The commodity sector ended the last week of April close to unchanged, but overall it was down for a second consecutive month – albeit by just 1%. The aftermath of the first round of the French presidential election saw gold weaken as the political risk faded, but it nevertheless put up a good fight against multiple headwinds from a weaker JPY to rising stocks and bond yields.
Crude oil also faced multiple headwinds and slumped before once again managing to find support. Drivers were returning production from Libya, stubbornly high US and global inventories, and concerns about Opec’s ability to successful extend production cuts into H2.
The agricultural commodities were mixed with the soft sector being hit again from continued selling of cocoa, coffee, and not least sugar. Key crops such as corn and wheat received demand from funds covering sold positions amid some concerns about the US planting prospects due to cold and wet weather. Gold traded in a relatively tight range following the initial weakness in the aftermath of the first round of the French presidential election, which yielded no major surprise. Trump presented his tax reform plan but being short on detail, it failed to hurt gold as the prospect of getting it past lawmakers could prove difficult.
Other headwinds were the continued strength in US and global stocks and a pickup in US bond yields. These developments were countered by North Korean worries as Trump warned that a major conflict remains possible if diplomacy fails.
April was not a good month for silver as it failed to receive the safe-haven bid which helped support a strong mid-month rally in gold. Hedge funds held a record net-long in silver as the month began, and the unwinding pressure from these helped bring down the cost of silver relative to gold.
The ratio between the two (which reflects the number of silver ounces required to buy one ounce of gold) reached 73.25, the highest level since last June.
The impact on gold from Trump’s presidency remains to be seen and as he celebrates his first 100 days in office, gold has returned to the level it was trading at prior to the November 8 election.
In between, however, it has been a very bumpy ride with an 11.5% selloff in the immediate aftermath being replaced by a strong rally as the reflation trade began to fade.
Where gold will trade following the next 100 days depends on several factors, including the trajectory of US growth and the Fed funds rate, the dollar, and the level of geopolitical uncertainty combined with Trump’s ability to get his policies pass lawmakers on Capitol Hill.
The multi-year downtrend line, now just below $1,290, has been rejected six times during the past year.
A rally above this level will set the stage for an extension while a break below $1,235/oz – the uptrend from December’s low – could see renewed long-liquidation.
We have been encouraged by gold’s recent resilience and while neutral at current levels we maintain our overall bullish stance with a year-end target of $1,325/oz.
This week we have an almost forgotten FOMC meeting as the risk of another rate hike has been put at single digits. It is also worth keep in mind that May has from a recent historic perspective proven to be a challenging month for gold with the price falling in 4 out of 5 as per the table below. April has been a troubled month for oil as the tug-of-war between the Opec-led cutting efforts and rising US production continued. However it seems to be finishing on a firmer footing after seeing a rejection below the 200-day moving average on both WTI and Brent crude oil.
The latest weakness that took oil through support came from additional supply pressure from Libya which is planning to lift production by 300,000 barrels/day following the restart of two oilfields.
The closure of Libya’s largest oilfield, combined with the US missile strike at Syria, were two key reasons behind the early April rally.
The weekly US inventory report proved to be another challenge for the market as a supportive reduction in crude oil inventories increased stocks of gasoline and distillates through surging refinery activity.
In addition, more crude oil was exported while imports from key Opec producers rose for a second week.
On a positive note from a price perspective, the weekly estimate of oil production growth slowed for a second week to 13,000 b/d, well below the 30,000 b/d average witnessed since last October.
We maintain the view that the oil market remains rangebound for now and we may see the price tick higher after finding support towards $50/barrel on Brent and below $50/b on WTI. The geopolitical risk premium has been removed but can return while in the US we have seen production growth slow during the past couple of weeks.
Opec meets on May 25 to discuss a potential extension of the current deal. The expectations for a seasonal pickup in H2 demand combined with a slowdown in US production growth would help boost the impact of an extension.
Opec seems to be in general agreement that an extensions will be required, in order to avoid an even deeper selloff, but much hinges on Russia, which so far has adopted a wait-and-see approach.
* Ole Hansen is head of commodity strategy at Saxo Bank.
Ole Hansen
