars per barrel, the highest level since October 2011. The reasons behind the latest move are several: low demand for WTI following a few US refinery outages combined with high domestic production has kept WTI under pressure. Meanwhile, Brent crude oil has witnessed fewer than expected shipments leaving the North Sea (after delays in the resumption of production due to maintenance) and has been affected by the on-going geopolitical tensions in the Middle East that increased this week caused by the stand-off between Syria and Turkey which is putting Iraqi flows at risk.
Natural gas to continue to benefit from coal switching
Natural gas continues to find support as coal to gas switching has helped reduce the supply glut in US underground storage facilities. A major spike however is not expected as this could result in the switch to be rolled back, given current depressed global coal prices. The extraction season, when demand exceeds supply, is slowly approaching and the near-term forecast for lower than normal temperatures have seen natural gas maintain support around 3.44 USD/mmbtu, being the 50 percent retracement of the 2011 to 2012 sell-off. Peak winter demand prices in February are already trading close to 4 dollars and further upside from that level will create some friction, given the price sensitive relation between coal and natural gas. A cold snap, as opposed to the very mild winter witnessed last year, would however lend support as inventories would shrink even further.
Precious metals – gold pausing ahead of 1800 USD
Gold investments through Exchange Traded Funds reached a new record during the week with more than 200 tonnes added since the rally resumed in mid-August once the price moved above 1,625 USD/oz. Hedge funds and other leveraged investors only joined in following the break above that level but have since then added 380 tonnes. Physical demand from China and India, the two major buyers, has been subdued but a pick-up has been witnessed over the last couple of weeks while central bank buying, especially from emerging economies, is expected to reach a new record in 2012.
All in all we continue to see further upside potential for gold and to a lesser degree silver as reduced demand from industrial users increases the pressure on financial investors to keep the supply surplus down. With the open ended nature of quantitative easing (part three), we see the potential for gold reaching the 2011 high at 1,921 USD/oz during December following an initial period of consolidation as USD 1,800 offers strong resistance. Into 2013 the rally may eventually take us up and above the physiological barrier of USD 2,000 before reaching a technical target of USD 2,075. The absolute line in the sand below is now the USD 1,500-50 area but we expect technical support at the 200-day moving average (currently at USD 1,659) will hold off any downside attempts.