Commodities Report
– Ole Hansen, Head of Commodities Strategy, Saxo Bank
Summary: Our weekly Commitment of Traders update highlights future positions and changes made by hedge funds and other speculators across commodities and forex during the week to last Tuesday, January 23. A week where risk appetite was supported by a succession of record highs in the S&P 500 amid upbeat earnings reports and investors cheering the economy’s resilience despite the most aggressive policy-tightening in decades. Meanwhile, despite broad gains, the commodity sector continued to see net selling from funds, especially in metals and grains, supporting the short squeeze that was seen towards the end of last week.
Commodities
The Bloomberg Commodity index, which tracks a basket of 24 major futures markets split between energy (30.1%), metals (34.2%) and agriculture (35.7%), traded higher on the week with broad gains being partly offset by a 15% tumble in natural gas. However, despite the broad gains, the net long futures and options position held by hedge funds and CTA’s was nevertheless reduced for a fourth consecutive week, reaching a fresh September 2019 low. In the process, several commodities, especially industrial metals and energy futures exposed to what followed last week, not least rising geopolitical tensions, China’s surprise cut in its RRR as well and the US GDP surprise. Selling was concentrated in metals and grains, while demand was concentrated in WTI crude oil, gas oil, and more.
Middle East risk premium continues to ebb and flow in crude and gold
Last week’s technical-driven rally in crude oil above recent resistance, in WTI at 75.50 and 80 in Brent, was extended on Friday and today in Asia before deflating following news about a Houthi attack on a tanker in the Red Sea and the drone strike that killed US army personnel in Jordan. Since early December, when the Red Sea crisis threatened to spill over the wider region, the market has been trying to price in the risk of an actual but not yet realised disruption to supply, the result being a mostly range-bound crude oil price seeing temporary spikes before deflating.
The latest developments briefly sent Brent crude through the November high at 84.61 before running out of steam after Iran denied having anything to do with the weekend attack on a U.S. base in Jordan. It supports our belief that Iran has no intention of stoking a war that could set the Middle East alight and disrupt supply from the region. Key producers in the area and critical consumers of Middle East oil, especially in Asia, will not allow this situation to escalate to a point where supplies are being disrupted. Ahead of the US election, however, we may see the Biden administration tighten sanctions against Iran, but with plenty of spare capacity available from GCC members, the risk of a price spike is limited.
Energy: Reversing recent behaviour, WTI finally saw strong demand, with the net-long jumping 48% to 134k, an 11-week high, while Brent was reduced by 8% to 208k. The fuel contracts were mixed with a near doubling of the ICE Gasoil long-standing out. Elsewhere, a 15% slump in natural gas saw the net flip back to a small short.
Market Report
– Charu Chanana and Redmond Wond, Market Strategists Saxo Bank
Commodities: Having touched the top end of its recent range, oil prices dropped slightly overnight as Iran denied having anything to do with the weekend attack on a U.S. base in Jordan. Tensions are, however, likely to keep oil traders on edge with market chatter hinting that Biden could be expected to authorise US military strikes in mid-East in the US evening today. However, the Biden administration may remain cautious of an oil price spike ahead of the US elections this year and could probably choose sanctions over a military response with plenty of spare capacity available from GCC members. Metals rallied, with Gold and Silver particularly liking the drop in yields.
