Baku, Azerbaijan, May 29
By Anvar Mammadov - Trend:
Commodities have outperformed other asset classes so far this year, and rising oil prices have steadily been feeding into an increase in headline inflation, says Ole Slot Hansen, head of department of strategy at Saxo Bank.
He told Trend that these developments together with increased geopolitical and weather concerns have all helped support investor demand for broad-based commodities exposure.
Rising commodity prices, according to him, led by crude oil have started to feed into headline inflation with its subsequent negative impact on bonds, often the biggest component in a diversified portfolio.
"The Bloomberg Commodity Index reached its highest level since 2015 this past week and is currently up by around 4% year-to-date. This means that it is still some distance behind the energy-heavy S&P GSCI index which has clocked up a 12% return so far," he said, noting that this is primarily due to crude oil’s surge to a 3½-year high on supply worries related to Venezuela and Iran.
"This past week, however, it was not crude oil and products that provided the gains. Instead, the grains sector and natural gas both found support from hot weather across the US. This development has been raising demand for natural gas from power plants to meet increased demand for cooling. Already dry weather conditions in the US and around the world has fuelled concerns about a price supportive reduced crop production this year," he added.
He noted that the extension of the crude oil rally following Trump’s decision last month of unilaterally abandoning the Iran nuclear deal has begun to run out of steam.
"This after Brent crude oil reached and found resistance at $80/b, a level last seen in late 2014. Faced with emerging signs of consumer unease about the rapid rise in recent months Saudi Arabia and Russia have both begun talking about rolling back some of the production cuts that during the past year successfully have supported a rebalancing of the global oil market.
The need to supply additional barrels to maintain a stable market has also become more apparent with the ongoing drop in Venezuelan production and the so far unquantifiable future impact of US sanctions on Iran’s export ability," he said.
According to him, in Venezuela the pace of decline of oil production is accelerating and following last week’s sham election which saw Maduro regain power the outlook for the country looks incredible dire. Adding additional sanctions from the US there is a risk that production could slump to just 1 million b/d, from 1.5 million currently.
"When sanctions hit Iran back in 2012 its exports fell by more than 1 million barrels. Without the support from Europe, Russia and China the impact of Trump’s new sanctions which will take effect before yearend is very difficult to quantify at this stage. Considering US ‘friends’ from Europe to Japan and South Korea currently buy around one-third of Iran’s export some impact on global supply cannot be avoided," he said.
On that basis, Hansen said, OPEC and Russia which have kept 1.7 million barrels/day away from the market since early 2017 are likely to step in sooner than expected to stabilise the market and prevent it from rallying to levels where global demand begins to be negatively impacted.
"At first the least controversial decision could be for the group to raise production by 300-500,000 barrels/day to meet the shortfall from Venezuela thereby bring the compliance back to 100% from the +150% seen in recent months," he said.
The short-term focus will center on the June 22 OPEC meeting in Vienna. The following day the cartel will meet with the non-OPEC group, especially Russia, who have supported the production curbs, he said.
" Watch what they do, not what they say, has been a very good description of hedge funds’ behaviour during the past four weeks. Since Trump’s Iran announcement hedge funds and money managers have been actively selling into the rally thereby cutting what a few months ago was a record combined long in Brent and WTI crude oil. In the week to May 15 the combined net-long dropped below one million lots to a five-months low," he added.
"The price behaviour this past week further strengthened the belief that the crude oil rally, at least for now, was running out of steam and needed consolidation. Two consecutive attempts to drive Brent crude oil above $80/b failed quite spectacularly as sellers emerged. News that both Saudi Arabia and Russia both suggested easing production cuts further added to the sense that the focus for now has turned to one of consolidation," Hansen noted.
He stressed that from a technical perspective Brent crude oil is currently consolidating more than its correcting. However, a break below $75.40/b could change this perception and help attract additional long liquidation.
As of 12:40 (GMT + 4) on May 29, oil prices declined. Brent is trading at the level of $75.28 per barrel, and WTI - $66.52 per barrel.
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