Commodity weekly: Gold’s surge is more than safe-haven demand driven

War risk premium ebbs and flows but overall keeping crude oil supported

The recent aggressive slump across the energy sector amid surging bond yields and the strong dollar accelerating demand worries has been almost fully reversed during the past couple of weeks as traders try to gauge the potential impact on supply from a widening conflict in the Middle East.

While the macroeconomic outlook remains challenged and demand shows signs of softening, the prospect of a geopolitical-led supply disruption and continued production restraint from OPEC+ will support prices in the weeks ahead. However, it is also clear from the price action this past week that it is exceedingly difficult to price the level of geopolitical premium and it has led to some volatile trading with buyers lacking the conviction to hold onto recent established longs.

With the US potentially recommitting to its sanctions against Iran after turning a blind eye for months – during which time production surged by around 700,000 barrels a day – the market was relieved by news that sanctions against Venezuela were going to be eased. However, following years of sanctions, the country’s ability to ramp up production is limited with analysts only seeing the potential for a relatively small 200,000 barrels per day increase within the next six months.

While the upside potential remains impossible to predict, the only thing we can be certain about is the existence of a floor beneath the market. Having fought so hard to support the price, and in the process giving up revenues, Saudi Arabia and its Middle East neighbors are unlikely to accept much lower prices. This leads us to believe support in WTI and Brent has been established and will be defended ahead of $80 and, barring any disruptions, the upside for now seems equally limited while the bear steepening of the US yield curve continues to raise recession concerns. With that in mind, Brent is likely to settle into a mid-80’s to mid-$90s range, an area we for now would categorize as being a sweet spot, not too cold for producers and not too hot for consumers.

Southern Hemisphere drought drives up agricultural sector

Wheat, corn and soybean futures in Chicago have seen a strong rebound this past week with prices reaching one-month highs. Following a prolonged period of weakness, prices are now being supported by dry weather potentially hurting the production outlook in South America and Australia. While both Australia and Argentina have recently seen wheat production forecasts being downgraded, the global supply outlook remains robust with the International Grains Council (IGC) raising its forecast for global wheat production in 2023/24 season with upward revisions for Ukraine, Russia, and the US more than offsetting a deteriorating outlook in Australia.

It also worth pointing out that months of price weakness has resulted in net short positions being held by speculators such as hedge funds in corn and wheat, and any change in the technical and/or fundamental outlook may drive an oversized price reaction as positions are being adjusted.

Other commodities in brief:

Arabica coffee trades up 12.4% on the month, and following months of weakness during which time hedge funds built a sizeable net short position, the market has found its footing after establishing a double bottom around $1.45/lb. In addition, both Arabica and Robusta futures have been supported by a drop in exchange monitored inventories. Arabica coffee inventories monitored by the ICE Exchange has fallen to 422k bags, not far from the two-decade low of 385k bags seen this time last year.

EU TTF Natural Gas continue to trade near €50/MWh on fears of a wider Middle East conflict that could impact global flows ahead of the critical winter peak demand season. The Israeli-Hamas conflict has so far led to the shutdown of a major Israeli gas field supplying Egypt, raising questions over liquefied natural gas exports from the North African nation. However, with inventories near full the February TTF contract, the peak winter demand contract, only trades six euros above spot with supply concerns still relatively muted.

Platinum trades around $900 with its discount to gold reaching a record $1088 per ounce on Friday, more than 200 dollars above the average seen so far this year, and it highlights how investor interest has been directed towards gold but also the potential for a catchup rally given the outlook for tight platinum supplies in the coming years.

HG Copper and other industrial metals remain under pressure amid concerns about the medium-term outlook for demand growth in China and the rest of the world. Driving the current weakness has been a recent rise in exchange monitored stocks pointing to ample supply – a view being supported by a rising contango, and together with the current renminbi weakness, the short-term outlook looks challenged. We are watching key support in the $3.54/55 per pound area with a break below potentially fuelling a sell-off lower with no clear support until around the $3.24/14 area.