Commodity wrap - Oil, gas, gold, copper (27.08.2024)

Oil:

• Price increases earlier this week are triggered by tensions in the Middle East and a production halt in parts of Libya
• The government in eastern Libya points to a halt in production and exports in response to actions by the government in Tripoli, which wants control of the central bank
• Current production in Libya is about 1.2 million brk per day. In the past, production has been able to fall almost to zero, which could significantly change the market picture in the coming weeks or months if the production halt proves to be permanent
• OPEC+ members will meet again at the turn of the month to consider the further fate of the production cut agreement. At the previous meeting, OPEC+ maintained its plan for a moderate return of production from the fourth quarter of this year. Prices have been falling since the last meeting, but after the latest rebound they are only 2% from the end of last month

Oil has rebounded nearly 9% from the bottom. Seasonality still points to a sideways trend, while net positions continue to fall. However, oil is encountering a very strong resistance zone between $77 and $80 per barrel, where the 50, 100 and 200 session averages are located. Source: xStation5

Gas

• Gas prices are retreating strongly from around the $2.2/MMBTU level in the face of changing weather forecasts in the US
• Temperatures have dropped, suggesting less electricity consumption for air conditioning operation
• Prices are trying to close the last gap formed during the roll-off, which was about 7%
• Technically, a potential oRGR formation is forming, nevertheless there would have to be a price rebound before the $2.0/MMBTU level
• Seasonality points to flat price behavior in the coming month and increases in October before the start of the heating season
• Given the recent reduction in LNG exports from the US, supply still outweighs demand, allowing for further replenishment. Nonetheless, for the first time in many years, we witnessed a one-time drop in inventories during the summer. However, inventories are still clearly above the 5-year average (about 13%)

The gas price is falling towards the 2.05 level, where the futures rollover has occurred. If the price does not fall significantly lower, an oRGR formation could be drawn, with a range around the $2.7/MMBTU level. However, it is worth remembering that the next rollover may already be in double digits, looking from the percentage change side. In view of this, much of the rebound may be due to the shape of the forward curve. Source: xStation

Gold:

• Gold reaches new historic highs in response to Jerome Powell's dovish speech at the Jackson Hole economic symposium
• Market expectations for interest rate cuts continue to point to a 100 basis point cut
• Looking seasonally, September is a very bad month for gold. The seasonality may be related to the return of investors to the markets after the vacations.
• On the other hand, India's wedding season is also approaching, and a weaker dollar and a reduction in import duties in the country are expected to revive gold demand
• Net positions on gold are at their highest since 2020. This generates a contrarian signal, although with previous such high overbought levels, i.e. in the aforementioned 2020 and 2016, gold prices were still gaining for “long weeks”
• There is a chance to realize gains on long positions after the Fed cut, but continued global geopolitical uncertainty and still high inflation could push gold prices to new historical highs
• Goldman Sachs saw gold prices at $2,700 per ounce in April, and maintains this forecast
• Citi points to buying by ETFs that could pull gold prices to $3,000 in a 12-month horizon
• UBS sees gold prices at $2,600 by the end of this year
• The peak in ounces held by ETFs was recorded in 2020, at around 110 million ounces. Currently it is 82 million ounces. The prospect of a comeback is almost 800 tons of gold

September has usually been met with a gold sell-off in recent years. Source: Bloomberg Finance LP, XTB

Looking at gold's seasonality, the 5- and 10-year averages point to a sell-off and local bottom in late October and early November. On the other hand, the long-term seasonality (since the 50s) indicates a continuation of the rise, but a local peak would have just occurred in early November. Source: Bloomberg Finance LP, XTB

Net positions in the gold market are extremely high, which generates the risk of profit taking. Source: Bloomberg Finance LP, XTB

ETFs have been accumulating gold for several weeks, indicating that interest rate cuts are coming. If ETFs were to peak again in the amount of gold held, then demand can be counted on to reach around 800 tons. This could push bullion to new historic peaks. Source: Bloomberg Finance LP, XTB

Copper:

• Copper prices rose to their highest levels in a month on expectations of interest rate cuts in the U.S., which could boost the economy
• We are also seeing all-time weakness in the dollar, including against the yuan (which is also related to the return of capital to Asia after the rate hikes in Japan).  A stronger yuan has usually heralded a stronger Chinese economy
• In China, there is talk of increased orders for copper rods and cables from the energy sector.  We're also seeing a drop in stocks on the Shanghai stock exchange, after rising to the highest levels since 2020
• The credit impulse points to a possible bottom in the near term, but stabilization thereafter, rather than a big price rebound 
• There has been a massive pullback in long copper positions in the market in recent weeks. The descent of long positions below the level of short positions may be a signal of oversoldness.

After reaching extreme peaks (inverted axis), stocks in China are starting to fall. Source: Bloomberg Finance LP, XTB

The credit impulse may suggest that a local bottom may be about to be reached, but at the same time we should not expect a significant increase in demand from the construction sector, on which the credit impulse is acting most strongly. Source: Bloomberg Finance LP, XTB

The yuan is currently very strong against the dollar, which could be another factor favoring copper. Source: xStation5