Refined product strength lifts crude – Saxo Bank MENA

(MENAFN- Matrix PR) Ole Hansen, Head of Commodities Strategy, Saxo Bank

Summary: The commodities sector continues to trade range bound with the Bloomberg Commodity Index hovering within a narrow 3.5% range since mid-December. During this period, strong gains in softs and energy have been offsetting losses across industrial metals and, not least, grains. In this update, we take a close look at under-pressure natural gas, crude's bounceback supported by product strength, platinum and palladium price parity, gold in a prolonged stalemate, cocoa's parabolic rise, profit-taking in uranium and finally a grains sector weighed down by ample supply.

Crude’s bounce-back supported by product strength and Middle East focus

Crude oil prices continue to gyrate while staying mostly rangebound, with the directional input being driven by the alternating focus between demand concerns weighing on prices and support from a not yet and limited risk of a supply disruption in the Middle East and OPEC’s efforts to support higher prices. The combination of these factors has, for the past few months, created a difficult trading environment with directional bets by speculators failing on several occasions, forcing trading positions, both long and short, to be adjusted on a regular basis, thereby creating moves that may not necessarily be supported by fundamentals.

Overall, we maintain the view Brent and WTI will probably remain rangebound, respectively, around $80 and $75 per barrel during the first quarter, but with disruption risks, OPEC+ production restraint, a tightening product market and incoming rate cuts potentially leaving the risk/reward skewed slightly to the upside. While the crude oil market remains rangebound, the fuel product market is showing some emerging strength, with refinery margins or so-called crack spreads continuing to rise. Not least diesel prices which are being supported by global stock levels falling below their seasonal averages. Distillate supplies, which include diesel, jet fuel and heating oil, have been disrupted by lower supply from Russia amid Ukrainian attacks on their refinery infrastructure and the attacks by Houthis on shipping vessels in the Red Sea and the Gulf of Aden.

Gold in stalemate between physical demand and “paper” selling

We retain a bullish outlook for gold and silver, but for now, both metals will likely remain stuck until we better understand the timing, pace and depth of future US rate cuts. Until the first cut is delivered, the market may sometimes run ahead of itself, in the process building up rate cut expectations to levels that leave prices vulnerable to a correction. With that in mind, the short-term direction of gold and silver will continue to be dictated by incoming economic data and their impact on the dollar, yields and, not least, rate-cut expectations.

The combination of a cautious Fed and recent economic data strength has seen the short-term rates market going from pricing in more than six 25 basis points US rate cuts this year to less than five, while bets on the first cut being delivered at the March 20 meeting has slumped to less than 20%. All
these developments highlight just how volatile markets can be in the run-up to a change in monetary policy.

The fact gold has ‘only’ lost around 2.5% year-to-date despite the stronger dollar, a pickup in bond yields, and reduced rate cut expectations is likely to have been driven by geopolitical concerns related to tensions in the Middle East, and not least, continued strong demand for physical gold from central banks and China’s middle class attempting to preserve their dwindling fortunes caused by the property market crisis and one of the world’s worst performing stock markets as well as a weakening yuan. In addition, the market has managed to deal with so-called “paper” selling with year-to-date outflows of 60 tons from ETFs and almost 200 tons sold by hedge funds in the futures market last month.

As per the gold chart below, the market looks increasingly stuck with physical demand from central banks, retail demand in China and India, and the Middle East concerns providing a soft floor under the market of around $2000.An upside break of $2065 looks difficult until we have a firmer idea about the timing, pace and depth of incoming US rate cuts. The fact that both gold and silver recovered following an algo-led selling reaction to Thursday’s stronger-than-expected US jobless claims print points to a market where the underlying demand remains firm.


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