Commodity Wrap - Oil, Gold, Natural Gas, Copper (20.06.2023)

Oil

• Oil remains under pressure due to a persistent oversupply in the market. It's worth noting that additional cuts from Saudi Arabia will take effect in July. Nevertheless, Brent price has returned to the upper range of consolidation at $77 per barrel. However, seasonality indicates a local peak in the near future.

• On the other hand, it's important to remember that the holiday season may lead to an increase in prices, considering the heightened consumption, especially in Arab countries.

• Currently, China is importing nearly 1.4 million barrels per day (bpd) of oil from Malaysia. However, Malaysia currently produces around 0.6 million bpd, which means that Malaysia is re-exporting oil of a different origin. It appears that this re-exported oil is most likely of Iranian origin.

• The significant share of Iranian oil prevents us from experiencing an additional shortage of oil due to the US and EU sanctions imposed on Iran

• JP Morgan sees a substantial oversupply in the market and points out that more cuts are needed from OPEC+ to sustain high prices. Bank lowered its year-end target price and set it at $81 per barrel

• Goldman Sachs recently lowered its 2023 end-year Brent price forecast to $85 per barrel

• Number of drilling rigs in the US continues to decline. Currently, the number has decreased by 4 to 552 active rigs, which may suggest production issues in the later part of the year

China is importing two times more oil from Malaysia than Malaysia produces, meaning that Malaysia is re-exporting what is most likely Iranian oil in spite of Western sanctions. Simultaneously, this is a factor showing that there are no problems with supply even after OPEC+ output cuts. Source: Bloomberg

Price is closing in on an important resistance but at the same time seasonality patterns suggest that local high should be reached soon. Source: xStation5

Gold

• The Federal Reserve has kept interest rates unchanged but maintained a hawkish tone, including a jump in year-end interest rate forecasts. Currently, the dot chart suggests the possibility of two more interest rate hikes this year, potentially in July and September.

• US bond yields remain at a high level, pushing gold prices into consolidation. Currently, only a significant drop in inflation and weak data from the US labor market could cause Fed to keep interest rates unchanged in July, and allow gold to break back above $2000 per ounce

• Looking at positioning, there doesn't seem to be increased investor activity, which could also indicate expectations for more significant changes in yields. The Fed's commitment to a hawkish stance has reduced the chances of significant movements in gold

Yields on US Treasuries remain at relatively high levels (inverted TNOTE). Gold started to trade sideways between $1,925 and $1,970. The $1,925 area also marks the lower limit of the Overbalance structure. A larger move on US yields could be a catalyst for GOLD to break out of the trading range. Source: xStation5

Latest FOMC dot-plot showed that US central bankers may decide on two more 25 bp rate hikes this year. On the other hand, market pricing for rate hikes barely changed following the FOMC meeting last week and still inches towards just one more rate hike later this year. Source: Bloomberg

Natural Gas

• A heatwave is expected in the southern United States in the near future, particularly in Texas, where a significant portion of energy is provided by gas-fired power plants

• The previous inventory report showed a build-up of supplies well below 100 bcf (+84 bcf), although it was close to the 5-year average. Comparative inventories remain at a high level, but gas prices have started to rebound after the latest inventory report. This may suggest that the local bottom has been reached and gas could be preparing for a seasonal rebound due to increased demand for electricity

• Similarly to oil, the number of gas drilling rigs is also declining. Data from the previous week indicated a decrease of 5 rigs to 130 active rigs.

Comparative inventories do not flash a bullish signal yet but the latest build-up of inventories was smaller than expected. Source: Bloomberg, XTB

It is expected that temperatures in the US South will be very high in near-term and may lead to increased demand for natural gas from power plants. Source: Bloomberg

Seasonality patterns show that NATGAS may be painting a local low right now and upward move should accelerate in the first week of July and last until the end of September. Source: xStation5

Copper

• China has lowered its key interest rates by 10 basis points, marking the first such move since August last year. However, the market was expecting more actions from the authorities regarding economic stimulus measures

• Refined copper production in China has increased to 1.1 million tons, reaching a record monthly level. Production at these high levels is expected to continue in the coming months, which could be a response to the ongoing high demand and simultaneously very low and declining inventories of the base metal

• Seasonality indicates potential declines until early July, followed by a slight rebound. A larger rebound is expected in the second half of July

• Copper price reached a $8,500 resistance area, where the upper limit of the Overbalance structure can be found

• At the same time, copper is experiencing a significant divergence from the yuan, which has further depreciated after the recent smaller-than-expected interest rate cut by the PBOC

Copper may be nearing an upside breakout of an important technical support but on the other hand, concerns are mounting over the condition of the Chinese economy and it is putting pressure on Chinese yuan. Source: xStation5