UAE. Economic activity during Q2 is showing signs of a slow-down. Of concern is especially US economic data and uncertainty about the political direction in China combined with data pointing towards a further fall in its economic output.
Eurozone anxiety has also returned in full force with the effect of previous liquidity injections by the European Central Bank proving to have had a limited impact. Protest elections across the region and the ousting of old governments with the prospect of new ones reneging on agreed austerity measures, which will cause Eurozone wide friction, is also weighing heavily on sentiment.
Investors reduced exposure to commodities during April and so far the story has continued in May. The selling has not been related to one sector in particular. All three major sectors, as tracked by DJ-UBS subsector indices, returned losses of between 3 and 4 percent.
According to data from the US Commodity Futures and Trading Commission speculative investors have reduced their exposure to US traded commodity futures by 285,000 contracts to 1,245,000 contracts representing a nominal change of USD 21 billion.
The chart below shows how speculative investors have changed their exposure to the 10 commodities with the biggest exposure from the peak in early March until now. All apart from soybeans have seen reductions, with corn and sugar suffering the biggest percentage losses and WTI crude and gold the biggest nominal reductions.
Turning towards the performance of individual commodities, during the past month the majority fell back with some of the heavyweights such as Brent crude, silver, wheat and gasoline all suffering losses of more than five percent. At the top we find cocoa, soybeans and for a change natural gas which seems to finally have found some support after having been stuck in quicksand for several months.
Brent crude lower as geo-political tensions ease
The verbal intervention that was very present during the past couple of months, especially from Saudi Arabia and the International Energy Agency seems finally to be paying off. Constant reminders that the global oil market is currently well supplied due to strong production from Saudi Arabia and Iraq and the removal of some of the outages seen in March have helped lower the price of Brent crude back to below 120 dollars per barrel.
Those who have been looking for an even deeper correction may end up disappointed as such a move would hinge on the outcome of the next round of discussions with Iran over its nuclear intentions. A risk premium, although sharply reduced, still exists and would only go away, thereby causing an additional drop in prices, should the negotiations result in a solution.
In our outlook for Q2 we discussed this weakness during the quarter and we still see a chance of reaching 115 dollars before support is re-established. Speculative investors have pulled 100 million barrels from WTI and Brent combined during the past few weeks and although the net long is still elevated at roughly 400 million barrels this has left the market less one-sided and less exposed than before the correction. My technical picture still points towards lower prices near-term but while momentum is slowing, indicating a possible change in direction, I am not bullish on Brent crude before 120.50 have been broken.
Gold continues to frustrate the bulls
The yellow metal has been finding it increasingly difficult to break away from its current 1,610 to 1,690 trading range. Talk about additional quantitative easing in the US has diminished somewhat as of late due to a growing sense of disagreement among Federal Reserve members as to what is the correct medicine for the economy.
This has left gold sailing around without a firm pair of hands at the wheel. US data however has increasingly been turning against the recovery but whether it warrants additional stimulus is the big question. Speculation about the threshold at which the Fed would have to act is being discussed.
Should the creation of new jobs as measured by the monthly nonfarm payrolls report due Friday May 4 drop below 100,000, and then expectations would rise - thereby supporting gold.
Speculative positions much reduced
Speculative investors through futures hold the smallest gross long position in more than three years and the action by this group holds the key to a possible revival of the rally in gold. Investors in exchange traded products meanwhile have also reduced exposure during April with the total holdings in ETP’s now amounting to 2,380 metric tonnes, the lowest level in three months and down from 2,410 a month ago.
All in all investors have ample room to increase exposure should the fundamental outlook turn more favourable with particular focus on developments in the US economy. In the short term however the technical picture looks a bit bleak as the market is trading below the 55-week moving average and the trend line from the 2008 low is coming under pressure again. A technical break below 1,610 carries the risk of a return to the December lows sub 1550.
Soybeans consolidating after month-long rally
The price of old crop soybeans traded above USD 15.00 per bushels, the highest since 2008, in a continuation of the month long rally that has seen the price soar by one third since December. Drought in South America has continued to reduce production estimates from the region which in turn has increased demand for US exports and prices have risen as a consequence.
Very mild late winter and early spring weather in the US has also meant that farmers have been able to plant much quicker than usual and this has favoured corn over soybeans, which are normally planted later in the spring.
The prospect of record acreage of corn and record yields have therefore caused the price of new crop soybeans to outperform corn by a considerable margin so far this year. During the week we saw price movements stabilise somewhat as some farmers may still be swayed by the high prices of soybeans.
Speculative traders have accumulated a net long of 400,000 contracts in the soybean complex which are soybeans, meal and oil and this is causing the biggest risk to prices near-term as any change in the fundamental outlook for beans could trigger a major round of long liquidation.
Note: This is the latest weekly commodities report by Ole S. Hansen ,Head of Commodity Strategy at Saxo Bank.
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