Commodity Wrap - Oil, Gold, Silver, Natural Gas (24.10.2023)

Oil

• Chevron is to continue investments in Venezuela, but over the next few months, production and exports to the USA should not exceed an additional 200,000 barrels per day
• The main factor keeping prices at a high level is the tense situation in the Middle East. Concerns about increased Iranian involvement continue to arise, which could harm oil supplies from that country or the region in general
• The head of the IEA (International Energy Agency) believes that the crisis in the Middle East poses a threat to the oil market
• At the same time, Birol from the IEA suggests that OPEC+ has enough spare supply to mitigate any excessive price increases. This may imply that the risk of significant price fluctuations in the near future is still quite substantial
• Countries that are the largest importers of oil are encouraging OPEC, especially Saudi Arabia, to increase production to ease the supply situation
• Meanwhile, average gasoline prices in the USA have fallen to around $3.50 per gallon, which could indicate either a lack of supply tension in the USA or low demand. All products delivered to the market in the previous week have shown an increase beyond the 5-year range, which may indicate either high demand or refineries operating at maximum capacity
• Earnings from US top oil companies - Chevron and Exxon - will be released this Friday
• USO, a popular oil ETF in recent years which was responsible for the price drop below zero in April 2020, is once again becoming the world's largest oil ETF.

Total products supplied to the US market climbed above the 5-year average for the period, which may hint at strong demand or pick-up in refinery run rates. Source: Bloomberg Finance LP

WTI price (OIL.WTI) dropped significantly over the past two days but it seems a support in the $85 have been found. Lack of escalation in the Middle East has lowered concerns over oil supply but, from a fundamental point of view, there is still a chance for oil to reach $100 per barrel. Source: xStation5

Gold

• Gold continues to trade at high levels, but it appears that the elevated metal prices are solely associated with the geopolitical risk premium
• The situation in the Middle East remains tense. Israel is still planning to send troops into the Gaza Strip, although it intends to allow refugees to escape from the area (according to information as of Tuesday, October 24th)
• The balance sheets of the four largest central banks in the world continue to trend downward, which did not justify a rebound in gold prices, as it did in March of this year, for example
• Yields remain extremely high, and bond futures are extremely oversold. On the other hand, there are reports that the largest speculators and insiders are exiting short positions in bonds, theoretically providing room for a rebound in bond prices and a decrease in yields, potentially leading to a continuation of price increases
• In the short term, a correction in the gold market is possible. In the past several months, the price has not closed above $2,000 even once (monthly candle). The range of $2,000 to $2,100 likely remains a very strong resistance, and without a change in the financial situation, there probably won't be a lasting significant price increase in the gold market

Gold continues to trade at high levels when compared to balance sheets of major central banks. Source: Bloomberg Finance LP, XTB

A $2,000-2,100 area remains a key resistance for gold. A drop in yields could provide a fuel for gains and allow for a monthly close above the $2,000 mark. Source: xStation5

Silver

• If the upward trend in gold is to be sustained, it's worth considering silver, which remains noticeably undervalued in comparison to long-term averages and the gold-to-silver price ratio
• The gold-to-silver price ratio currently stands at 85, while the 10-year moving average is at 81, and the 10-year static average is at 76. Assuming gold at $2,000 and a move toward these historical averages, the price of silver should be around $24.7 and $26.3, respectively. This could provide a potential price movement of 6% to 15% if the upward trend in gold prices continues and silver market volatility increases
• Historically, silver is more volatile than gold
• Silver tends to respond to a decrease when its price reaches the 1-year moving average and the 5-year moving average, indicating that it is neither undervalued nor overvalued. This is in contrast to gold, which has shown signs of overvaluation when compared to its 5-year moving average
• This year, silver has lost 4.5%, while gold has gained nearly 8%. This month, silver is up around 3%, while gold has increased twice as much. Looking at the past 12 months, the changes are not as significant: silver has gained just over 19%, while gold has risen just over 20%
• One potential factor supporting high gold prices is a clear shift in the stance of the Federal Reserve toward a pivot that could lower yields in the USA and worldwide, providing support for a rebound in metal and commodity prices

Gold-to-silver ratio remains above 10-year averages. Source: Bloomberg Finance LP, XTB

Silver price trades near 1- and 5-year moving averages. Source: Bloomberg Finance LP, XTB

12-month commodity returns. In spite of gold faring quite well, silver lags behind what creates some room for the upside. Source: Bloomberg Finance LP, XTB

Natural Gas

• High temperatures in the USA are causing gas consumption to be lower than the average for this time of year when the heating season begins
• Contract rollover today is expected to bring a nominal price increase of approximately $0.3 to a level of around $3.3 per MMBTU if the price doesn't decrease significantly
• There's a possibility of closing the gap if the weather situation remains unchanged
• At the same time, there is a significant decrease in short positions in the market, which may indicate investor positioning ahead of the heating season. However, historically, such a substantial reduction in short positions did not necessarily herald significant price rebounds
• Seasonality still points to price increases until mid-November

Net speculative positioning increased significantly following a drop in short positions. A reduction in the long positions can also be spotted, what may suggest that investors' interest in the natural gas market is moderating. Source: Bloomberg Finance LP, XTB

Gas prices broke above the range of the largest correction in the current uptrend but should return back above $3.00 per MMBTu following today's rollover. Unless weather outlook in the United States changes, there is a high chance of the price gap being filled later on. Source: xStation5