It has been a very interesting few weeks in the commodity arena with upside breakouts all over the place driven by a wall of liquidity, strong equity markets and a weak dollar.
The five month range in Crude Oil finally got broken on Thursday following in the steps of a similar move in gold the previous week. Momentum had been building all week as strong equity markets driven by stronger than expected Q3 company earnings continued to drive the dollar lower thereby supporting the upside move in energy. The move out of the trading range occurred as the weekly DOE storage data showed bullishness across the board. This fundamental support gave traders the confirmation they had been looking for and a wave of stop loss buying from those who had successfully been playing the range for so long saw November WTI Crude reach USD 78.17 on Friday, a new high of 2009.
A big drop in gasoline stocks, down 5.2m barrels versus an expected rise of 0.8 m were the main trigger. Interestingly enough some of the reason behind this drop were due to a big fall in refinery activity caused by poor demand and weak margins. In other words data over the following weeks will be watched very closely.
Another slight worry is that distillates inventories are currently 40% above last year’s level which means that the U.S. can sustain a very cold US winter lasting all the way to June.
The next few weeks will undoubtedly set the trend for the remainder of the year. Many will rightfully argue that the range has been broken and the uptrend from March could be about to resume. The next big technical level is 50% retracement of the big sell off last year which stands at USD 90.
What we probably need initially is confirmation of the break so look for a buying opportunity down towards USD 76.30 with a stop below the previous high at USD 75 on WTI Crude for November delivery. Next week the December contract will become the new spot month but the above levels will still be valid as they are based on the continued spot month contract.
Gold have near term run out of steam after making a new record high at USD 1072 during the week. Just like Crude attention have now turned to the sustainability of the break out, something that can really only be confirmed by testing the underlying strength on any setback.
It is a popular belief that gold should be a hedge against inflation. We believe that to be inaccurate. Gold is a hedge against instability. It tends to rise in periods of unanticipated inflation as well as unanticipated deflation/disinflation. That is why gold rallied in 1982 and in 1985-1987. That is also why gold is performing extremely well in the current environment where the US is experiencing the first deflation since 1955.
On this basis we see the break above USD 1,000 as having opened up the possibility of a sustained move higher, initially towards USD 1,100 and longer term towards USD 1,300. The road ahead will be bumpy with major setbacks along the way. Near term the market bulls are fighting a huge speculative long position and a period of consolidation is required in order to sustain the rally.
Technically we are looking for a setback towards the 2008 high of USD 1,032.70 and would be a buyer towards that level. Near term one of the big drivers, namely the weak dollar have found some support ahead of the 1.5000 level versus the euro and some consolidation seems needed before another attempt to weaken the dollar further is instigated. Other support levels to look out for are USD 1,024 and very importantly USD 985.
The long awaited move higher for US grains and soybeans has begun over the last few weeks with several factors helping the prices along the way. First of all the weaker dollar has increased US farmers competitiveness on the international market but secondly and quite significantly the weather has begun to play up with frost and rain keeping the combine harvesters of the fields.
Freezing temperatures covered areas of the Midwest this past week and temperatures dropped below levels at which some yield loss can be expected. How much damage has been done to what has been expected to be a record harvest is still too early to say?
We see the downtrend as having been broken and will be looking for buy opportunities in December Corn at USD 350, December Wheat at USD 480 and December Soybeans at USD 945.
Sugar which has more than doubled over the past year rallied this week and a break above USD 24.90 on the ICE NYBOT March contract would signal a resumption of the uptrend with some talking of USD 40 being a possible target.
Global consumption is expected to outpace supply by nearly 7 million metric tons next year after bad weather has hurt crops in India and Brazil.
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