Half way through December and the slowdown in market activity normally seen this time of year has yet to arrive. A crazy year in terms of market events and movements look set to continue right to the close.
A year that gave us Brexit, Donald Trump, the potential end to a 30-year bull run in US bonds, the emergence of Chinese commodity speculators and Opec unity helped create some major market movements.
Within the commodity space, the year began with oil traders starring down the barrel without being able to see the bottom while precious metals saw light at the end of the tunnel following three years of selling. Industrial metals, meanwhile, were struggling with demand failing to keep up with rising supply.
One US presidential election, an Opec agreement and a US rate hike later the markets have been turned upside down. Oil has stabilised and look set to move higher next year, as long producers stick to agreed production cuts. Industrial metals have surged in the belief that fiscal policies instead of central bank handouts will support growth and increased demand.
Precious metals have received a serious knock in response to surging bond yields, record stock market levels and not least a dollar which has hit a 14-year high against a basket of currencies.
The Federal Open Market Committee delivered its much awaited second rate hike in this cycle. It helped extend the current dollar rally while sending US bond 10-year bond yields to a 27-month high. The outlook for three additional rate hikes in 2017 was the driver behind these moves as it was more hawkish than what was expected.
As a result, precious metals were knocked lower, thereby extending golds losing streak into a sixth week. The hawkish tone helped reduced the future inflation risk expectations and as a result the real yield (nominal yield minus inflation) jumped to 0.7% after averaging 0.25% this past year. Rising real yields in an environment of rising dollar and stocks remove the appeal of gold as an alternative investment and this is the situation that the metal is currently adjusting to.
However from a trading perspective we now find that the dollar is overbought while bonds are oversold and this development combined with support at $1,125/oz. could help trigger some consolidation.
Gold is now facing its biggest battle for support in a long time. The technical picture has deteriorated after leaving $1,172/oz behind. But with the market oversold and in need of consolidation, we should see the metal find support ahead of $1,125/oz, the next and final Fibonacci level on gold’s recent journey lower from the July high.
A break of the steep downtrend above $1,150/oz is required in order the shift the sentiment back to neutral and to halt the increased amount of fresh short-selling seen this past week.
Crude oil was on track to deliver its first weekly decline in five weeks. The latest spike in response to the deal with non-Opec producers to support the rebalancing process lasted less than 48 hours before news of increased supply from producers outside the recent deal sent it lower.
In the weekly “Petroleum Status Report” from the EIA, US production showed a jump of 99,000 b/d with all of it coming from the Lower-48 states which is shale oil country.
Although these weekly numbers are estimates and can be corrected before the department of energy releases its quarterly numbers, they nevertheless show a trend.
Rising US production combined with an unusual aggressive seasonal inventory build-up at Cushing, the delivery hub for WTI crude oil futures, helped put oil futures under some renewed pressure.
In its monthly Oil Market Report, the IEA struck a bullish note saying that the global oil market could reach a supply deficit during H1, provided the agreed production cuts were implemented. Opec’s own Monthly Oil Market Report struck a much more cautionary note in saying the same as the EIA, that the market may remain oversupplied well into H2.
Into these developments, we had the added news from Libya that two of its biggest oilfields in Western Libya and its largest export terminal are re-opening after being closed since 2014. The Sharara and El-Feel oilfields have the potential of raising Libya’s output by more than 400,000 b/d. If realised it will almost certainly make it impossible for Opec to reach its 32.5mn b/d production target during the early part of 2016. It may also add some additional pressure on Saudi Arabia to reduce production even further.
The renewed weakness is undoubtedly also being driven by the speculative traders reducing what was a record buildup in bullish bets following the Opec meeting on November 30.
In the week to December 6, hedge funds increased bullish bets in WTI and Brent crude oil by 228mn barrels to a new record of 728mn barrels. The downside price risk of such a big position, should profit taking set in, cannot be ignored. Even if the market does not correct in any major fashion, the latest news hitting the market may limit the upside with long liquidation likely to be seen into any major uptick in the market.
The ongoing dollar surge following the hawkish rate hike from the US Federal Open Market Committee could add another risk to longs at this stage. Although the correlation between the dollar and oil fluctuates, the risk to global growth and subsequent demand from a stronger dollar and rising cost of finance cannot be ignored.
After the 38.2% correction of the November rally, traders will be focusing on whether Brent crude can close the week above $54.60/barrel. This neckline of a major head-and-shoulder formation going back 15 months, will help provide some clues on short-term direction.
* Ole Hansen is head of commodity strategy at Saxo Bank.
Ole Hansen
