Commodity Wrap - Oil, Gold, Silver, Coffee (21.12.2021)

Oil

• Oil resumed declines amid concerns over impact of Omicron variant and potential restrictions

• Netherlands impose a 3-week lockdown over Christmas and New Year. Germany and United Kingdom also consider whether tougher restrictions would be appropriate

• After initial restrictions were lifted in some countries, like for example Austria, mobility recovered to pre-pandemic levels

• Market reacted positively to news from Moderna saying that booster shot should prove effective against Omicron

• Oil stockpiles are dropping in-line with seasonal patterns. Demand in the coming months may be underestimated

• Both OPEC and IEA expect surplus on the oil market throughout the 2022. However, assuming that supply issues will not be resolved and OPEC continues to change production limits, a deficit on the oil market cannot be ruled out in the second half of 2022

US oil inventories drop in-line with seasonal patterns, suggesting that demand remains strong and there is no basis for a deeper correction on the oil market. Source: Bloomberg

Gold

• Gold price reacted positively to changes in policies of major central banks, even though those were hawkish changes

• Fed may deliver 3 rate hikes in 2022 with the first one being delivered in the middle of the year

• Seasonal patterns for gold point to a solid end-of-the-year period. Gold tended to gain at least 1% between December 23 and January 3

• Average of forecasts point to a gold price of $1,680 per ounce at the end of this year! Forecasts for 2022 also point to sellers remaining in control

• It should be noted that the first rate hike was an important signal for buyers in the past. Gold gained 10% on average during the first 150 sessions following first rate hike (based on previous 7 rate hike cycles)

Seasonal patterns suggest that gold should have a solid end of the year. Source: Bloomberg

Historically, the first rate hike of the cycle has been a signal to close short positions. Gold gained at the beginning of the previous 7 rate hike cycles. Gold price rallied following the first rate hike of the cycle launched in 2015. Source: Bloomberg, XTB

Silver

• Silver recovered strongly in the middle of December, what can be reasoned with post-FOMC profit taking

• Of course, rate hikes should be negative for precious metals prices. However, US yields do not reflect expectations of a strong policy action from central bank

• Silver price painted a double bottom pattern and a textbook range of the breakout from the formation points to an upward move to as high as $29.50

• 250-session moving average marks a neckline of the pattern and may turn out to be a key resistance for buyers

• Demand situation does not look too encouraging. ETFs have been selling out silver for the 3 straight quarters already, what is the worst streak in years

• Gold-to-silver ratio keeps increasing, distancing further away from a long-term average (60-65). Moreover, copper price and base metals index suggests that the ratio should be much lower - as it was in 2011

ETFs have been selling out gold for the 3 straight quarters. Will ETF purchases recover next year? Rising US yields do not favour such a scenario. Source: Bloomberg

Gold-to-silver price ratio keeps rising. On the other hand, the base metals index suggests that ratio should be two times lower. Source: Bloomberg

Silver price painted a double bottom. Neckline of the pattern is still far away. Silver seems to be priced in-line with yields. Source: xStation5

Coffee

• The latest weather forecasts for Central America and Brazil were very good. However, it should be remembered that production outlook does not change in a nick of time

• A massive deficit on the coffee market is expected - potentially the biggest in history

• Coffee stockpiles are dropping once again, suggesting that the markets remains stretched

• Net speculative positioning remains high. Positioning of the so-called "dumb money" (lower panel on the chart) continues to drop, what suggests a positive outlook for prices

• Futures curve has changed significantly over the past month - a strong backwardation can be spotted at the moment compared to a more or less flat curve a month ago. Markets sees a potential for large supply in the future, especially from September 2022

Coffee inventories resumed declines. It suggests that coffee prices should remain at elevated levels for an extended period of time. Source: Bloomberg

Positioning of the so-called "dumb money" continues to point to a strong upward trend on the coffee market. Source: Bloomberg