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Saxo Bank: Commodities higher on cocktail of dollar weakness and inflation

Business Materials 20 February 2018 20:54 (UTC +04:00)
Crude oil, led by WTI, recovered close to half of its early February slump as the dollar weakened and US weekly inventories rose by less than expected
Saxo Bank: Commodities higher on cocktail of dollar weakness and inflation

Baku, Azerbaijan, Feb. 20

By Anvar Mammadov – Trend:

Crude oil, led by WTI, recovered close to half of its early February slump as the dollar weakened and US weekly inventories rose by less than expected, Ole Hansen, head of Commodity Strategy at Saxo Bank, told Trend on Feb. 20.

“We turn neutral on oil after seeing the price almost reach our Q1 downside objective,” he said. “However, a weaker dollar driven by increased concerns about the US economic outlook is not a strong enough foundation from where a price recovery can be established. On that basis we expect the market to remain range-bound for the time being.”

“Natural gas came bottom of the pile as strong winter demand continues to be offset by record production,” he noted. “With the market running out of heating days to dent inventories further, the risk is that the summer injection season could raise stock levels to a record ahead of the 2018-19 winter season. As a result of these developments Natural gas has slumped by 22% this month and is once again challenging key support at $2.52/therm, a level which has provided support on four previous occasions since 2016.”

“After falling by more than 12% and after almost reaching our downside target for this quarter, crude oil is showing increased signs of stabilizing,” he said. “However, a weaker dollar driven by increased concerns about the US economic outlook is not, in our opinion, a strong enough foundation from where a price recovery can be established.”

“During the past week the three most closely watched market forecasters Opec, the EIA and the IEA all released their monthly updates on the outlook for global supply and demand,” he added. “While there tends to be a difference in the outlooks, especially between the International Energy Agency (representing consumers) and Opec (representing producers), the trend towards rising non-Opec supply and steady demand continued.”

“The tightening of the global oil market that followed production cuts from the Opec+ group last year helped support a return to backwardation,” he said. “Such a situation where the first futures contract trades as the most expensive relative to the rest of the curve, supported a strong and eventually unsustainable accumulation of speculative bets from hedge funds.”

“The correction seen during the past couple of weeks was driven by the stock market rout and an oil market that had run out of the price-supportive news that was needed to support a speculative bet exceeding 1 billion barrels,” he noted. “Not least after US stocks began their seasonal climb, albeit at a slower than usual pace, and US production broke above 10 million barrels/day.”

“Brent crude oil managed to find support ahead of our target at $61/b, the 38.2% retracement of the June to January rally,” he said. “A correction of this limited size tells us that what we have seen so far is only a weak correction within the established uptrend. Adding the fundamental overlay of rising non-Opec production, crude oil is at best likely to settle into a range with sellers emerging ahead of resistance at $66.50/b on Brent crude oil.”

“Gold traded higher in response to the dual support from a weaker dollar, not least against the Japanese yen, and continued focus on inflation,” he added. “The latter received additional attention after seeing both consumer and producer prices beat expectations. For now though, gold is primarily a story about the weaker dollar with the recent gold negative spike in ten-year bond yields to 2.9% a four-year high and real yields to 0.8%, a two-year high having limited negative impact.”

“Gold has once again returned to an area of resistance where several battles between bulls and bears have been fought since 2014,” he said. “On the previous two occasions in July 2016 and last September the rejection resulted in sharp corrections. With this in mind it is natural to see the market pause once again while trying to gauge whether this time is different. Whether or not that is the case very much depends on the dollar's ability to weaken further while maintaining the theme of rising inflation potentially spiced with geopolitical uncertainty.”

“Breaking above the 2016 high at $1375/oz could see gold mount an extension towards $1436 and ultimately $1480/oz while another rejection carries the risk seeing a correction to $1330/oz.,” he added. “We maintain a bullish outlook for gold but would use current levels to reduce exposure and either wait for a pullback or a break above $1375/oz to re-enter.”

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