Commodity Monthly Monitor: Oil and silver outshine

Lower energy input costs have kept commodities under pressure in recent months, with reduced pressure on producer bottom lines. Despite the recent oil price rally, a price war still rages on with OPEC countries trying to sell cheaply in..

ETF Securities – February/March 2015

Asia. The number of rigs in operation in the US is falling and well growth slowing, but it may be too early to say that

supply is really tightening in global markets with OPEC continuing to pump oil at a break-neck pace. We assume that OPEC will eventually cut production, but oil prices are likely to remain volatile. The weakness in general inflation resulting from low oil prices is likely to keep global monetary policy at a loose setting, helping to boost the demand for other cyclical commodities in the medium term.

– Policy easing in China does little to lift industrial metal sentiment. With China content with trading lower levels of economic growth for stability, markets do not expect the extreme monetary loosening we have seen in past cycles. Industrial metals fell across the board as the largest consumer of these metals makes a structural adjustment.

– El Niño off the cards for now. South American activity is driving agricultural prices at the moment. The return of rain in Brazil led to a slump in coffee prices, although the optimism on yield may be misplaced given that most of the damage to this year’s crop has already been embedded from last year’s drought.

– More production cuts needed to sustain higher oil prices. Oil stockpiles continue to rise despite the decline in rig counts, highlighting that a lot more needs to be done to bring the market into balance and sustain the recent rally. Meanwhile a series of cold blasts have driven natural gas prices 10% higher, although a return to seasonal normal demand could break the rally.

– Gold back in vogue? With speculative positioning and ETF flows at their highest since 2012, gold appears to be making a come-back. The haven asset has once again become the first port of call for defensive investors worried about the ECB leading the quantitative easing  charge and the perils of Greek debt negotiations.

Sector Overview


With the exception of cotton, all agricultural commodity prices fell last month. Coffee led the decline with an 11.5% drop. The market has become less pessimistic about the size of this year’s coffee crop than it was previously after the return of rain in Brazil has provided the soil with much-needed moisture. While the rain is beneficial during the coffee cherries ‘filling’ period, most of the damage to the coffee bushes was made during last year’s drought and so the current rain is unlikely to reverse the coffee supply deficit expected this year. We believe that after the recent correction, there is more upside potential for coffee prices as we could easily see a return to the dryness that prevailed in December/January.

– While cocoa prices fell during the month, they have risen 6.4% in the past week as a lack of rain threatens to spoil the flowering for the April-September ‘mid-crop’ period.

– Cotton, the only commodity to post gains in the month rose because the International Cotton Advisory Committee forecast a cut in China production this year. However, the USDA raised world output forecasts, which is likely to cap the upside.

While low energy prices have dragged down metal prices by reducing their cost of production, we feel negative sentiment, rather than weak fundamentals, is weighing on the copper price at the moment.


– Industrial metals recorded losses across the board last month, as global growth expectations were revised downwards. Aluminium bucked the trend, posting a 1.3% gain over the period as inventories fell to the lowest level since May 2009. The prospects for further price gains are however limited, as oversupply in China remains an issue. China accounts for half of global production and has been responsible for the global surplus in the market for the past 7 years. Even after shutdowns, new capacity is expected to be added in China.

– Copper was the worst performing metal last month, with an 8.8% loss over the period. The copper price fell to the lowest level since 2009 in January, after both the World Bank and the IMF lowered their forecasts for global growth on concerns over a slowdown in China. While China is turning its focus from construction and export dependent manufacturing to domestic consumption, we think depressed copper prices do not reflect the underlying fundamentals.


– The prospect of more severe winter weather in the US has seen the price of natural gas rally by over 10% from the 2½-year low reached in January 2015. Weather uncertainty is likely to contribute to near-term volatility but with stock levels near the 5-year average, the prospect for lower prices going into a traditionally softer demand period is expected.

– Although oil prices have risen strongly over the past month, unexpectedly large back-to-back weekly builds in US oil inventory levels has seen some of the optimism over a sustainable oil price rally fade. The fifth consecutive rise in inventory levels takes total stockpiles to more than a 30-year high.

– Despite some likely volatility as a base begins to form for oil prices, production in the US will continue to be lowered if prices remain where they are. The sharp correction in oil prices has already prompted a 19% decline in US oil rigs since the end of August 2014. While we have seen a reduction in overall rig count, a sustainable oil price rise will be predicated on a reduction in shale production. While horizontal rigs have declined by 12% since the end of August, further cuts in shale production are needed to rebalance the oil market.


– In the past month, long gold speculative futures market positioning and gold ETP inflows have reached their highest levels since 2012. Investor demand for both gold and silver as a store of value increased as central banks across the globe attempted to combat deflationary pressures via monetary easing.

The spot price breached the US$1,300/oz level before falling as signs of US labour market strength stoked speculation of a sooner-than-expected rate hike. The gold price will likely experience elevated levels of volatility in upcoming months as rate hike fears from the US and quantitative easing in the Euro area will pull the price in opposite directions.

Pessimism about global growth weighed on platinum group metals last month. Downward revisions to the World Bank’s 2015 growth forecasts caused palladium to experience the largest one day decline since June 2014. Palladium has suffered more than platinum due its higher industrial exposure.

Technical Overview


– Positioning in sugar reverted to net long after being net short for most of December and January. The apparent optimism reflects Brazil raising fuel tax (favouring cane-based-ethanol over gasoline).

– Speculative net short positions in natural gas futures have reached the highest level in over five years. Meanwhile crude oil positioning remains at or near longer-term averages.

– Positioning improved across the whole industrial metal sector last month with the exception of tin, as investors are becoming less negative on the sector. While copper positioning remains net short, some of the bears left the market.

– Long gold futures positioning is at the highest level since 2012 as investors are increasingly uncertain about global growth prospects and the current political and economic situation in Greece.


– Soybean oil inventories increased by 14.5% over the past 3 months as increased production and flat demand have led to a higher ending stock forecast.

– US oil stockpiles are currently at their highest level in over 30 years. US natural gas stocks are still in decline and are hovering around the 5-year average, but are nearly 25% higher than this time last year.

– Aluminium inventories fell to the lowest level since May 2009 over the past month and are now standing 19% below the 5-year average.


– Backwardation in the live cattle futures curve steepened to provide a  positive roll of 3.5%, while contango in the lean hogs curve yields a  negative roll of 7.6%.

 -Brent futures curves remain in contango but have moderately flattened since January at the front end. The roll yields rose to -2.3% to -1.8% over the past month. The natural gas curve has steepened, taking yields into negative territory, from -0.03% to -1.00%.

– The front end of the copper futures curve moved into a slight contango last month, while aluminium contango deepened.


– Lean hog prices have collapsed 22% in the past month, with the front month contract trading 39% below its 200dma. As hog counts have largely recovered from last year’s Porcine Epidemic Diarrhea, their price has been driven lower.

– Both Brent and WTI are likely to experience some stiff resistance as prices bump up against the 50-day moving average. Meanwhile, even after the recent price jump, depressed natural gas prices remain around 10% below the 5-dma resistance level.

-All industrial metals are trading below their 200dma and 50 dmas, indicating negative sentiment across the sector.



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