Saxo Bank: Commodities boosted by fading dollar
Baku, Azerbaijan, Jan. 30
By Anvar Mammadov - Trend:
Seven consecutive weeks of dollar selling has supported a strong rally in commodities, not least energy and precious metals, Head of Commodity Strategy at Saxo Bank Ole Hansen told Trend.
It culminated this week when the Bloomberg dollar spot index, which tracks the performance of the dollar against ten leading currencies, including the Chinese yuan, reached a fresh 3-year low, he said.
Crude oil continued higher as it found support from dollar weakness, supportive comments from Saudi Arabia and Russia and a continued reduction in US crude oil stocks, he added.
“The rally only paused after both WTI and Brent crude oil managed to recover half of what was lost during the 2014 to 2016 selloff,” he said.
A combination of a seasonal slowdown in refinery demand and rising gasoline stocks due to lower demand during the winter months and the continued rise in production is soon likely to pause the record stretch of weekly crude oil inventory reductions, he noted.
“Once that happens the market is likely to turn its attention towards the relentless rise in US production which could soon breach 10 million barrels/day,” he said. “Combined with a record long position of close to 1.1 billion barrels held by speculative accounts this is likely – at minimum – to trigger a halt and potentially, a correction. Given the impact on the price of oil of a few hundred thousand barrels per day in changed supply or demand we see the risk – especially during coming months – skewed to lower prices with Brent crude oil more likely to settle into a $60 to $70 range instead of continuing higher.”
“A weaker dollar still combined with renewed geopolitical risks are likely to be the key sources of support that could upset our call for lower prices during the first quarter of 2018,” he noted. “In the short term, the recent highs at $65 in WTI and $70 in Brent crude will offer support while a break could signal the potential beginning of a correction phase.”
Gold reached resistance at $1,366/oz before finding sellers and after having rallied $130 since December 12 and without any significant pullback, the yellow metal increasingly looks in need of consolidation, according to the expert.
“Underlying demand remains strong and only a significant change in the current negative dollar outlook can hurt this sentiment,” he said. “However, a healthy correction back towards $1,316 should not be ruled out at this stage. A longer-term chart shows that a break above $1,380/oz could see gold targeting $1,484/oz.”
The softer dollar also helped support the grains sector which showed a rare sign of life, the expert noted.
“This occurred on a combination of increased export competitiveness for dollar-denominated contracts and the need for funds to reduce what up until recently had been a record short position across the three key crops of corn, wheat and soybeans,” he said. “While this supported Chicago traded crop contracts the euro-denominated milling wheat contract traded in Paris struggled. With the negative fundamentals in terms of the current overhang of supply not having changed to any large degree, it remains to be seen whether the sector can trade much higher on just the currency correlation.”