Ole Hansen, Head of Commodity Strategy/Saxo Bank
Oversupply, US rate hike and El Nino worries remain the three major themes in commodities markets. While the latter provided support to a few food commodities, the others helped drive the Bloomberg Commodity index to a new 16-year low following a fifth consecutive weekly loss.
The energy sector was the hardest hit, with crude oil weakening for a second week as the continued rise in inventories, especially in the US, remained the focal point.
Copper hit a five-year low and was the hardest hit among industrial metals. Concerns about higher US rates and the potentially negative impact on EM growth and the dollar combined with disappointing economic data from Europe and China remained the key negative drivers.
Oil dragged lower by supply overhang
Crude oil extended its slide into a second week as US stockpiles rose more than expected and the IEA said that OECD inventories had reached a record above 3 billion barrels. This primarily due to record production from Russia, Iraq and Saudi Arabia. Opec meanwhile predicted that global oil markets would remain oversupplied in 2016 which, if realised, would further postpone a price recovery.
US crude oil inventories reached 487 million barrels and now exceed the five-year average by 118 million barrels. While the number of oil rigs operating across the US continues to decline, we are yet to see a continuation of the drop in production that was seen in the third quarter.
The IEA, however, maintained its expectation that US production will fall by 600,000 barrels in 2016 and this, together with a continued strong year for demand growth, should eventually help the market to rebalance, despite an expected pick-up in exports from Iran.
The IEA also said that with "brimming crude oil stocks" and storage facilities filling up, the global oil market has built up "an unprecedented buffer against geopolitical shocks or unexpected supply disruptions."
Against this backdrop, crude oil will remain sluggish before the next OPEC meeting on December 4, and the lower the price is at that time, the more heated the discussions will be.
US refinery demand for crude oil will increase over the coming weeks which will prevent inventories from rising much further.
The current overhang of supply, increased oil from Iran next year, combined with a slow reduction in non-OPEC supply and concerns about the strength of the global economy, will result in nervous trading up to the December FOMC meeting, considering its potential impact on the dollar.
The current negative momentum could see Brent crude trade down to $43.25/barrel, which is not far from the August low at $42.23/b. In WTI crude, sellers could be targeting $40/b. Overall we continue to see rangebound trading over the coming months and the mentioned levels are likely to attract buyers if reached.