The DJ-UBS Commodity index is showing signs of bottoming out following three weeks of selling which was led by a broad-based round of profit taking across the agriculture sector, writes Head of Commodity Strategy at Saxo Bank Ole Sloth Hansen.“Once again, this sector saw negative performance this past week not least driven by a correction in soft commodities and continued weakness in corn and wheat,” he said. “Industrial metals continue to make up lost ground with nickel and aluminum making good progress while platinum group metals outshone precious metals as supply concerns linger. Crude oil maintains its support as the seasonal pickup in demand can be added to the support the sector is already receiving from geopolitical concerns.

“While US stocks continue to trade near record levels some headwind for commodities could potentially come from a recovering dollar which has made tentative gains, not least against the euro since the cross almost hit 1.40 on May 8. The European Parliament elections could be on track to cause some tremors across the political landscape as anti-EU parties are expected to make solid gains. At the same time we are seeing economic data slowing within the Eurozone and yield spreads between core and non-core countries are widening again after reaching their lowest levels in almost three years. All of this is has made holders of euros nervous and it could be the precursor to a very interesting European Central Bank meeting on June 5 as the markets are gearing up for another potential bazooka being unleashed by Mario Draghi similar to his "whatever it takes" statement back in the summer of 2011

“The best performing sector for a second week in a row is the industrial metals sector with aluminium and copper receiving a boost from improved Chinese data and signs that US housing and employment data also continue to improve. Nickel, meanwhile, was higher following the recent bout of long liquidation as supply concerns related to Indonesia and the continued suspension of production at a Vale mine in New Caledonia lend support.

“This was another positive weekly performance of both Brent and WTI crude oil. The drivers behind the positive momentum are the combination of the annual pickup up in demand from refineries as production of gasoline escalates and geopolitical concerns mostly related to Ukraine and Libya rumble on. In the US, weekly inventories shrank by a surprising 7.23 million barrels — the most in four months — on a combination of reduced imports and increased refinery demand. Adding some additional price support was another inventory draw at Cushing, the massive storage facility in Oklahoma which serves as the delivery hub for WTI crude oil futures in New York.

“WTI crude is currently trading within a 100 to 105 USD/barrel range and we may see an increased amount of profit taking should the upper end of the range become challenged but for now momentum remains positive and hedge funds are increasing their net-long positions following the reduction that took place in early May.

“China and Russia signed the biggest gas deal to date but prices both in Europe and the US continue to trade on the weak side. In Europe, the ICE UK natural gas futures touched a six-month low while US inventories rose by more than forecast. Following the very cold winter gas stockpiles are still over 40 per cent below the five-year average for this time of year and a relatively high price is needed over the coming months to encourage producers to keep production levels high and also to motivate power plants to switch from gas to coal. So far, however, the weather conditions have been perfect for the rebuilding of storage as slowly rising temperatures requires less fuel for air conditioners compared with cold weather. The longer this remains the case we could see a successful rebuilding of storage levels back towards the US Energy Information Administration's target of 3,500 billion cubic feet at the end of the injection season in October.

“Precious metals continue to bounce between support and resistance with the only good news being that the current range can hardly become much narrower and a breakout is now on the horizon. The big question and the reason why we are stuck in this range is the uncertainty about where to go next and need to determine what themes should be the overall driver for this sector at the moment. Holdings in exchange traded products backed by physical gold continue to hit new 4½ year lows while physical demand may receive a boost from pent up Indian demand later this year when import restrictions are expected to be eased by the new government. With just one holiday shortened week (UK and US) left to go, May is currently on track to produce the tightest monthly trading range since 2003 so traders and investors are all longing for an increase in volatility. I can only see that pickup occurring on a price move, either above 1315 or below 1277.

“The platinum group metals (PGMs) consisting of platinum and palladium continue their strong performance as supply concerns emanating from the mining strike South Africa and the potential for increased sanctions against Russia both lend support. As a result, we have seen palladium jump to a 33-month high while platinum has reached its highest levels since last September. So while consumers begin to worry about the availability of supply during the coming months, investment holdings in exchange traded funds backed by platinum and palladium have both been climbing to a new record. Platinum is currently commanding a price premium over gold of almost 13 percent but considering the current outlook this premium could widen even further beyond the 15.5 percent level that was reached in January when the South African strike action was announced.

“The price of key crops, such as corn and wheat on one side and soybeans on the other, went their separate ways with the cost of the new crop soybeans future rising strongly. Relentless demand for US soybeans, both from domestic processors and exporters, has driven current inventories down to precarious low levels. This is leaving little room for disappointment during the coming planting and season as a record soybean harvest is required to rebuild inventories for the 2014/15 season. As a result of the rally in soybeans, the relative price over corn is trading at its most expensive for this time of year in at least ten years and this could influence farmers’ planting decisions this spring in favour of soybeans. Should growers decide to allocate an even higher acreage to soybeans at the expense of corn this could ultimately lend support as corn production estimates may have to be revised lower.”
Source: Saxo Bank