News Column

Weekly Commodity Update: Commodities recover as growth potential supports

January 20, 2014

Commodities saw their first positive weekly performance out of the last three this past week, not least helped by a recovery in all sectors apart from precious metals where some profit taking was seen after having outperformed the others during the early parts of January. The energy sector saw the biggest increase with gains in natural gas and WTI crude oil more than off-setting losses in gasoline. Industrial metals came second, not least helped by strong gains in nickel and lead which helped offset a small loss in copper. The agriculture sector was mixed with soybeans and live cattle ensuring a general positive week despite another week of losses in coffee and sugar. Natural gas reached a three-week high on speculation that the current cold winter across the US will result in a continued strong withdrawal of gas from US underground storage facilities as demand for heating remains elevated. The weekly inventory data showed a reduction of 287 billion cubic feet to 2.53 trillion cubic feet. Although this was lower than expected and helped calm traders nerves it was nevertheless the biggest decline in weekly data going back to 1994 and this left inventories down by 20 percent compared with the same time last year. Live cattle futures for April delivery rallied to an all-time high of $1.398 /lb on the Chicago Mercantile Exchange (CME) as beef production is expected to see a record Q1 drop compared with the previous quarter. The rally has been driven by reduced availability of supply as the coldest winter in 20 years has reduced herd number and weight. As a result, the price of beef in the spot market has moved to an unusual premium over the April futures price. As long as this pull from the spot price persists further upside on the April future is possible and any technical driven setback due to market now being in overbought territory may prove to be short-lived. WTI crude rallied while Brent crude almost moved in opposite directions and this resulted in the spread between the two global benchmarks contracting to a one-month low. Brent crude came under some relative pressure due to rising production in Libya and increased hopes that Iranian sanctions could eventually be lifted. WTI crude benefited from an overdue correction as better than expected economic data pointed towards higher growth and demand. The potential for a full return of oil from Libya and Iran together with the continued increase in non-Opec production are currently some of the themes that may receive the most attention in 2014 and which, barring any unforeseen eruption of geopolitical tension, carries a downside risk to oil prices. Increased production will put a lot of focus or pressure on Saudi Arabia as the biggest swing producer to reduce production as it otherwise raises the risk of an oil glut later in the year. The lack of fresh directional input resulted in gold staying confined to a trading range of less than $23 , the lowest range since August 2009 if we disregard trading around Christmas. Several failed attempts to crack open the resistance area, currently between $1,255 and $1,268 , eventually led to some long capitulation but support was quickly established and gold spent the remainder of the week trading sideways. Gold was unchanged as a result following what has been a generally strong beginning to the year for precious metals. Most of the buying seen this January has so far primarily been driven by positive news from the physical market where demand has remained firm ahead of the Chinese Lunar new year celebration at the end of January together with some position adjustments by hedge funds of which some where holding near record short positions at the end of December. Gold remains one of the least favoured commodities on investment managers' shopping list and as long we continue to see improved US data and tapering together with stable stock markets, the upside potentials at this stage seems limited despite the continued support from the presence of physical demand. Many of the major research houses generally hold a negative view on gold for 2014 and this will be factor which at least over the coming quarter may prevent the market from rising as many investment decisions are being made on the back of this advice. The Peninsula

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Source: Peninsula, The (Qatar)

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