The commodity sector and especially energy ran into a brick wall on Wednesday as they were hit by a series of non friendly news. The dollar halted its recent slide, the Chinese stock market went into reverse and the weekly storage data showed a surprising strong increase in Crude stocks.
The recent dollar selling against the Euro ran out of steam as the pair failed to breach the June high at 1.4330. Commodity markets continue its strong link to dollar moves and this removed some of the recent support.
China sneezed as its stock market saw a big one day sell off on the back of news that bank lending had to be reduced in order to avoid the system overheating. This led to the usual worries that Chinas strong demand for commodities could be reduced.
The Contango on WTI Crude future which is the time spread between two contracts has begun to move higher again and was lent further support on the news that Cushing, the storage point for NYMEX WTI Crude, saw an increase of 1.3 m barrels to 32.12 m which is close to the February high of 34.9 m. The spread between September and October almost touched USD 2.0 after having traded as low as USD 0.5 back in June.
Another rise of Cushing inventories will be difficult for the market to overlook and could lead to further widening of the Contango and the spread between North Sea Brent Crude and WTI Crude. September Brent has this month outperformed September WTI Crude by more than four dollars.
One Investment Bank estimates that a total of 140 m barrels of Crude Oil is currently stored offshore which equates to 70 VLCC (Very Large Crude Carriers) as demand from developed nations continue to lag behind production. A lot of Crude surplus has gone into the production of refined products these past few months but the same lack of demand has pushed stockpiles to daunting high levels.
It is clear that current news and statistics do not support prices but the rally in stock markets on expectations that the global economy has turned a corner and will pick up steam in 2010 is a theme favored by many hence the current stalemate between USD 60 and 70.
For now the strong positive reaction on Thursday to better than expected company results from a phone, cookware and a writing instruments company illustrates the current sentiment that future expectations overrides the present reality. Failing to reach USD 1,000 on the S&P 500 index however could be the trigger for renewed weakness.
Technically the September Crude is stuck between USD 59.30 and USD 70 with the downside being favoured. Some support should be found at USD 61.50 ahead of the recent low at USD 59.30.
Gold found sellers above USD 950 as disappointed investors took the opportunity to reduce positions after the recent rally and switched into equity markets instead. This has also been reflected through the holdings in ETFs which has seen the biggest monthly outflow of investments since April last year.
IMF announced they plan to sell 403 tonnes of Gold within a new European Central Bank gold pact currently being negotiated. Market impact seems to be limited as the sale will be spread out over 2-3 years and will be part of a new Central Bank Gold Sales Agreement CBGA which should be finalized by October.
Technically spot Gold is in a triangular formation with the current range being USD 916 to 980 with near term support being 100 day moving average at USD 925 and resistance at USD 942 and USD 960. Sooner or later the recent rally in stock markets will have to be tested and that should lend investors a hand but as talk of inflation get pushed further out we would expect additional long liquidation on any rallies.
The price of Sugar continues to rise and the 2006 high of USD 19.73 is now within reach. Last time we were up here where at the height of the early Ethanol craze when sugar suddenly found itself loved not only by chocolate and sweet producers but also by dual fuel car owners.
The recent rally has been weather related as the annual monsoon rain in India, the world’s largest consumer, has been below average combined with the opposite problems in Brazil where excess rainfall has lowered yields. This has led to speculation that India will have to double their imports to as much as 5 m metric tons. Sugar has now rallied more than 45% and is the third most rising commodity in 2009.
Other agricultural products to keep an eye on are Corn and Soybeans as the weaker dollar has lead to good foreign demand for US crops. Soybeans especially shifted up one gear during the week rising the most in nine months while Corn seems to have found a base after the recent round of weakness.
Finally a look at the 2009 performance table shows no change at the top with Copper (+83%) still in front ahead of RBOB Gasoline (+79%) followed by Sugar as mentioned before. At the bottom Lean Hogs (-62%) still faring worse than Natural Gas (-44%).
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