Tag Archives: commodities

The oil price follows the market’s heart, not head

This week, Mike van Dulken and Augustin Eden from Accendo Markets tell Hot Commodity why it’s sentiment, not fundamentals, that will boost the oil price.

Equities remain rather sensitive to commodity prices – understandably, given their links to economic growth sentiment. In the oil space we continue to hear mumblings of meetings to discuss production freezes (Moscow next?), yet the probability of any agreement between Opec and Russia is non-existent as long as Opec’s own members fail to agree – Iran and Iraq are still increasing production. Can members trust each other anymore? Has the oil price decline on Saudi-led stubbornness taken things too far in some cases? Is the cartel no more? US production has fallen to a six-month low, helping prices recover to their best levels in many weeks, yet as we have written before, this just risks the US shale frackers rolling back in to make the most of more economically viable prices. They are the new swing producers.

While this remains a distinct possibility, we can’t fail to note some interesting technicals of late that are at odds with some of the fundamentals. US Crude has broken above $36 which could see it on for a double-bottom pattern completing around $45. A price in the mid-$40s makes sense after comments from some US producers about $40 being the new $70, and a $45 figure being cited as enough to encourage some of the nimble drillers back to their rigs. Yet US stockpiles continue to grow to fresh all-time highs. Will today’s data show yet another increase?

Brent Crude, on the other hand, never tested its $28 lows twice and so a double-bottom can’t be on the cards. While there is interesting resistance at $41.30, there is still potential for an inverted head and shoulders reversal to complete at $48 after the breakout at $36. Importantly, if both patterns achieved their objectives this would put paid to major long-term downtrends, getting prices back above what has been bugbear falling resistance since those long gone $100+ highs of summer 2014. It was also maintain the current $3 spread between the two benchmarks.

A major broker may have announced to the world yesterday that the recent surge in commodity prices has gone too far with fundamentals unchanged, exacerbated by short covering, ETF buying and banks vying to distance themselves from bad sector debts. That call may have resulted in a sell-off yesterday. However, markets have already regained poise. After all, fundamentals are one thing, but sentiment is very much another. And hopes of a more favourable message from central banks over the next week or supportive chat from major oil producing nations could easily serve to boost bullishness for the barrel again.

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

Good news! The US economic revival is definitely on its way

This week, Mike van Dulken and Augustin Eden from Accendo Markets tell Hot Commodity why the US is on the up…even if the rest of the world isn’t.

Equity markets went to town yesterday on positive US data and hopes of more stimulus from the European Central Bank (ECB) and China’s People’s Bank of China (PBoC). Yet this is surely supporting the case for the US Federal Reserve to deliver further interest rate hikes this year – something likely to stifle US growth.

So was the market reaction simply increased confidence in the US economic recovery, coupled with a realistic belief the Fed won’t dare hike this year for fear of a repeat of January’s volatility? This should maintain a nice accommodative tilt to global monetary policy to spur economic recovery elsewhere.

US interest rates have risen only a touch to regain 0.5 per cent and equal the historic lows of its peer across the pond – the UK’s Bank of England (BoE). However, US macro data has blown too hot and cold since then for the Fed’s Federal Open Market Committee (FOMC) to be comfortable hiking again anytime soon. Mixed Fed chat of late, with some quite noticeable changes of heart by long-term committee hawks (Bullard), adds to our belief.

With markets already building up to Friday’s US Non-Farm Payroll numbers, it’s worth noting that jobs data has been anything but a worry for the Fed for a good while now, with net monthly additions averaging around 225,000 since 2013. Unemployment at 4.9 per cent remains in a downtrend towards 10 year lows, but wage growth is still lacking.

News that US Q4 2015 GDP growth was revised up to one per cent quarter-on-quarter from 0.4 per cent last week was welcomed by markets, but it still showed a slowdown from previous quarters.

US Consumer Price Inflation (CPI) expectations have also faded quite dramatically (just 1.4 per cent for the next decade, suggestive of another oil price plunge), and sit way below the Fed’s two per cent target. Core CPI figures (excluding food & energy) may have accelerated back to target but for this to hold up oil prices must fall no further, allowing the influence of their 2014 price plunge to dissipate.

So aside from the fact that Friday’s US jobs figures are sure to deliver the traditional monthly market volatility, for us it will only serve to bolster confidence in the US economic revival. Good news. This in turn may further support the case for policy normalisation, but it’s not going to be enough for the Fed to consider the stars truly aligned for another press of the big red button. Even better news for risk appetite. Enjoy the first Friday’s usual fun ‘n’ games, but other data is far more important.

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

Accendo Markets: will the Fed release the doves?

In the first of Accendo Markets‘ regular market commentary for Hot Commodity, Augustin Eden and Mike van Dulken discuss whether the Fed is having cold feet and why gold is good…

This week’s main event is sure to be this evening’s US Federal Reserve policy statement and whether it dares issue some form of dovish mea culpa regarding its December decision to hike, especially given the market turmoil that has greeted us in 2016. While credibility was on the line after such a protracted warm-up, it probably felt obliged to hike rates on US data improvement.

However, it at least has the option to tone down its opening message of 2016 (with no press conference or Q&A) about how many more hikes we might expect this year. From a lofty three, markets are now pricing in one at best. What’s clear is that while the US may have been ready, the global markets were not.

Will the Fed’s focus lie with the US economy’s continued recovery progress or recent financial market volatility? It should be the former, but the latter can’t be ignored. Arguments may dwell on how it was right to move then, but hold now.

Financial markets have neither enjoyed the second half of 2015, nor the tricky start to 2016, but the same needn’t necessarily be said about all asset classes. While equities are hindered by persistent commodity price weakness after an 18-month rout, and a slowing and troubled China, many ask whether the worst is priced in and the doom and gloom overbaked.

So far so gold…

What’s this got to do with the price of gold? Well, it’s having a cracking start to the year, bouncing from 5/6yr lows on talk of output having peaked. Also, as a safe-haven, it needn’t worry about US dollar strength. If people are that fearful (unless they’re Warren Buffett) they’ll probably be yellow-metal bound. The zero-interest bearing asset has seen rising demand from market volatility and technical drivers as well as hopes the Fed will go all dovish on us after December’s ‘mistake’ to raise rates from record lows.

If this does happen, we could well see a pullback in recent USD strength. It’s almost as if the dollar has been simply resting near its 2015 all-time highs, waiting for its next pointer, which could well be revised US monetary policy guidance for 2016. There’ll arguably be a knock-on for the entire commodities sector from that. Even oil could gush a little higher from the FX benefit, despite a more meaningful recovery surely needing moves to cut output and reverse its own supply glut.

This commentary was provided exclusively for Hot Commodity by Mike and Augustin at Accendo Markets – https://www.accendomarkets.com.

Do you agree with Mike and Augustin or do you have a different take on the Fed’s next move? Email info@hotcommodity.co.uk with your comments.

Libyan oil will fail to deliver despite unity government

Libya nominated a unity government yesterday after a lengthy UN-brokered negotiation, aimed at harmonising the embattled country that is currently being run by two rival governments.

But sadly political stability is still far away for this resource-rich country, which is having to fight the aggressively expansionist militant group Islamic State.

As such, it seems unlikely that the North African country, which has the largest oil reserves in the continent, will be able to return production to its 2011 peak of around 1.6bn barrels a day from its current levels of under 400,000 barrels.

With brent crude dipping to 12-year lows this week and hovering at around $28.30 a barrel yesterday evening, an absence of Libyan output will be of no matter to the market. But it is everything to Libya’s financial stability and its peace.

When I edited a Middle East-focused trade mag, I remember chatting to an insurance company CEO in Dubai shortly after Gaddafi had been toppled in 2011. The CEO, and a number of other UAE delegates, had been invited on a trip to Libya to boost trade. At the time, there seemed everything to hope for – I even wrote a feature along the lines of Libya’s oil reserves being the next big thing. But the awaited period of political stability and harmony failed to arrive, with competing armed forces taking control of oil fields even before IS came on to the scene.

Libya relies on oil for around 90 per cent of its revenue, so an unproductive Libyan oil sector means a financially weak Libya. A power vacuum and a struggling economy are manna to IS, which is destroying Libya’s oil fields, rather than taking them over like it did in Iraq and Syria. Whether this is a plan to weaken the country further in order to take control, or simply stage one of a plan to devalue the oil assets before pouncing on them, is debatable.

Either way, Libya is in dire straights. RBC Capital Markets research earlier this month called the country a “wild card” that could potentially add substantial quantities of oil to an already saturated market this year, but I think the term wild card is far too optimistic in this case. For wild card suggests a possible return to the stability needed for Libya’s oil sector to prosper – which would be incredible in the current climate.

Firstly, the new, nominated government needs to win acceptance – the fact that two out of the nine members of Libya’s Presidential Council have already rejected it shows just how divided the country is.

Secondly, to make progress on energy security in the face of low revenues, a divided government and attacks from a number of rebel groups, not just IS, will be a long and arduous process.

Thirdly, a growing number of oil fields have been destroyed by IS, meaning work would need to be done to return them to an operational standard.

Of course, situations change quickly and perhaps 2017 could present a more promising year for Libya and its oil reserves. But the longer it remains in flux since the demise of its tyrannical ruler, the less likely it seems.

Latest oil price slump shows that black gold has lost its lustre for good

Oil tumbled more than two per cent yesterday, edging perilously close to an 11-year low despite growing fears of World War Three kicking off between Saudi Arabia and Iran.

You’d think that the risk of disrupting supply from two of the world’s largest producers would rattle traders, but no! Late last night you could buy a barrel of brent crude for a little over $36 (£25) – small change compared to the $115 highs of Summer 2014. Prices had trickled down to an 11-year low of $35.98 just before Christmas.

I’ve been bear-ish on oil for quite some time now despite some spikes throughout the year and I still think it could drop to $20 a barrel. But increasingly the market consensus appears to be that oil will rise in the medium term.

The typical view from people I speak to is that Opec (for which read Saudi) will keep production high, which will keep prices low by creating a supply glut. This in turn will cause other producers (for which read the US) to cut their output as they can’t make a profit and eventually this will push prices up as there will be less oil around to meet the demand.

I think this is a far too simplistic a theory.

Firstly, I think the decrease in production, namely from the US, would have to be incredibly dramatic and it would take quite some time to show up due to their mammoth stockpiles of oil. This would be a long term not a medium term effect – and would only work this way if there are no other mitigating factors. I wonder if the hand of government would come into play if the mighty US lost its booming shale industry that was turning it from a net importer to a net exporter of energy?

Secondly, this theory only works if demand stays the same. And here lies the unknown. With growth in China – the world’s largest consumer of commodities – having slipped back into second gear, will there be enough demand to keep oil prices high? The market volatility in China this week shows that no-one really has the faintest idea about what’s going to happen.

Meanwhile in the West, increased energy efficiency measures and investment in renewable power sources mean that oil isn’t the master of the energy market that it once was. There are even predictions that the West’s energy consumption will decrease by the 2030s.

Why does everyone assume that oil prices must, and will, stabilise at a higher price? Surely a lower price could eventually become the new normal and economies would have to adapt or die as a result?

Are you an oil bull or a bear? Email info@hotcommodity.co.uk with your views.

Happy New Year to you all!

Glencore’s update is better than expected, but miners are set for more pain

On a day like this, Glencore must still be plagued with shopper’s remorse over its badly timed acquisition of miner Xstrata back in 2013. The deal added masses of mining operations to the commodities trader’s business, which have struggled in the commodities price rout.

But the company, which is making grand efforts to reduce its staggering $30bn (£19.8bn) debt pile, today surprised the market with a more ambitious than expected plan to cut its borrowing and hopefully save its treasured investment grade credit rating.

It has increased its debt reduction measures to $13bn, up from $10.2bn, and has a new net debt target of $18-19bn by the end of 2016, an improvement from its previous target of low $20s bn.

It says it has $8.7bn of these cuts already locked in.

Safe to say, the market loved it. Glencore, which has seen its share price plunge by almost three quarters on the FTSE 100 index this year, gained 14 per cent by mid-morning trading.

“Glencore is well placed to continue to be cash generative in the current environment –
and at even lower prices,” said boss Ivan Glasenberg. “We retain a high degree of flexibility and will continue to review the need to act further as required.”

But will Glencore’s efforts be enough? With slowed growth in China and the eurozone severely denting demand, everyone can speculate but noone quite knows just how far commodities prices could fall. As Ivan suggests, there may be a need for Glencore to act further. I certainly do not think this will be the last of it. How can it be, when there is no end in sight to weak pricing?

As for the other miners, Anglo American made its own savage cuts earlier this week, shedding 85,000 staff, with all eyes on BHP Billiton to make the next move.

It seems likely that the latter will follow Glencore and Anglo and suspend its dividend as part of its cost cuts. The sector is hemorrhaging money and nothing seems quite big enough to stem the flow…

Why we need to give up on UK steel

As Jennifer Aniston’s relentless array of terrible movie roles demonstrates, sometimes you just need to accept something isn’t working, will never work and move on. Because if you don’t, you will be throwing money down the drain that could be better spent elsewhere and will inevitably look back on it as a costly mistake.

Just as Jen should put the rubbish rom-com scripts down, the UK’s steel industry needs to accept its shortcomings and cut its losses.

Over the past few months, mill closures and job cuts have grabbed headlines, with the UK’s steel crisis blamed on a handful of things: the dumping of cheap steel from China; high energy costs; a strong pound; and high business rates for capital intensive firms.

Out of these factors, China has broadly been seen as the largest culprit in making UK steel unprofitable. After a slowdown in the world’s second largest economy, the People’s Republic has had a surplus of steel on its hands that it has been offloading for a cheaper price. Plentiful state subsidies give Chinese steelmakers an even more unfair advantage in the global market, its critics say.

I’m not disputing the validity of these arguments. China is a big problem. Energy costs and business rates are higher for steelmakers here than overseas. But I do not see any way that UK steel could become truly profitable without heavy state subsidies.

The industry has received £50.4m from the UK government since 2013 to offset environmental levies and is currently waiting for EU state aid approval for the Energy Intensive Industry Compensation Package, which will provide hundreds of millions of pounds for energy-intensive industries including steel.

And the sad truth is it would take even more than this to keep it afloat, due to the myriad of problems hammering the sector.

European politicians have this week promised “full and speedier” measures to address Chinese dumping, but knowing Brussels bureaucracy this is likely to be nothing near speedy, if anything is achieved at all.

Even if China were tackled AND the UK government lowered business rates AND energy rates, you still have the strong pound to worry about – and the fact that it’s cheaper transportation-wise to make steel in countries such as China, which are closer to where iron ore is mined, especially as the end-user is often in the Far East.

For me, the situation draws immediate parallels with UK coal. We still get a significant part of our energy from coal, yet our coal-fired power plants continue to shut down. Instead, we rely heavily on cheaper, imported coal. We simply can’t compete on price.

It may seem harsh to want to curtail support for domestic industries and I am not intending to diminish the devastating impact of job cuts on local communities in any way. But the UK needs to look to its strengths and replace investment in loss-making industries with investment in new ones.

Rather than provide a temporary panacea for steel plants with a support package that will inevitably run out and need renewing, why does the UK government not invest in the communities affected, providing new jobs in more sustainable industries?

Giving up on UK steel does not mean giving up on UK industry – it’s about adapting to our strengths and accepting our weaknesses.