Analys

A moment in markets – Dollar weakness bodes well for commodities

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4 år sedan

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6 oktober, 2020

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The US dollar has been meaningfully weak this year with most of the depreciation occurring since June. The dollar index spot rate – measured as the average exchange rate between the dollar and major world currencies – fell by over 8% between 15 May and 31 August (see figure 01 below). The US dollar is typically seen as a safe-haven asset during times of financial market volatility and economic uncertainty. This year, however, it has failed to live up to that reputation.

In March, when the pandemic first tightened its grip on markets, the dollar rose sharply but was unable to sustain its gains for long. In September again, as second wave fears and US election uncertainty paired up to create volatility in stock markets, dollar initiated a rebound. It appears to have lost steam even more quickly this time around though.

Strengh in commodities — Source: WisdomTree, Bloomberg. Data from 01 Jan 2020 to 04 Oct 2020. US dollar is represented by DXY Index (dollar index spot rate) and Broad Commodities is represented by Bloomberg Commodities Index.

Weaker for longer?

What else can dollar bulls count on if haven demand fails to materialize despite the challenges facing markets and the economy? Currency strength is relative and weakness in other major currencies including sterling and euro could help revive the dollar. Euro and sterling may fall if Brexit uncertainty and disruption hurt the economic prospects for both Europe and the UK. This would need to be supplemented by continuously improving economic data in the US.

Dollar bears would point to short-term risks facing the economic recovery including second wave virus risks as well as election uncertainty. If the conversation veers towards longer term prospects, they may end up throwing a knockout punch by highlighting the Federal Reserve’s lower for longer policy. In the end, ultra-loose monetary policy for a protracted period is bound to put pressure on the currency.

Physical gold and silver — Source: WisdomTree, Bloomberg. Data from 28 April 2006 to 04 October 2020.

Commodity investors aren’t complaining

Dollar weakness has helped fuel the recovery rally in broad commodities – albeit supporting different commodity sectors in different ways and to varying degrees. There are two key reasons why dollar weakness supported commodities – notably since June – and why continued weakness in the greenback could be good news for commodity investors:

The haven effect: With the dollar being weak, investors have turned to alternative safe havens as better ‘stores of wealth’. Gold and silver have benefitted the most from this ‘haven effect’. Dollar’s strength and gold’s weakness were both short-lived in March. Investors have turned to physical precious metals knowing that, with their finite supply, they cannot be devalued like fiat currencies by policymakers in response to crises (see figure 02 above).
The purchasing power effect: Cyclical commodities also benefit from dollar weakness as holders of other currencies find it cheaper to buy dollar-denominated commodities. Both industrial metals and agricultural commodities stand to benefit from this effect.

There is, however, a catch…Trade wars

The dollar depreciated considerably in 2017 and start of 2018 which lent support to broad commodities (see figure 03 above). Arguably, among the reasons for the erosion in the currency’s value was an increase in protectionist rhetoric from President Trump. The possibility of the US isolating itself rather than being an integral force in the global economic machine hurt the dollar back then. The reason why commodities could not sustain a lasting rally was because the protectionist rhetoric eventually culminated in a trade dispute between the US and China with tariffs directly imposed on several commodities. While gold benefitted as a geopolitical hedge, cyclical commodities including industrial metals and agriculturals suffered. The catch, therefore, is that for broad commodities to make lasting gains from a weak dollar, the weakness in the currency must stem from accommodative monetary policy rather than an acceleration in trade wars. If trade tensions escalate again, defensive commodities like precious metals will be expected to extend their gains over cyclical sectors.

Mobeen Tahir, Associate Director, Research, WisdomTree

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Stronger inventory build than consensus, diesel demand notable

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Yesterday’s US DOE report revealed an increase of 4.6 million barrels in US crude oil inventories for the week ending February 14. This build was slightly higher than the API’s forecast of +3.3 million barrels and compared with a consensus estimate of +3.5 million barrels. As of this week, total US crude inventories stand at 432.5 million barrels – ish 3% below the five-year average for this time of year.

Ole R. Hvalbye, Analyst Commodities, SEB

In addition, gasoline inventories saw a slight decrease of 0.2 million barrels, now about 1% below the five-year average. Diesel inventories decreased by 2.1 million barrels, marking a 12% drop from the five-year average for this period.

Refinery utilization averaged 84.9% of operable capacity, a slight decrease from the previous week. Refinery inputs averaged 15.4 million barrels per day, down by 15 thousand barrels per day from the prior week. Gasoline production decreased to an average of 9.2 million barrels per day, while diesel production increased to 4.7 million barrels per day.

Total products supplied (implied demand) over the last four-week period averaged 20.4 million barrels per day, reflecting a 3.7% increase compared to the same period in 2024. Specifically, motor gasoline demand averaged 8.4 million barrels per day, up by 0.4% year-on-year, and diesel demand averaged 4.3 million barrels per day, showing a strong 14.2% increase compared to last year. Jet fuel demand also rose by 4.3% compared to the same period in 2024.

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Higher on confidence OPEC+ won’t lift production. Taking little notice of Trump sledgehammer to global free trade

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4 dagar sedan

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19 februari, 2025

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Ticking higher on confidence that OPEC+ won’t lift production in April. Brent crude gained 0.8% yesterday with a close of USD 75.84/b. This morning it is gaining another 0.7% to USD 76.3/b. Signals the latest days that OPEC+ is considering a delay to its planned production increase in April and the following months is probably the most important reason. But we would be surprised if that wasn’t fully anticipated and discounted in the oil price already. News this morning that there are ”green shots” to be seen in the Chinese property market is macro-positive, but industrial metals are not moving. It is naturally to be concerned about the global economic outlook as Donald Trump takes a sledgehammer smashing away at the existing global ”free-trade structure” with signals of 25% tariffs on car imports to the US. The oil price takes little notice of this today though.

Bjarne Schieldrop, Chief analyst commodities, SEB

Kazakhstan CPC crude flows possibly down 30% for months due to damaged CPC pumping station. The Brent price has been in steady decline since mid-January but seems to have found some support around the USD 74/b mark, the low point from Thursday last week. Technically it is inching above the 50dma today with 200dma above at USD 77.64/b. Oil flowing from Kazakhstan on the CPC line may be reduced by 30% until the Krapotkinskaya oil pumping station is repaired. That may take several months says Russia’s Novak. This probably helps to add support to Brent crude today.

The Brent crude 1mth contract with 50dma, 100dma, 200dma and RSI. Nothing on the horizon at the moment which makes us expect any imminent break above USD 80/b

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Brent looks to US production costs. Taking little notice of Trump-tariffs and Ukraine peace-dealing

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6 dagar sedan

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17 februari, 2025

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Brent crude hardly moved last week taking little notice of neither tariffs nor Ukraine peace-dealing. Brent crude traded up 0.1% last week to USD 74.74/b trading in a range of USD 74.06 – 77.29/b. Fluctuations through the week may have been driven by varying signals from the Putin-Trump peace negotiations over Ukraine. This morning Brent is up 0.4% to USD 75/b. Gain is possibly due to news that a Caspian pipeline pumping station has been hit by a drone with reduced CPC (Kazaksthan) oil flows as a result.

Brent front-month contract rock solid around the USD 75/b mark. The Brent crude price level of around USD 75/b hardly moved an inch week on week. Fear that Trump-tariffs will hurt global economic growth and oil demand growth. No impact. Possibility that a peace deal over Ukraine will lead to increased exports of oil from Russia. No impact. On the latter. Russian oil production at 9 mb/band versus a more normal 10 mb/d and comparably lower exports is NOT due to sanctions by the EU and the US. Russia is part of OPEC+, and its production is aligned with Saudi Arabia at 9 mb/d and the agreement Russia has made with Saudi Arabia and OPEC+ under the Declaration of Cooperation (DoC). Though exports of Russian crude and products has been hampered a little by the new Biden-sanctions on 10 January, but that effect is probably fading by the day as oil flows have a tendency to seep through the sanction barriers over time. A sharp decline in time-spreads is probably a sign of that.

Longer-dated prices zoom in on US cost break-evens with 5yr WTI at USD 63/b and Brent at USD 68-b. Argus reported on Friday that a Kansas City Fed survey last month indicated an average of USD 62/b for average drilling and oil production in the US to be profitable. That is down from USD 64/b last year. In comparison the 5-year (60mth) WTI contract is trading at USD 62.8/b. Right at that level. The survey response also stated that an oil price of sub-USD 70/b won’t be enough over time for the US oil industry to make sufficient profits with decline capex over time with sub-USD 70/b prices. But for now, the WTI 5yr is trading at USD 62.8/b and the Brent crude 5-yr is trading at USD 67.7/b.

Volatility comes in waves. Brent crude 30dma annualized volatility.