Baku, Azerbaijan, Nov. 13
By Anvar Mammadov – Trend:
The Bloomberg Energy Index reached a 10-month high, with the sector continuing to attract attention and demand, Ole Hansen, head of commodity strategy at Saxo Bank, told Trend Nov. 13.
“The approach of winter saw natural gas break out of its months-long price range, while crude oil traded higher for a fifth consecutive week, with increased geopolitical risks being the main driver of the latest gains,” he said.
“The geopolitical risk premium in oil, which began rising after Iraqi forces retook the Northern Iraqi city of Kirkuk from the Kurdish Regional Government (KRG) on October 16, increased further after arrests and charges of corruption against prominent princes, ministers and business people in Saudi Arabia. Tensions between Shiite-led Iran and Sunni-led Saudi Arabia added an additional lawyer of uncertainty.”
“A combination of supply disruptions, strong demand growth, falling global inventories and increased geopolitical risks have led to surging investment demand for crude oil, not least Brent,” he noted. “Due to liquidity constraints further out the curve, speculative demand tends to be concentrated at the front of the curve, thereby giving a potential false sense of the market being tighter than it is.”
“Heightened geopolitical risks – including those related to Saudi Arabia's purge of its leadership –have created a perfect tailwind for oil bulls already long a record 530 million barrels of Brent as such risks sideline potential short-sellers in danger of being caught if worries about supply disruptions turn real.”
“The 2017 Opec World Oil Outlook (WOO) was released this past week,” he added. “From 2016 to 2022 world consumption is expected to rise by a healthy 6.9 million barrels/day to 102.3 million b/d. The challenge for Opec, however, is that 5 million b/d of this growth could be delivered by non-Opec producers. Those producers include US shale oil plays, which Opec now says will grow considerably faster than previously expected over the next four years. The revised outlook illustrates Opec's current dilemma: with supply curbs also helping its rivals, demand for the group's crude will remain little changed until shale oil output peaks after 2025.”
“The weekly US crude oil production estimate hit an all-time high of 9.62 million b/d, thereby breaking the previous record from June 2015, just before the oil price crash sent US oil output spiraling down to about 8.4 million b/d,” he added. “China's October import of crude oil dropped to a 13-month low on a combination of a holiday-shortened month and independent refineries having used up their annual import quota.”
“Rising geopolitical risks have benefited Brent crude more than WTI, with its premium expanded once again,” Hansen said. “The US Energy Information Administration expectS the wide WTI/Brent margin to remain around $6 until the second quarter of 2018 before declining to $4/b. Rising shale oil production has increased transportation constraints from Cushing, Oklahoma – the storage hub for WTI crude oil futures – to the US Gulf Coast.”
“Apart from potential supply risks, the focus over the coming weeks will turn to the November 30 Opec meeting in Vienna, and not least the debate about whether the cartel already at this meeting will announce an extension of the deal to curb production beyond next March.”
“Brent crude spent the week consolidating after the latest surge,” he said. “The market remains overbought, but it should not prevent it from moving higher if the geopolitical risk escalates further. The elevated fund long is unlikely to created any downside pressure unless the price drops back below $60/b.”
“One year on from the US presidential election, we find gold increasingly stuck in a sideways trading pattern, pivoting around $1,250/oz, with lower highs and higher lows telling a story of a metal in need of a spark,” he noted.
“Key drivers for gold, such as the value of the US dollar, real interest rates and the Fed funds rate, have propelled gold in opposite directions during the past year. Gold-supportive dollar weakness has been offset by the rise in real yields and the Fed funds rate.”
“Initial gold weakness after the November 2016 election was driven by euphoria surrounding the economic and fiscal impact of promised infrastructure spending and tax reforms,” he added. “As 2017 arrived and Trump's popularity and ability to pass growth-friendly policies faded, attention swung to geopolitical risks.”
“The price gyrations have created a difficult environment for traders, including hedge funds as they got caught out on several occasions,” Hansen said. “Not least after the election when a near-record long had to be reduced and then again at the beginning of the year when gold rallied strongly on a combination of reduced rate hike expectations and geopolitical concerns.”
“After seven weeks of selling, funds held a long of 167,000 lots in the week that ended October 31, down by just 10,000 lots during the past year, but somewhat above the three-year average of 110,000 lots. Investment demand for exchange-traded products backed by bullion has been even steadier, with total holdings down by only 2%.”
“Looking ahead, gold will continue to take its cue from developments across other markets, not least the dollar and interest rates,” he added. “Geopolitical risks related to North Korea have faded during Trump's four-nation visit to Asia, while at home the Republicans' proposed tax reform may struggle to garner the majorities needed, not least in the Senate.”
“The latest news on the tax reform potentially struggling has seen gold move higher this past week, but for now the move has been lackluster to say the least, and it highlights gold's current predicament. Underlying demand from investors seeking protection has so far been sufficient to dampen the negative impact of fund selling, but, with no clear direction at this stage, traders should probably adapt a relative short investment horizon.”
“Nevertheless, having survived the latest selloff without making a lower low, gold is likely to attract some renewed attention on a break back above $1,290/oz which could clear a path back towards the October high at $1,306/oz.,” he added.