Commodities Weekly: Oil tumbles on supply/demand dynamics

Oil has been the biggest mover this week with the US-China trade war continuing to undermine the global demand outlook, despite an upbeat assessment of the US economy by Fed Chairman Powell. Gold is still struggling to maintain its safe haven status and other metals remain at the mercy of the rampant US dollar, while the agricultural sector remains broadly under pressure.

Energy

Crude oil prices have slumped more than 10% over the past week as the threat of increased supply and tapering demand take hold. There is growing concern that Trump’s tariff initiative will dent global growth and hence put a lid on, or even reduce, the demand for oil. Couple this with chatter that Saudi Arabia has offered more crude cargoes to Asian customers, so oil continues its retreat from 3-1/2 year highs struck at the beginning of this month.  West Texas CFD is now trading at 68.257 and the Brent/WTI spread is holding steady at about 4 pips.

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Natural gas appears to still be in consolidation mode after the steep slump in February this year. Summer months in the northern hemisphere is likely to keep demand subdued and Gas should remain close to the current 2-month lows. Near-term support could be found near last year’s lows in February and December around the 2.54 level.

Germany’s dependence on Russian gas and oil has once more come in to the spotlight following Trump’s visit to the NATO summit last week. Concerns that the building of a new pipeline directly linking Russia and Germany will introduce another “threat” level to the NATO alliance, be it from a dependence perspective or from a national security perspective.

 

Precious metals

Gold is still struggling for traction even as the US dollar pauses for breath after its stellar rise. The precious metal is now down 5.3% vs the dollar from its June 13 peak and has fallen 9.25% from this year’s high on January 25. Gold may find minor support at the December 2017 low of 1,236.683 and will likely be capped at the recent high of 1,266.113.

Source: Oanda fxTrade

There was little reaction to news that production at the Tongon gold mine in the Ivory Coast, which produced 288,680 ounces of gold last year, had come to a halt amid a strike by miners as government-led negotiations broke down.

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Latest data from Chicago’s Commitment of Traders report, with the snapshot taken as of July 10, shows that managed money accounts were net sellers of 1,273 gold contracts from a week prior and short positions exceeding long positions by 2,527 contracts.

Silver continues to echo gold’s heaviness and it looks set to retest the December low of 15.6316 in the near term. The low so far this year has been 15.7064. CFTC data as of July 10 shows money managers reduced net long positions by 3,434 contracts, but overall still hold net long positions.

The gold/silver (Mint) ratio has been steady over the past week with a mild upward bias targeting the 100-DMA at 79.1150.

Source: Oanda fxTrade

Platinum is just about managing to hold above the 800 mark following its first dip below the level since December 2008. A Reuters report from July 11 suggested that current prices are below the average production cost in South Africa, which was calculated to be $834 an ounce last year. Meanwhile, Johnson Matthey forecasts a global oversupply of 316,000 ounces, the biggest since 2011, for the year. The 55-DMA continues to cap to the upside while the July 3 low of 798.365 should hold in the near-term.

Palladium has drifted towards the lower end of its recent 3-month range. It is currently retracing the uptrend started at the beginning of 2016 and has so far managed a correction as deep as 21%. Palladium is currently trading at 922.52.

Base metals

Copper has plunged more than 18% from its peak in June as the escalating trade war between the US and China escalates, casting a huge shadow over the outlook for the global economy. The base metal closed below the 100-week moving average support last week for the first time since October 2016.Copper is attempting a rebound but any recovery could be limited by the slightly slower China Q2 GDP data released yesterday. Any impact from trade wars going forward on growth could limit demand for copper, since China is the top industrial metals consumer.

Agriculturals

Slowing demand and increasing production are both combining to keep sugar pressured. A report from India Sugar Mills Association yesterday suggests India’s sugar production could increase by 8.6% to 10.2% in the 2018-19 season. It estimates total acreage devoted to sugarcane is around 8% higher than the 2017-18 period. Money managers added about 11,000 contracts to short positions, according to the latest CFTC data as of July 10.

As with any crop, the weather could play a significant role and the second half of the year could see concerns about another El Nino weather pattern in Asia emerging. That could be the only hope for bulls. Sugar is now at 0.10946 after touching 0.10633 earlier today, the lowest since September 2015.

Corn is still attempting to recoup some of June’s heavy losses, and not making any headway. The CFTC data as of July 10 shows money managers are still holding net short positions, adding a net 10,064 contracts during the reporting week.

Soybeans touched a 9-1/2 year low of 8.074 early yesterday, yet appears poised for a second consecutive day of gains today. This would be the first time since end-May that the commodity has managed more than a one day uptick.  Monday’s low of 8.074 should provide near-term support while the July 6 high of 8.761 will be the next resistance point.

Wheat continues to hold above the 200-DMA at 4.4944 and is currently consolidating a rebound off a near-three month low seen last week. In a report released at the end of last week, the US Department of Agriculture offered a bullish outlook for wheat production, increasing harvested acres while upping yields per acre as winter wheat yields in the plains have been better than expected. They are also expecting a whopper spring wheat crop.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Andrew Robinson

Andrew Robinson

Senior Market Analyst at MarketPulse
A seasoned professional with more than 30 years’ experience in foreign exchange, interest rates and commodities, Andrew Robinson is a senior market analyst with OANDA, responsible for providing timely and relevant market commentary and live market analysis throughout the Asia-Pacific region. Having previously worked in Europe, since moving to Singapore he worked with several leading institutions including Bloomberg, Saxo Capital Markets and Informa Global Markets, proving FX strategies based on a combination of technical and fundamental analysis as well as market flow information. Andrew began his career as an FX dealer with NatWest and the Royal Bank of Scotland in the UK.