Prices were generally higher across the different commodity sectors last week, with weather and geopolitics still having the upper hand. There was a limited focus on weak economic growth across the world, which otherwise would argue against rising prices. However, following the month long rally, attention will increasingly return to slowing demand. The sustainability of the recent rally, especially in energy, can be put into question, according to a commodities report prepared by Ole Hansen, head of commodity strategy at Saxo Bank.
The DJ-UBS Commodity index rose by 0.4 percent. It has now rallied during six of the past seven weeks as the agriculture and the energy sector have experienced strong gains.
Crude oil
The price of North Sea Brent crude rallied for a second week in a row and in the process recovered more than 60 percent of the March to June sell-off. The bullish drivers are currently three fold: A drop in supply from the North Sea during the August to September field maintenance season, geo-political tensions from hot spots in Syria, Iran and Libya which also leaves the supply side exposed, and finally continued expectations for additional quantitative easing, which once again have been attracting financial investors into energy.
As a result of the reduced North Sea production, the Brent crude spot month premium over WTI crude has widened to $20 and the spread between the first over the second Brent futures contract has moved from a discount to a premium of 1.6 dollars per barrel during July and August, which is an expression of tightness in the spot market. Daily loadings in September of the three North Sea crudes which make up the Brent crude benchmark are expected to drop to the lowest level in more than five years.
Geo-political tension is lurking just below the surface, leaving the supply side exposed to sudden reductions. At the moment we have several hotspots, which individually and combined add to the sense of unease across oil markets.
On a negative note, OPEC in its monthly report saw 2013 oil demand growth slowing compared to 2012, with the risk skewed to the downside as a gloomier picture in Europe in particular could reduce the forecast by up to 20 percent. Other non-supportive news for oil came from China, which saw a collapse in its export growth for July. China's net oil imports shrank to the lowest level this year.
All in all the three bullish drivers mentioned have collectively helped drive oil prices higher, despite a lack of support from the level of global activity. “Until we see solid signs that the global economic outlook has improved - and thereby also the demand for oil improved - we will stick to our Q3 forecast of the Brent crude price later this year moving back toward $105,” Saxo bank said in its report.
Gold
With liquidity at a premium during the holiday month of August, where many traders are away from their screens, the primary activity has been in the hands of short-term traders looking for small movements to benefit from. With the lack of any major spark to push at boundaries, gold continues to find itself confined in a tighter and tighter range.
The price action during the week, however, still points toward an underlying positive sentiment, as sell-offs have been met with instant buying. With the dollar finding some support again following a period of position adjustments, especially versus the euro where short covering has been seen, the headwind from this will continue to frustrate bulls looking for higher prices. “So while we wait for the spark, which could come from increased worries about inflation as food prices continues to rise, we should expect continued range trading with focus on the key levels at $1,640 to the upside and $1,570 and $1,540 to the downside,” the report said.
Sugar
The price of sugar rallied hard during July and helped drive the UN FAO sugar index up by more than 11 percent during the month. The rally was driven by a slower-than-expected start to the Brazilian harvest as rain hampered the process, coupled with the prospect of lower production in India due to a poor outlook for the monsoon. This raised concerns that the projected 2012/13 production surplus would not materialize. Money managers jumped on the story, not least helped by the bullish attitude toward agriculture commodities in general.
