Commodity review: Continued volatility in markets ahead

July 03, 2011 - 9:18:28 pm

Weekly Commodity Update

 By Kjeld Lynggaard

(Vice President,

Saxo Bank Trading Advisory)


It has been a Wild Wild West lately and a difficult few weeks for commodity players, hedgers and producers, with macroeconomic uncertainty prevailing over stock markets, with risk on and risk off on an intra-day basis and speculative positions being stopped out, washed out, re-entering, rebuilding, but not panicking. But most of the erratic moves have been caused by external events such as IEA release, USD volatility and not by rock firm underlying fundamentals supporting commodity prices long-term.

A reduction of speculative longs as observed in recent weeks is structurally positive for commodity assets, which still are run by weather developments, geo-political events and the good old supply and demand fundamentals.

Also Chinese speculative volumes reduced as Commodity futures trading in China, the largest buyer of copper and soybeans, tumbled 30 percent in the first half as regulators clamped down on speculation and as the central bank mopped up liquidity to ease rising inflation.

Around $7bn was withdrawn from core commodity investments in May, a level of outflow not seen since the financial crisis. Total commodity AUM experienced a massive decline of $26bn to $425bn , the first decline since August 2010 and the largest since the $55bn fall in October 2008 Stay alert Annie and keep some powder dry for continued volatility ahead.

Oil news is bullish: Indian oil demand was at its second highest level ever in May, with diesel demand at a record high buoyed by greater usage in power generation. Japanese demand already shows signs of improvement, with May demand down by just 90,000 b/d y/y.

Latest weekly DOE data show a fall in US oil inventories led by crude inventories, while June demand softens on the back of poor distillate demand. The surplus of US oil inventories relative to their five-year average has fallen by 4.1 million barrels in the latest data release and now stands at just 27.1 million barrels.

Oil prices recovered strongly this week as advocated by TAT in our Next Week and Trades on the radar for Saxo Bank Trading Advisory clients and now stand above levels at which the SPR was released.

August Brent gained $3.6 to $111.65/bbl while the equivalent WTI contract added $1.8 to $94.56/bbl. Indeed, after the initial knee-jerk reaction lower, it does seem to us that the market is finally viewing the IEA stock release with a fair degree of skepticism and even supporting bullish view, with worries about the possible signals it sends beyond the upfront price developments an focusing on the long-term impact. If in the long-term the oil goes back and the release is essentially borrowing oil from the future, it will have done little to alleviate market tightness for the future.

Moreover, if this is viewed as Opec being unable to meet current demand through its capacity usage or even worse if output is reduced as consumer governments take on the role of the marginal supplier, the negative impact on prices will be extremely short-lived and even positive….short term gain, long term pain!

Natural Gas: US natural gas prices gained on the week as warmer temperatures approaching supported the market. August contract is trading virtually flat to July, expired and gained from 4.20 to 4.36 during the wobbly week. The approach of warmer temperatures has overcome what still appears to be bearish sentiment in the marketplace.

Carbon: European Union carbon permits fell 20 percent in June, the most since January 2009 as regulators set rules that will prompt more supply and potentially trim demand. The EU plans to sell at least 300 million tonnes of allowances starting this year and running through 2012, boosting supply. They will be the first sales for the phase than begins in 2013 and ends in 2020. This week, Carbon regained some strength and trading low 2010 levels which seems low considering the global industrial pick-up.

Silver: Silver ETP holdings continue to dwindle, with June set to mark the third consecutive month of outflows also emphasised by recent reduced CFTC data showing only minor longs left in Silver futures.

Gold: Gold buckled under the weight of growing investor appetite for risk on Thursday after Greece looked increasingly likely to push through austerity measures, which offset the potentially bullish impact of a weaker dollar. The price of gold is on course for an eleventh consecutive quarterly gain during the second three months of 2011, so Gold is losing steam as safe haven status and inflation hedge excuses are evaporating. The battle for 1500 continues.

Agriculture – Cliffhanger: Corn extended its biggest monthly loss since October 2008 and wheat tumbled to the lowest level in almost a year after the US reported acreage and inventories that topped analyst’s estimates. Corn stocks to use ratio is currently below 5%, whilst wheat stocks around 21% of global annual consumption. Corn cannot afford one single weather event and Apollo 13 will take off again. Rice, our top pick, however raced limit up the daily 50c to 15.05.

Cotton down: US farmers seeded 9.2 percent more cotton than forecast in March, exceeding estimates by analysts, after prices surged to a record this year according to USDA data. Cotton fell to a seven-month as more orders were canceled from the US, the world’s top exporters, and a report showed planting topped estimates

Sugar: The strongest gainer was sugar, with the front month peaking 8% higher and closing only just 1% higher on the week. The Peninsula