Commodities looked for support and found it - Weekly Commodity Update

Commodities began the week on the defensive but recovered as the U.S. GDP confirmed that the recession had ended.

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The rebound in GDP however positive unfortunately came about primarily due to a rise in consumer spending helped along by various government subsidies such as “cash for clunkers” and tax credits for homebuyers. Both these subsidies have now been removed and the big question going forward is weather higher consumption can be sustained without government support.

Despite the rise in economic activity household disposable incomes fell during the quarter as unemployment kept rising. This lack of consumer confidence will play an important role during the next few months and whether the risk appetite will stay very much depends on economic data, crucially U.S. employment data next Friday.

The two main market drivers once again decided the direction during the week as early dollar strength combined with a 5.5 pct sell off in the S&P 500 sent commodities looking for support. Interesting support levels were tested in the process but the U.S. number were good enough reason to halt the return of risk aversion.

Crude Oil rally ran out of steam this week as weaker stock markets and an unexpected build in Gasoline inventories gave bears the excuse to test support that they had been looking for. The sell off only lasted a few days as support from previous highs around USD 77 halted the move.

Near term we expect continued consolidation with the range trading being the favoured strategy by most traders. Look for support at USD 77 followed by USD 75 and resistance at USD 82 (100 week moving average) followed by USD 85.

U.S. natural gas prices slipped after inventories rose 25bn cubic to another record of 3,759 bn cubic feet. One piece of good news is that is now highly unlikely that the national working capacity limit of 3,900 bn cubic feet will be breached as winter demand will increase over the next few weeks .

The market is however still left with a huge overhang of supply which has put the new front month of December under pressure as soon it became the spot month. Unless we see a change in weather forecast further upside seems limited. The December contract on Nymex will be stuck in a wide USD 5.45 to 4.35 range until further news becomes available.

The brief return of risk aversion which saw the dollar at one point strengthen by 2.5% also made an impact on gold thereby confirming the continued strong relationship between the two.  Spot gold dropped 4% but found support at the previous high at USD 1024.30 before rallying strongly ahead of the weekend. 

 

Technically the new trading range continues to take shape with support at USD 1024 now confirmed and resistance at USD 1070 having proved solid over the last month. Additional strong support can be found at USD 995 which is trend line support from the 2008 low.

A worrying development recently has been the renewed rally in the price of rice. According to the U.S. Rice Producers prices may return to record levels as bad weather curbs output in major growers including India. In addition the increased cost of oil has pushed up the cost of fertilizers boosting prices further.

Everyone remembers the food price protests that swept the globe last year after fears of supply shortages prompted prices to surge to a record of USD 25 per 100 pounds in April 2008. The Philippines has brought forward rice imports for 2010 after cyclones have reduced the domestic output while the situation in India is being watched closely. So far they have not any plans to import rice as its reserves are adequate.

 

During the week CBOT Rice for January delivery reached levels not seen since January this year. Look for resistance at USD 14.80 on the front month continuation while a break could set up a move back towards USD 16.35.

In summary commodities had the biggest rise since May primarily driven by agricultural and energy markets with the CRB index rising 10%. Going into November continue to look for clues in the dollar, stock markets, weather forecast and economic data, especially U.S. employment data next Friday November 6.

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