By Ole Hansen, Head of Commodity Strategy at Saxo Bank
Commodities were back on the defensive for a second week running with China growth worries, a stronger dollar and high inventories of key commodities such as oil and aluminum continuing to drag on the sector.
A surprisingly dovish statement from the European Central Bank, however, has primed the market for additional stimulus helping to reduce some of the negative sentiment across the board, not least among precious metals.
The biggest market moving event turned out to the ECB's monthly meeting. While leaving rates unchanged, bank chief Mario Draghi was very dovish in his comments particularly in his outlook for global growth which is still slowing.
With the prospect of a stronger dollar this leaves the potential for aggressive tightening from the US Federal Reserve much reduced. This will eventually support growth-dependent commodities and, in the near-term, investment commodities such as precious metals.
The technical outlook for gold has continued to improve since a low point was reached back in August and the latest surge to $1,192/oz has forced many trend- and momentum-following hedge funds to get back in. The weekly data from the US Commodity Futures Trading Commission covering speculative positioning among hedge funds and money managers shows this change.
A break above the recent high at $1,192/oz (which represents a 50% retracement of this year's range) would signal a move towards $1,220/oz. Support is located at $1,158/oz followed by $1,148/oz and it would require a move below $1,138/oz. to change the improved sentiment.
Challenging quarter for oil only just started
Crude oil continue to settle into the range that has prevailed since early September. With Opec showing no signs of yielding space to additional Iranian barrels once sanctions are lifted, the rebalancing process will continue to be a long, drawn-out process.
This is particularly apparent considering the current season of low refinery demand which this week saw US inventories move 110 million barrels above the five-year average.
US production continues to defy gravity with producers maintaining production from an ever-dwindling number of wells. While production is expected to slow and to become a major contributor to the rebalancing process, Opec members must be worried about the resilience shown.
If US production does not continue to slow down, Opec will have to find a way to make room for increased supply from Iran within a few months.
Failure to do so carries the risk of sending the oil price even lower and considering that current levels are low enough to slow non-Opec production, an even lower price would be totally unnecessary and would only create further havoc among producers.
In the short-term we see the market continuing to stabilise but a failure to hold above $44.5/barrel support on WTI crude oil would attract renewed selling from hedge funds who have almost halved their bearish bets during the past couple of months.