Wall of money playing into the hands of Market Bulls.

Commodity markets continue their month long drive higher aided by ample liquidity, a dollar reaching a new low point for 2009 and ongoing strength in stock markets.

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The CRB index which tracks the 19 most actively traded commodities have now risen more than 12% during this past month as all sectors have showed positive returns and six commodities have showed returns above 20 percent. The Crude break out have obviously made an impact as three energy futures can be found among the top six with the remaining three being Orange Juice, Wheat and Corn.

Investors looking to hedge the risk of a falling dollar continue to pile money into commodity funds with commodity hedge funds seeing asset under management rise by 7.3 percent in the third quarter to USD 60 billion according to Bloomberg.

Crude Oil made new highs during the week and is poised for a fourth week of gains. The improved economic environment combined with continued draw of the gasoline and distillate products from storage helped the sector. Gasoline has despite its recent strength still not broken out of its trading range going back to June this year and the catalyst for further gains could be tied to an ongoing reduction of available inventories and a definite confirmation of a pick-up in demand.

OPEC’s Secretary General suggested surprisingly on Thursday that OPEC could announce an increase in production at their next meeting in December. Although it came with certain conditions such as the elimination of floating storage and stockpiles returning to the five year average it was nevertheless surprising and shows how the pace of price recovery has caught most by surprise. 

This obviously raises the question if the recovery has been too fast? One of the issues that OPEC will be looking at is the continued weakness of dollar which if it continues undoubtedly will continue to drive commodity prices higher. This will lead to the question of how high energy prices can run before consumption begins to be impacted. It is not in anyone’s interest to see Crude back to USD 100 at this stage of the fragile recovery and OPEC obviously share this view hence their comments this week.

Where does this leave Crude prices near term? The break above USD 75 recently triggered a wave of short covering from traders who successfully had been trading the range over the summer months. In addition a lot of technical buying from momentum funds took prices above USD 80 this week.

We do not see energy markets as once again having become a one-way bet upwards. Instead WTI Crude for December delivery is in the process of creating a new trading range with the top coming in between USD 85 and 90. Initial resistance is the 100 week moving average at USD 82.10 which so far has held amid overbought signals on both 9 and 14 days RSI. The downside is now well protected at USD 75 and a break below USD 70 is needed for this recent rally to be rejected.

The seasonal support for Natural Gas have driven the November contract back up to USD 5 despite U.S. inventories rising to a record for a fourth consecutive week. According to the Energy Department natural gas in underground storage rose to 3.734 trillion cubic feet and is getting close to the estimated capacity of about 3.9 trillion cubic feet.

Stockpiles historically rise until the middle of November before they begin to decline as demand for heating fuel increases during the winter.  Weather forecast over the next few weeks will be watched closely for indications of colder weather which will be supportive of prices. Other than that a general pick up in industrial demand is required for the price recovery to continue.

Copper followed in the footsteps of Crude this week breaking out of its 3 months range. However the break was not followed by any fireworks and subsequent rally. On this basis the break needs to show more conviction for the move to continue higher.  A weekly close above USD 300 on the High Copper contract for December delivery should help the positive sentiment with USD 310 being the first target followed by USD 325.

 

The move followed a combination of news that China expanded 8.9 percent in the third quarter driven by its stimulus and record lending together with worries about supply disruptions from Chile and Peru due to industrial action.

Corn which has rallied 30 percent over the last month continued to find support this week as rain and snow in the Midwest of the U.S. delayed the ongoing harvest further. The recent rally in crude has also brought back another source of support namely ethanol which again is becoming competitive with current oil prices.

Having finally left the September lows behind us corn for December delivery has now set its sight on the June high at USD 450 ahead of USD 485. One near-term concern is the RSI which indicates the market is overbought at present levels. A pull back towards USD 390 could be possible but overall support looks firm for now.

 

Gold had a quiet week consolidating further in its new trading range between USD 1,043 and 1,070 on spot. The recent dollar weakness has not triggered another move higher which indicates the need for consolidation before another attempt can be made.

Look for support at USD 1,043 ahead USD 1,032 and resistance at USD 1,070 followed by USD 1,083.