Commodities | Aug 21 2009
By Chris Shaw
It is unusual for one piece of data related to commodity markets to impact significantly on a broad range of financial markets but Barclays Capital notes that is what occured this week when the weekly US Department of Energy report showed a large decline in US oil inventories.
The news was enough to push up not only the oil price but equity markets and the prices of other commodities, while the US dollar weakened on the news. While the fall in inventories was the biggest weekly decline since May of last year the group suggests the real significance is it strengthened the case in favour of the recession coming to a close and heightened expectations activity levels will begin to push higher.
As well, it suggests the way the market acted on the release of the figures shows markets are looking to the commodities sector for evidence confirming a rebound in OECD growth and here the group expects plenty of signs of improvement in coming months.
The reaction to the number supports the group’s view commodity markets are likely to continue trading in a volatile pattern for some time, with sideways price action most likely, though it continues to see price risk as tilted to the upside for industrial metals and energy in particular. This view is based on the expectation both markets benefit from improved seasonal activity levels and re-stocking from September, which it expects will quickly remove lingering market scepticism with respect to the economic recovery.
According to Barclays Capital two of the best ways to play this outlook are the copper market, where demand is normally very sensitive to the industrial production cycle in OECD economies, and in distillates, where diesel demand could rise quickly on a pick up in the rate at which goods are transported around the world.
Looking across the commodity sectors, the group suggests oil prices currently are well supported at the low US$70s per barrel level in what it views is a consolidation phase before a sustained push above US$75 per barrel. While stocks are currently high, demand is improving and supply continues to tighten, so any increase in the pace of inventory erosion will support prices in its view.
This sell-off in base metal prices earlier in the week on the back of weaker US housing market data was short-lived and shows the sector remains susceptible to bad news but the group suggests support levels are still moving higher. As a result dips are proving to be shallow and it expects this will limit price downside.
Given most elements of the demand picture are pointing the same way, Barclays expects OECD demand to recover soon, creating significant upside potential for metal prices in the second half of this year. As economic recovery picks up steam, prices could go even higher in the group’s view.
For the precious metals US dollar movements are still the main market driver and with expectations for a stabilising in the greenback shorter-term range trading for gold is likely until physical demand again turns higher. This is expected to occur ahead of the Indian wedding season, which begins in October.