Category Archives: Commodities

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Brexit has been a gem for FTSE miners

Mike van Dulken, head of research at Accendo Markets, tells Hot Commodity why miners have struck gold from our decision to leave the EU…

FTSE miners are in a funny place right now. On the one hand, their share prices are supported by being among the major beneficiaries of a Brexit-inspired weak pound, getting a helping hand from a favourable translational gain on foreign profits. Which is all of the them, given that their London listings have everything to do with being quoted in the right financial centre and nothing to do with extracting minerals from within Blighty’s shores. On the flip side, a weak pound and a rising probability that the US Federal Reserve delivers another rate rise in December is keeping the US dollar strong, hampering the prices of their main products – commodities such as industrial metals – which would normally be a hindrance.

Except that oil is doing just fine, trading around 12-month highs on hopes that a production freeze/cut to put an end to a global supply glut is in the making. And oil often leads the commodities space, a signal of optimism about global economic growth and demand. Whether said hopes prove correct or not is by-the-by. What’s important is that markets are giving Opec the benefit of the doubt while its members meet for more informal discussions on the sidelines of the World Energy Congress in Istanbul. This is only two weeks since what was deemed a ‘positive meeting’ at the IEA forum in Algiers, where Opec mouthpiece Saudi Arabia importantly softened its stance ahead of the official November Opec meeting in Vienna. Will the world’s most famous cartel actually deliver?

Mining sector share price gains are also in spite of the sector’s strong links to global growth, a topic on which markets remain very uncertain to say the least. As we move into third-quarter earnings season, stateside Aluminium giant Alcoa has already disappointed and the IMF has cut growth forecasts for several developed nations, worried about the rise of populist anti-globalisation rhetoric. However, with miners still very much exposed to emerging markets (doing much of their digging there) and growth forecasts for these regions having increased, this is providing yet another helpful tailwind for rampaging share price recoveries from extremely depressed multi-year lows around the turn of the year.

So it’s a win-win situation for the miners from a currency, oil and geographic standpoint. The sector is proving to be a nice investment, sheltered from the Brexit turmoil along with many of those internationally focused US dollar-sensitive high-yielding defensives that everyone has run to amid the global hunt for yield. The latter has been engineered by years of extreme central bank stimulus deigned to keep borrowing costs low but which has taken many yields to near zero, if not negative. When this does finally unravel further down the line, could the mining sector once again prove a very unlikely and unintentional port in a storm?

Look at the FTSE’s best performers in the year to date. The miners make up the top five, up anywhere between a respectable 19 per cent and a whopping 244 per cent. Can a very favourable market set-up keep these trends alive? Will more hard Brexit talk send the pound lower? Will FOMC minutes and Fed chat send the US dollar even higher and the pound lower, maintaining that handy translational benefit? Could the US dollar pull back, giving commodity prices and emerging markets currencies a welcome boost? Will positive Opec talk keep oil on track for a $55/barrel price not seen for 15-months? Will fiscal stimulus and infrastructure spending, taking over from central banks, increase demand for raw materials?

Is everything just rosy for the FTSE’s miners, whatever the outcome?

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

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No cheers from Algiers: oil price set for more volatility

Mike van Dulken, head of research at Accendo Markets, tells Hot Commodity why Algiers was fruitless and what we can expect next from the oil market…

It seems, as expected, nothing will come from an over-hyped Opec-led oil production freeze meeting in Algiers. Except for providing lots of quotes to fill the airwaves and fuelling oil price volatility, that most would have happily forgone.

I’m not sure how markets developed any optimism whatsoever that an agreement would be made, given the poor track record at meetings so far this year. We now likely have to wait for the official Opec meeting in Vienna at the end of November for something more concrete in terms of concerted efforts to stabilise the global oil market, buoying prices in the face of a global supply glut. However, having everybody (Opec and Russia) in the same room and on the same page is a good start. As is some welcome, even surprise flexibility from the Saudis.

The build-up to today’s finale has been as fun as ever, with plenty of inflammatory and contradictory comment almost making a mockery of the event and the major parties involved. Deals and solutions were allegedly plentiful only to result in little. Iran is the linchpin – stubborn as ever. But rightfully so, in our view, preferring to ramp up production from 3.6m/bpd to its goal of 4m. A distinct lack of urgency on its part to find compromise with struggling Opec peers suggests it is nowhere near as desperate to help stabilise prices. It clearly sees more upside in selling 10 per cent additional production at $46-50/barrel than selling its current output at $50+. How so? After years of sanctions, being able to sell any oil at all is a bonus. And if peers do capitulate and cut production, it will only help Iran in its quest to retake market share. Where’s its incentive to play ball before it gets back to pumping at full pelt? Let the others move first.

This makes sense, with Iran’s public finances far less exposed to the oil industry than Opec mouthpiece Saudi Arabia. The latter was, to nobody’s surprise, the most frustratingly but unproductively vocal this week. It helped the oil price rally with talk of a deal offered to Iran (“if you freeze, we’ll cut”) only for the gains to be swiftly eroded by Iran’s flat refusal. This suggests, even confirms, that the Saudis are in a much more perilous position financially, needing a production freeze/cut deal soon. It’s no surprise, with a skyrocketing budget deficit of $100bn, that it’s mulling a Saudi Aramco IPO and selling government debt to ease the burden of lower oil prices on public spending plans inked when oil was closer to $100/barrel. It is set to meet Russia again next month; prepare for plenty more market-moving rhetoric.

This week’s meeting may not have delivered that much, but will hopefully prove a stepping stone on the way to more stable oil prices. The stream of disagreement between all parties involve, however, remains a wide one to cross. What’s the chance that November’s Opec meeting is yet another damp squib, forcing us to look to 2017 and contemplate déjà vu all over again?

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

Oil price: don’t expect much from Algiers

Mike van Dulken, head of research at Accendo Markets, tells Hot Commodity why the oil majors’ meeting in Algiers is unlikely to bring resolution to the production impasse…

The price of a barrel of brent crude oil sits at the mid-point of a tight $45.5-$50/barrel September range, one which has already closed in from a wider $42-$53 from April through to mid-August. Investors are pausing for thought, price activity narrowing as they await the outcome of an informal Opec-led meeting on the sidelines of the International Energy Forum in Algiers, Algeria on 26-28 September. It is here that we hope to finally hear some real progress regarding an agreement between major oil-producing nations to curb excessive output, stabilise the market and solve the global supply glut. This would likely help the oil price rally quite significantly.

We have been here before though, if you cast your mind back to April in Doha. The risk is we simply end up with yet another unanimous agreement that a freeze is necessary but which nobody is willing to implement, because they don’t trust fellow attendees to honour the promise and/or because they can’t afford to cap production themselves. With oil prices down at $45 versus the $100+ they traded at when times were good, most oil-reliant nations are hurting badly – Opec mouthpiece Saudi Arabia included. The latter has resorted to selling bonds and is prepping for a future IPO of state oil company Saudi Aramco. A painful adjustment is becoming increasingly necessary within the group to rebalance previously oil-funded public finances with much lower oil receipts.

Conflicting comments from oil ministers as the meeting approaches does little to inspire confidence. The Saudis, Iranians and Russians are keeping us entertained. Buy the build-up, sell the meeting has proved the correct strategy so far this year.

While a failed meeting risks sending oil prices lower, a host of drivers are, nonetheless, keeping prices from falling markedly: the buck-denominated commodity is buoyed by expectations of a delay to US Fed rate rises, something we don’t see happening until March next year at the earliest; the energy commodity remains in recovery mode with technicals still showing supportive rising lows around $45 since the very depressed 12/13 year lows (<$28) in January; global growth has not collapsed, even if remains sluggish to say the very least; there is no sign yet of a Chinese hard landing (big oil consumer). Also, monetary stimulus/accommodating policy remains in abundance from all the major central banks; geopolitical instability in the Middle East remains ever-present; and US oil inventories continue to oscillate around breakeven, never straying too far (last week’s aberration drawdown was due to a storm). As with the Fed and its rate rises, I struggle to see how we can get a unanimous agreement to freeze production or respect caveats this month, which means prices are highly likely to correct. But I also expect the build-up to generate much excitement and a price rally beforehand, meaning the ensuing correction merely retraces the up-move and doesn’t do too much damage. After all it’s in every participants' interest to talk up the price, but in nobody’s interest to see it break the 2016 recovery uptrend. Expect lots of chat and media comment for something that will likely amount to nothing more than another round of tea and biscuits and agreeing to disagree by the great and good (and bad) of the oil world. This commentary was produced exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

US rates: Is Yellen set to spoil the party for commodities?

This week, Mike van Dulken from Accendo Markets looks into his crystal ball ahead of Janet Yellen’s speech on Friday…

All eyes (and ears) will be on her majesty the US Fed chair Janet Yellen this Friday, when she delivers what could be major market-moving speech at the Kansas City Fed Economic policy symposium in Jackson Hole, Wyoming. It is hoped that her talk will include hints (both clear and, of course, cryptic) about the path for US monetary policy. This is because the US Federal Reserve is the only major central bank fortunate enough to be in the position of being able to tighten policy post-crisis. And the reach and influence of the world’s reserve currency (the US Dollar) is far and wide as commodity traders well know.

Fed members have sounded hawkish of late, suggesting a rate hike might indeed be warranted sooner than markets are pricing in, but the US dollar remains well off its summer highs. In fact, it’s not far from its summer lows with a rising trend of support going back four months. We believe this provides Yellen with the breathing space she needs to take a rather hawkish tone, without it resulting in so much US dollar strength that it actually prevents her and her committee from voting for another hike in September.

We still see September as highly unlikely. Even December to us is off the cards when you take into account political event risk on both sides of the Atlantic (Trump stateside; Spain and Italy in Europe). Yes, there are US data points suggesting a US rate hike could be due, but surely not while other central banks are doing the polar opposite. The European Central Bank is widely expected to add to stimulus on 8 September while the Bank of England updates us on 15 Sept and the Bank of Japan could move again towards the end of next month.

Don’t forget that every step the latter group takes to ease policy further, which serves to weaken their own currencies, has the offsetting effect of strengthening the US dollar. A US rate hike, or a strong hint of one being imminent, therefore represents a risk for Yellen. It will potentially send the US dollar much higher than the Fed might be comfortable with, thus becoming a hindrance for exporters. Even if it gives consumers more bang for their buck in terms of imports.

The Fed has been at pains to hammer home a message of a ‘slow and gradual’ pace of future hikes, aiming to keep the US dollar index from returning to flirt with the 100 mark it traded around at the beginning of December and end of January. Would it risk sending it back there? Yellen is still having to tread the fine line between countering market complacency about low rates forever while simultaneously prepping traders for another eventual US hike. Not an easy job.

Economic barometer copper is already back testing July lows. We wonder whether a hawkish tone this Friday could serve to deliver a real dent to the commodity space, with a negative knock-on for the FTSE’s mining contingent. We already see the red-metal and others (aluminium, oil) putting raw material-focused names on the back foot this morning as a result of last night’s US dollar rebound. Could these trends become rather unwelcome friends?

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

US driving season is failing to rev up the oil price

This week, Mike van Dulken and Augustin Eden of Accendo Markets tell Hot Commodity why the outlook is rather gloomy for the oil price…

Oil’s making the headlines this week – crude stockpiles may be falling but so too are prices. Far from this being a mere case of the market ‘throwing its toys out of the pram’ when the data is not quite as bullish as it would like, it’s rising Gasoline inventories that’ve got people scared. Which brings to our attention the rather important issue of demand. Until recently the buzzword in the oil space has been ‘supply,’ global oversupply to be precise, and not only has this presented a one-sided picture – that big producers are keeping the taps open trying to freeze out smaller competitors with lower prices – it’s failed to account for how much oil is actually being consumed in the form of fuel. It’s left out the consumer!

The crude price rally to June highs came with expectations that Americans would spend the coming months driving around in their big gas guzzling American cars. This phenomenon is so well known it’s been given a name, ‘US Driving Season’, and it should have been viewed with particular gusto this Spring since crude stockpiles have been consistently falling (drawdowns in 10 of the last 11 weeks). The only problem is that gasoline stocks have been rising. Meaning Americans aren’t driving quite so much this Driving Season!

With the rise in US gasoline stocks offsetting the fall in crude – considered the most important market and thus a global bellwether – not much has actually changed and so we’re back to the situation whereby supply is still exceeding demand. This time, however, it’s made worse by a situation of under-demand – the same thing but with a different emphasis. It’s not just supply that’s the problem now. It’s also demand, or a lack thereof.

Demand for oil is of course not confined to those American drivers, it’s arguably driven harder by refiners who, seeing gasoline prices falling and thus their margins squeezed, will surely simply buy less crude oil to refine. The upshot of that is…. rising crude stockpiles. This all as we move out of Driving Season.

With oil market dynamics somewhat like a proverbial bunch-up on the motorway, it looks as if the 2016 oil price rally is now in need of some fresh ideas.

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

The copper price is brightening despite the Brexit vote that rocked the markets

Augustin Eden and Mike van Dulken from Accendo Markets tell Hot Commodity why copper is faring well in a tumultuous week following the Brexit vote…

What a turnaround in the markets this week. Talk of fresh restraint concerning US monetary policy normalisation (a 2018 rate hike, anybody?), reassurances from China that it will continue to meddle in its financial markets as required and hopes of coordinated central bank intervention have all helped boost the price of copper via a weaker US dollar and improved risk sentiment. This has in turn stopped a good portion of the record bearish speculative bets on the commodity, providing further support. You wouldn’t be wrong in concentrating exclusively on Brexit this week, but it’s probably time to start remembering that the wider world does still exist – even more so the fact that the wider world is far more of a going concern for the UK’s FTSE 100 blue chip miners than the country in which their shares are merely listed.

In particular, for all its imperfections, China is a godsend when it comes to copper. The world’s 2nd largest economy may be slowing (no arguments there) but it still currently buys 40 per cent of all the copper produced annually around the world. The Chinese government is doing everything it can to paint a positive picture, while regulators intervene in financial markets to keep all the balls in the air. And with ‘fiscal support’ (whatever that actually means in China’s case) constantly warming up on the touch-line, the positive impact on classic risk plays in the UK’s mining sector has helped offset global growth concerns emanating from Brexit.

Base metals haven’t been rocked as much as everyone thought they might have by the Brexit hit to global market sentiment. We know the miners are less exposed to the UK economy than they are to emerging markets and we’ve got this fantastic tool in the Chinese government primed to act the very moment things start to turn sour. Aside from the safe havens, copper could now be set to benefit most of all as trade talks commence in North America – with energy production a major talking point – and with the potential longer term for more of that between the UK and China. Energy is likely to be on the agenda here too, with the UK facing an impending shortage as coal plants close to be replaced by, er, well, nothing has been decided yet. But many renewables are likely to require a lot of a certain red metal to transmit what they can harness naturally.

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.

Dong Energy’s IPO shows why offshore wind is more than hot air

Like Saudi Aramco, Dong Energy is now in the midst of preparing for an initial public offering.

The Danish energy giant’s June listing is expected to value the firm at up to $16bn (£10.9bn), making it one of the biggest flotations of the year. It will of course be dwarfed by Saudi Arabia’s oil colossus, which has been valued (perhaps overenthusiastically) at up to $2trn, but it’s still not to be sniffed at.

I think the two energy companies make for an interesting comparison. On one hand, you have Saudi Aramco – a longtime oil Goliath that has provided the Gulf state with lucrative revenues, but has recently fallen into comparatively tougher times as a result of the oil price rout. Saudi Arabia has now had to stop using its oil revenues as a piggy bank, has tapped the debt market and will be tapping the equity market in order to get rid of its deficit (which came in at a national record of $98bn last year).

I’m sure its plans to raise money will succeed, as well as its new strategy to diversify its economy away from black gold. But what for oil itself? Where will it sit in a rapidly changing energy sector where it must compete with other sources such as shale, at a time when the West is pushing energy-efficiency and a move to renewable power, while China’s energy demand is slowing down as its economy slows?

This brings me on to Dong. The energy firm, which counts the Danish government as its biggest stakeholder, used to have a major focus on coal but has now transformed itself into the world’s largest offshore wind farm operator. It has tried – unsuccessfully – to sell its oil division, as it looks to shed its “dirtier” assets to become greener than green.

Its efforts have paid off. Since 2013, when it was still struggling post-financial crisis and Goldman Sachs bought a stake in the firm (amid a gigantic public furore into the influence of the US investment bank on a state utility), it has increased its profitability – thanks to its offshore wind division.

Renewables are expensive and controversial. While they make sense environmentally, they require hefty state subsidies in the transition period and transitioning too fast can be a costly burden. Certain types can also be less reliable, such as solar and wind, as they are dependent on certain weather conditions.

In the UK (where Dong makes large profits), energy secretary Amber Rudd has called for deep cost cuts to offshore wind farms if they wish to receive billions of pounds of new subsidies.

But – and excuse the pun here – they’re the way the wind is blowing. Political pressure to implement and raise renewables targets mean that they’re here to stay. They just make long-term sense, despite their short-term challenges.

Perhaps it is a little simplistic to say that oil is the past and renewables are the future, especially at a time when the former is relatively cheap and the latter still expensive. And oil is still one of the world’s major energy sources, while renewables are a mere pipsqueak. A pipsqueak still relying on handouts from mum and dad.

I’m sure bankers and investors will be able to profit from Aramco’s IPO more than Dong’s, despite the changing fundamentals.

But with a move to greener energy sources inevitable in the developed world and oil reserves (and revenues) depleting, I wouldn’t be surprised to see the balance changing – after all, the vampire squid must be smelling money…

Oil price: can $50 be conquered?

Can oil make it back up to $50 a barrel? And what does this mean for US rate rises? Mike van Dulken and Augustin Eden of Accendo Markets give their take on this pivotal day in the recent recovery…

A stronger US dollar is showing no signs of hampering the oil price rally towards $50, even after a trio of Fed speakers (non-voters we must highlight) spiced things up by jumping on a few bright spots of macro data to send the US dollar basket back to 3-week highs, suggesting a June US rate hike remains a possibility.

Wording is surely key here, with a rate hike technically possible at every meeting. Whether one is likely or not is a very different matter. Markets may now be pricing in a slightly higher likelihood, but they are by no means pricing in a hike. It’s generally accepted that the Fed prefers to avoid surprising markets – it’s not a good look for the central bank of the world’s reserve currency and number one economy. Better warm ‘em up and hint for a while before delivering the killer blow. And anyway, last night’s speakers (Lacker, Williams Kaplan) are all non-voters, which suggests this evening’s Fed Minutes will be more important in terms of deciphering the FOMC rate-setting committee’s most up to date views.

As it stands, we just don’t see June on the cards for a hike, even if some US data is surprising to the upside (did the trio miss May’s Empire State Manufacturing data cratering on Monday?). Certainly not with a UK referendum on EU membership set to take place less than a week after the Fed next meets. It’s assumed that a Leave vote would ‘pound’ sterling even more than jitters already have, which would only go to put unwelcome upward pressure on the dollar – in essence delivering a rate hike of sorts.

Surely the Fed would be better holding off. If a Remain vote prevails, a relief rally in GBP could provide more room for manoeuvre via a corresponding drop in the dollar. Furthermore, as if that wasn’t enough, with each day that passes it looks increasingly possible (scarily so) that Donald trumps his democrat rival Hilary in the race for the a White House. Is that a geopolitical environment the Fed really wants to be hiking into? Of course not. The committee knows its choices have far-reaching implications. It was given a timely reminder in January via an aggressive market selloff in response to its December decision to go for it and deliver that first major post-crisis hike.

Which brings us to the non-currency drivers of the price of oil, the stuff we should really be concentrating on. THE FUN-DA-MENT-ALS. Supply disruptions have been a major issue of late, with Canada and Nigeria tagged as major reasons for prices continuing their 2016 reversal recovery. But these are likely short-term issues, in which case supply perceptions could be set to calm, thus hindering oil prices.

Extra help came from last week’s surprise drop in US weekly crude stocks (which suggests that consuming more = good) coupled with continued drops in US rig counts and stateside production as Opec-competing frackers call it a day. Opec mouthpiece Saudi Arabia remains stubborn within a divided cartel. All have helped usher prices ever higher and, as we write, there is the possibility (borrowing from Fed terminology) that another big drawdown in stockpiles is delivered this afternoon, sealing a test by oil prices of that key $50 level. Add to this improving, if patchy, US data and a better than expected rebound in Japanese GDP (big oil importer) and fundamentals are supportive of the near-term uptrend.

The question now is whether the current trend has legs? How close is US production to a turning point as shale and frackers return to bring production back on-line at more sustainable prices? They had been talking about $45-50 which is where we are. Those nasty 18-month term downtrends have been overcome to take us back to six-month highs. Can a major psychological level in $50 really be conquered too?

This commentary was provided exclusively by Accendo Markets for Hot Commodity: https://www.accendomarkets.com.

Rio and BHP’s share price rally show the mining recovery is in full swing

This week, Mike van Dulken and Augustin Eden from Accendo Markets explain why bad news can be good news when it comes to mining…

Logistical problems (weather, transport) would normally be considered a negative for a dual-listed mining giant such as BHP Billiton (BLT) or Rio Tinto (RIO). However, trouble getting stuff like the iron ore required to make steel to market in the first quarter of the year has actually proved perversely beneficial to the recovering mining pair.

The news may have impacted recent quarterly financials and resulted in cuts to full-year production guidance, however, prices of the raw material have been buoyed by the interpretation of restricted product supply helping with a slowly reversing global glut. Rather than hurt the companies’ shares, they have maintained their recovery trajectories, even accelerating to make bullish breakouts to levels last seen in October/November. This may serve to attract even more interest, which could prolong the trend.

If I were to tell you that BLT has rallied over 70 per cent from its January lows and RIO by more than 55 per cent, these are exciting moves within the space of three months. Annualise that! Note that their peer Anglo American (AAL) is up 250 per cent from its lows. This is not a typo. It is trading at 780p vs Jan lows of 225p.

No surprise then that commodity prices are well off their lows too, and while the circa 50 per cent oil price recovery has been well documented, and given a depressed commodity sector a boost, it’s the 10-60 per cent rebounds in metals prices (aluminium, copper, nickel, zinc) that have really helped, and iron ore in particular (the winner, up 60 per cent).

This stems from a host of drivers. Tough decisions by the miners included reducing output by abandoning no longer viable projects to stem the supply glut. They have also cut costs and dividends to save money.

A weaker US dollar based on a more gentle normalisation of US monetary policy is also helping by making dollar-denominated commodities that bit cheaper. Short-covering of bearish bets will have added handsomely to early 2016 recovery momentum.

Furthermore, a slower growing China has become more acceptable to the investing masses, the belief being that it is no longer set for a hard landing (the government and central bank will intervene do whatever’s necessary). With China and the rest of the world still requiring mountains of commodities like iron ore for future growth, the outlook is not as bad as it was.

While corporates remain cautious, markets are cautiously optimistic. After the great sell-off we look to be in the midst of a great recovery. The big question now is how far it will run?

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.