February may have marked a first rise in eight months for commodities, but it was back to type in the first week of March with weakness across most sectors. 

This was driven by the adverse impact of the dollar rising to a fresh 11-year high against the euro while China downgraded its growth target for 2015 to just 7 percent, the lowest in more than decade, according to a report prepared by Ole Sloth Hansen, head of commodity strategy at Saxo Bank. 

The resumption of dollar buying occurred as the market prepared for the beginning of quantitative easing from the European Central Bank. 

A move that has already seen bond yields tumble across the euro area and the governments in France and Netherlands to Germany can now issue two-year government debt at negative yields.  

The agriculture sector, not least the grain sector, came under some renewed selling pressure as a the rising dollar continue to erode US crops competitiveness on the global market exacerbated by competitors in South America, the Black Sea area and Europe all enduring significant currency weakness against the dollar. 

Chicago wheat took the brunt of this selling, not least due to a bigger-than-expected forecast on 2015 production from the UN FAO. 

The soft sector is another casualty of the rising dollar, not least sugar and Arabica coffee, considering Brazil's important role in the global market for these commodities. 

The combination of ample rain in Brazil leading to raised production estimates and the continued weakness of the Real have seen both commodities remain under some considerable selling pressure.

Crude oil settling into a range

Both WTI and Brent crude saw volatility drop to December levels as both continue to settle into a range. On the supply side, US production continues to rise and during the last week of February, inventories rose by 10.3 million barrels to another multi-decade high at 444 mn barrels. 

US refineries are yet to emerge from the annual slowdown in demand due to maintenance and turnaround towards gasoline production. Once they do, the build in inventories will slow especially if we finally begin to see negativity filter through from the price slump. 

These developments are still weeks away so in the near-term inventories are expected to keep rising and this has raised some speculation and concerns about just how close the US storage facilities and pipeline infrastructure will come to full capacity. 

As a result, the potential upside for WTI crude remains limited at this stage and at the start of the week the discount to Brent crude reached $13 a barrel. 

Current OPEC focus

Brent crude, however, failed to hold onto this elevated premium on increased speculation that a deal with Iran over its nuclear program could be reached. 

Iran has made it clear that once sanctions are eventually lifted, it will be ready to increase exports and reclaim some of the market share that has been lost since Western sanctions were introduced back in 2012.

State owned Saudi Arabian Oil Company raised the prices that customers in Asia, Europe and the US will have to pay for its crude oil during April. The market took this as a sign that the market outside the US is slowly beginning to balance itself. 

Minister of Petroleum and Mineral Resources Ali Al-Naimi warned nevertheless that it was not the Saudi's role to subsidise high-cost producers and that non-OPEC producers would have to help balance the market.

Near-term outlook

US supplies will continue to rise in the near term, thereby putting some additional pressure on US storage facilities while supply disruptions in countries like Libya and recently Iraq together with the prospect of rising demand, will help balance the market outside the US. 

Brent should find some support on the back of this but while we wait for news from Iran, the upside seems limited.

Technically, the price of Brent is being boxed into a tight range and a breakout is expected soon. A break below $60 a barrel, however, has the potential to cause a bigger upset than a move above $63 a barrel. 

This scenario is being reflected in the options market where the cost of protecting a downside move through puts remains much higher than the cost of calls. 

Precious little joy for gold

Precious metals came under some renewed selling pressure as the dollar resumed its ascent against most currencies. Against the euro, it reached a new 11-year high as the prospect for QE in Europe and rising rates in the US left both metals on the defensive. 

The renewed focus on the adverse impact of dollar gains was found in the numbers with gold falling by more or less the same percentage that the dollar rose. Silver took out a technical support level at $16.08/oz which led to some underperformance relative to gold. 

Holdings in exchange traded products backed by physical gold jumped by 80 tonnes to 1,680 tons during January and the subsequent $100 plus selloff has so far only had a limited impact on these holdings.

Negative bond yields on core government bonds in Europe have been adding some support and probably helps to explain the recent resilience among ETP investors with many private investors balking at the prospect of negative yields and getting into stock markets which have seen strong gains already.

Following another strong US job report Friday gold broke out of its recent $1,190-1,223/oz range, and while the dollar continue to scale new highs, the focus will be centered on the risk of further losses, not least considering the continued expectation that the US Federal Reserve will raise rates later this year. 

Amid a rising dollar the near-term risk to gold is that it will have to go lower with the next level of support being the January low at $1,168 followed by $1,150.