WCU: Oil slides and gold shines in volatile start to 2016

WCU: Oil slides and gold shines in volatile start to 2016

Ole Hansen Head of Commodity Strategy / Saxo Bank

A tumbling Chinese yuan triggered a major rout across global markets during the first trading week of the year. Plunging Chinese stocks twice forced trading halts, while global stocks had the worst four-day start to a year since 1988. Oil prices collapsed to the lowest since 2004, gold surged on safe-haven demand and short-covering from overextended short positions, and industrial metals fell under the weight of potential bigger-than-expected slowdown in China, the world's biggest consumer.

Looking at the individual commodity performances below, it felt a whole year was packed into just one week. The overriding theme which helped drive the Bloomberg commodity index to a 1999 low was the uncertainty about whether the accelerated devaluation of the yuan was an expression of unexpectedly sharp slowdown in China.

Stock markets across the world took fright at this thought, and China's Shanghai Shenzhen CSI 300 index slumped by double-digit percentages before managing to stabilise at the end of the week when the CNY finally fixed a bit higher. The stronger than expected US job report on Friday failed to trigger a recovery which indicates that more pain can be expected in the short term.

The energy sector was the hardest hit despite some support from colder US weather, which helped send natural gas higher. Crude oil traders started the week getting caught out by heightened geopolitical tensions between Iran and Saudi Arabia. But the price boost this uncertainty lent the market lasted less than 24 hours, and what followed was a sharp selloff.

This was driven by a resumed focus on the current global oversupply, which is only expected to get worse this quarter before improving later this year. Adding to the supply focus traders also had to deal with the potential impact of Chinese demand failing to meet expectations.

WTI and Brent crude found support at $32/barrel, while Opec's oil basket continued to slump reaching $27.85/b on Thursday. Spare a thought, however, for Canada where the price of the Western Canadian Select, one of the most expensive crude oils to extract, slumped below $20/b to hit a record low at $19/b. Current prices are well below shut-in levels, and we could start to see producers taking projects offline or shut down completely.

Lower prices are the cure for high production, and with increasing numbers of high-cost producers in the US and Canada now operating below the shut-in level, we will see output begin to slow over the coming weeks and months. But before that happens the market still have to deal with the extra barrels to come from Iran within weeks, while at the same time coping with US inventory levels, which are more than 100 million barrels above the five-year average. The important storage facility at Cushing, Oklahoma, which serves as the delivery hub for WTI crude oil futures has seen a 10-million-barrel increase during the past couple of months. At 63 million barrels, tanks are approaching full capacity, and if they fill up, tank owners will need to push oil away at lower prices to attract buyers.

The oil recovery, once it eventually occurs, will not happen until the market becomes convinced that the risk of further losses has been reduced. What will follow is a potential sharp move higher, with speculative shorts adding some additional upwards pressure.

Geopolitical risks are never far away, and the new year gave us a reminder of this, with the spat between Iran and Saudi Arabia. But it also gave a good indication of how immune the market has become as the sheer overhang of supply has reduced the threat of price spikes similar to those witnessed during earlier parts of this decade.

The geopolitical risk premium tends to be priced through Brent crude, so any increased tension could see Brent recover some of the premium against WTI crude that was lost following the removal of the US export ban last month.

In the near term, the $30/b level will provide a major line in the sand, while a breach of resistance at $40/b will be required before we can begin to talk about a low being in place. The options market has seen a major pick-up in demand for puts, with strikes at $30 and $25, and this could be an indication of increased fear of further losses or simply that traders increasingly prefer to express further price weakness through options.

Gold has started 2016 on the attack, with prices heading higher, particularly when priced in yuan. Safe-haven bids and lower bond yields related to the tensions in the Middle East, combined with the Chinese troubles and yuan devaluation, have all helped to attract buyers (not least from hedge funds who entered the year holding a record short position).

From a technical perspective, gold has been trading sideways since November, but the break above $1,102/oz has opened the door for move higher, initially to $1,119/oz. The stronger-than- expected US job report on Friday failed to send the dollar higher, and gold managed find support ahead of $1,088/oz, which is now the key level below which sentiment once again could sour.

Investors trading gold through exchange-traded products were net-sellers during the past couple of weeks, and only at the end of the week did we see a pick-up in demand. Total holdings at the beginning of this year are still hovering just above a six-year low.

Any change in sentiment at this stage will leave many - and particularly the aforementioned funds - underinvested, but at this stage no large-scale reduction or change in sentiment has been detected. This leaves the upside limited for now with strong US data still pointing towards an accelerated pace of US rate hikes.

Subscribe to Trend in Google News! Subscribe
MFA of Kazakhstan issues statement on European Parliament resolution on situation in country
MFA of Kazakhstan issues statement on European Parliament resolution on situation in country
16,284 more COVID-19 cases reported in Kazakhstan
16,284 more COVID-19 cases reported in Kazakhstan
Kazakhstan Railways opens tender to buy spare parts
Kazakhstan Railways opens tender to buy spare parts
Loading Bars
Turkmenistan has great potential for green energy initiatives – USAID
Georgia, Azerbaijan discuss customs cooperation
USAID eager to partner with Turkmenistan on low carbon development
Only Azerbaijani citizens older 18 allowed to visit liberated lands - adviser to minister
Azerbaijani currency rates for January 21
Uzbekistan shares domestic COVID-19 data for January 20
Oil falls as U.S. inventory build prompts profit-taking
MFA of Kazakhstan issues statement on European Parliament resolution on situation in country
Japan approves Pfizer's COVID-19 vaccine for children aged 5-11
2022 can be called the year of investments in Karabakh - Country Managing Partner of PwC (Interview) (PHOTO/VIDEO)
16,284 more COVID-19 cases reported in Kazakhstan
China, Russia delay U.S. bid to sanction North Koreans at U.N.
Turkey confirms 71,843 daily COVID-19 cases
New vaccine passport rules in France to come into power from next week
U.S. FAA approves 78% of planes for low-visibility landings near 5G airports
Gloomy Netflix forecast erases much of stock's pandemic gains
Turkey, El Salvador sign 6 agreements during Bukele visit
Austria becomes first country in Europe to mandate COVID-19 vaccination for all adults
Google launches fresh appeal to overturn $2.8 bln fine at top EU court
Russian, Iranian top diplomats confirm commitment to Vienna talks to restore JCPOA - MFA
Gas prices in Europe above $900 per 1,000 cubic meters
Tehran offers swap of Russian gas from Azerbaijan to southern Iran
Czech Development Agency eyes launching new projects in Georgia in 2022
Sudan military chief Burhan announces ministerial appointments: Sovereign council
Azerbaijani FM discusses issues of bilateral cooperation with Austrian minister
Azerbaijani FM meets with OPEC Secretary General (PHOTO)
UN General Assembly adopts resolution condemning Holocaust denial
Cavushoglu and Israel's Lapid hold phone call
Iran, Russia reach agreements in oil and gas sector, says minister
Children over 5 years old allowed to be vaccinated against coronavirus in Uzbekistan
Ankara expects to host Putin-Zelensky meeting - Erdogan
Turkey, Qatar agree on ensuring security at Kabul airport
Turkish Parliament speaker pays tribute to memory of martyrs of Azerbaijan's January 20 tragedy
Georgia slightly decreases imports of petroleum gases from Azerbaijan
US will keep probing diplomats’ health incidents: Blinken
Georgia shares data on cement imports from Azerbaijan
Kazakhstan Railways opens tender to buy spare parts
Azerbaijan's metallurgical production increases
Cost of manufactured computers up in Azerbaijan
Central Bank of Turkey makes decision on key rate
President Ilham Aliyev receives Advisor to French President's Cabinet and EU Special Representative for South Caucasus (VIDEO)
January 20 tragedy laid foundation for Azerbaijanis' struggle to restore their statehood and independence
Azerbaijan shares data on number of vaccinated citizens
Price indexes of industrial, trade sectors at Uzbek stock exchange rise
Azerbaijan confirms 1,186 more COVID-19 cases, 582 recoveries
Turkish VP tweets about anniversary of Azerbaijan's January 20 tragedy
Kazakhstan talks persons not eligible for support on loan deferrals, write-offs
Uzbekistan’s Bukhara oil refinery discloses volume of its production in 2021
Turkmen enterprise releases its first tablets and smartphones
Azerbaijan is beneficiary of recovery trend in hydrocarbon market - Gazprombank
Technical specifications of Azerbaijan’s Khizi-Absheron power plant revealed
Uzbek Central Bank makes decision on its main rate
Azerbaijan boosts oil exports to Georgia
State Statistics Committee discloses cost of machinery, equipment produced in Azerbaijan
Cars re-export from Georgia to Azerbaijan increases
Uzbekistan’s gas chemical complex reveals volume of its products for 2021
Kazakhstan unveils value of vehicles insurance over 11M2021
Kazakhstan reports increase in monetary base value
Kazakhstan's first president to retain right to speak at parliament and government
Azerbaijani Executive Power in Baku opens tender for purchase of truck spare parts
Tesla Berlin factory to elect works council on Feb 28
Kazakhstan to introduce two alternative ways to repay deferred payments
Introducing hydrogen as energy carrier can raise energy security risks
Impact of large-scale protests in Kazakhstan yet to play out - WoodMac
Azerbaijan's State Agency for Use of Mineral Resources opens tender on survey services
India’s cumulative COVID-19 vaccination coverage exceeds 158.88 Cr
PM Modi to host first ever India-Central Asia Summit in virtual format on Jan 27
Indian NSE world’s largest derivatives exchange for 3rd straight year
Artel launches Innovative Educational Center in Tashkent
Uzbekistan shares data on industrial production in 2021
Events held in Azerbaijani army, dedicated to January 20 tragedy (PHOTO)
Guides to accompany passengers of bus trips to Azerbaijan’s liberated Aghdam, Shusha cities
Can hydrogen market be cartelized?
Azerbaijani NBCO eyes boosting car loan portfolio
Memory of January 20 tragedy victims honored in Azerbaijan's Shusha (VIDEO)
Indian economic recovery yet to attain durability: Icra
Russia records another 38,850 coronavirus cases, highest daily number since Nov 13
PM to launch India-assisted projects with Mauritius counterpart Jugnauth today
Rapid growth of hydrogen to underpin rising demand for nickel, zirconium
Azerbaijani State Border Service to purchase building materials via tender
Iran’s CBI discloses data on balance of bank loans
Uzbek Statistics Committee reveals amount of construction work done in 2021
Azerbaijan's minister of health talks quarantine regime
Turkmen garment factory ramps up production
Iran reveals COVID-19 data for January 20
IEA expects Azerbaijan to increase oil output in 2022
Turkish MoD shares publication on anniversary of January 20 tragedy in Azerbaijan
Work related to Armenia's environmental crimes in Azerbaijan's Karabakh in progress - ministry
Iran’s Bahar Azadi gold coin price continues to rise
Turkish, Armenian special reps to discuss confidence-building measures - FM
IEA evaluates Azerbaijan’s OPEC+ compliance
Kazakhstan crude and condensate production estimated to go up in 2022
European Hydrogen Backbone joined by six more companies
Swiss Expo inks solar power purchase agreement in Poland
Кazakh Electricity Grid Operating Company opens tender to buy spares for vehicles
Turkmenbashi refinery opens tender to purchase necessary equipment
EBRD to allocate loan for Turkey’s renewable energy sector
Azerbaijan develops action plan to provide liberated areas with internet
Georgia shares data on trade turnover with Azerbaijan
Russian MFA talks about expansion of transport corridors within GUAM
All news