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Saudis lifting oil while gold remains rangebound

Oil&Gas Materials 16 August 2016 17:18 (UTC +04:00)
Following a strong first half of the year for commodities, gains this quarter (with the exception of metals) have been harder to come by, Ole Hansen, Head of Commodity Strategy in Saxo Bank told Trend on Aug. 16.
Saudis lifting oil while gold remains rangebound

Baku, Azerbaijan, Aug. 16

Trend: Following a strong first half of the year for commodities, gains this quarter (with the exception of metals) have been harder to come by, Ole Hansen, Head of Commodity Strategy in Saxo Bank told Trend on Aug. 16.

In response to the continued delay of oil markets' rebalancing and the prospect of another bumper US crop, hedge funds have cut bullish commodity bets by 40% during the past six weeks. These developments have left some markets exposed to the risk of contrarian trades triggering renewed strength, not least in oil markets where a record gross-short was seen before the latest recovery.

With this in mind the Saudi energy minister on Thursday weighed in to support oil prices saying that large short positioning in the market had caused the oil price to undershoot. His comments sent oil, still reeling from a huge overhang of supply, sharply higher. As a result, oil advanced by the most since April.

Real money investment demand for commodities has seen a strong revival this year but as the table below shows most of this demand has been going towards precious metals, not least gold. The SPDR gold shares (GLD) which is the world's biggest gold ETF have so far this year seen net flows of more than $13 billion with the iShares Gold Trust (IAU) in second place receiving $2.8 billion.

The performance across these sectors have been very impressive so far this year. Not least the white metals of silver and platinum which following the Brexit vote back in June have seen a phenomenal run higher. In order for these impressive gains to be maintained all eyes are clearly on gold. Following two failed attempts to challenge the $1,375/oz high from July 11 the yellow metal has started to look exposed and the risk of another correction is lurking.

The longer-term prospects hinge on the direction of the dollar and the actions and intentions of central banks, not least the US Federal Reserve. Fed chair Janet Yellen is due to speak at the annual Jackson Hole Policy Symposium on August 26. This annual event in the Wyoming mountains has become the Davos for central bankers and will be keenly watched with bonds, equity and commodity markets all looking for additional guidance.

Crude oil torn as short-term and long-term conflict collides

It was a big week for reports and forecasts as the three major oil institutions of EIA, Opec and IEA all released their monthly views on energy markets.

The EIA continues to see the global oil market being oversupplied deep into 2017. In their update they also raised US average production for 2017 by 100,000 barrels/day to 8.3 million, still some 400,000 b/d below 2016.

Opec also saw the rebalancing of world markets being delayed. Instead of a small average deficit for 2017 in the previous report, it now expects the global oil market will see a 100,000 b/d average surplus.

The IEA was a bit more upbeat on the rebalancing process, despite record Gulf production. Citing the report Reuters wrote that "oil markets will begin to tighten already during the second half of 2016 but process will be slow and painful as global demand growth declines and non-Opec supplies rebound".

These developments add to the concerns that current high inventories of both oil and products will take longer to reduce back to longer-term averages. With this in mind and following the recent selloff back towards $40/b several Opec members once again stepped up support through verbal intervention. A similar approach had already proven successful on a couple of occasions this year but with the focus on oversupply and a surprise weekly rise in US inventories it needed the support from Saudi Arabia's Energy minister Falih to succeed.

Recent developments highlight the continued battle between those holding short-term and long-term views on the market. Once the glut begins to fade, investors will turn their attention to the billions of dollars in lost investments having been removed during the past two years.

These, combined with continued rise in demand, will eventually create the need for higher prices in order to incentivise new production, both from traditional and non-traditional production techniques.

Saxo Bank does not see Opec taking any action at this stage but the delay to the process of achieving balance will ensure continued comments from members to prop up the price as we approach September, a month which has yielded negative oil returns for the past five years.

Saxo Bank maintains its Q3 call for Brent crude to trade mostly within a $45-50/b range. An end-of-year price much higher than $50/b will be hard to achieve with the additional price recovery likely having been delayed well into 2017.

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