Muscat: A tumultuous first trading week of 2019 headed towards a calmer close. After hitting a 33-months low the Bloomberg Commodity Index managed to climb to record its first weekly gain in five. The global market rout was caused by economic and political uncertainty as well as tightening liquidity paused on Friday after Beijing confirmed that a US trade delegation would visit on January 7- 8.
Hopes for a breakthrough have been raised as the impact of the trade war between the US and China begins to show up in weaker-than-expected economic data from the world’s two biggest economies.
While US stocks began January having recorded their worst December since the early 1930s, the currency market had been a sea of calm, at least up until this week. The first profit warning in 16 years from Apple, due to a slowdown in Chinese demand, sent a shiver through the markets and helped trigger a global risk-off wave.
This combined with an illiquid holiday market in Japan saw the Japanese yen rip higher. The AUDJPY cross, often seen as a proxy for the health of the Asian market dropped by 7 per cent before recovering all its losses once Tokyo reopened on Friday. These and other developments helped send the dollar lower for a third week, thereby providing some additional support for commodities.
Into this mix of uncertainty and volatility, commodities generally managed to kick off 2019 with gains across most sectors. The bellwether oil sector led from the front with global growth and demand concerns outweighed by a dramatic December production cut from Opec led by Saudi Arabia. Brent crude, which in late December found support at the critical technical and psychological $50 per barrel level, was heading for its best week since last April.
Crude oil is beginning to show signs of support following the +40 per cent collapse since last October. Since hitting the key technical and psychological $50 per barrel level last week it has managed to recover strongly due to an improved outlook for both supply and potentially also demand.
On the supply side, the Dallas Fed in its fourth quarter Energy Survey said that the region’s oil and gas sector growth had stalled amid the sharp oil price decline. The (anonymous) comments from top oil and gas executives provide a good insight into the renewed stress caused by the dramatic price slump. US shale oil production growth is likely to slow following the price slump, but if the 2014 to 2016 sell-off is anything to go by it may take up to six months before the impact becomes visible in the data which for now continue to show year-on-year growth close to 2 million barrels/day.
While doubts are being raised by US production growth going forward, Opec responded strongly to the worsening outlook by slashing December crude oil production by the most since January 2017. Monthly production surveys from Bloomberg and Reuters both showed that Opec had cut production by around 500,000 barrels to 32.6 million barrels per day. The slump was led by a voluntary reduction from Saudi Arabia (420,000 barrels per day) and unplanned reductions from Iran (120,000 barrels per day) and Libya (110,000 barrels per day).
While supply reductions may begin to provide some support, the demand outlook needs to stabilise as well. The previous sell-off occurred during a time of rising demand; on that basis producers found it relatively easy to trim output and change the direction of oil. This time is different with Opec and other producers not only having to deal with a renewed pickup in US production which may take months before slowing.
They also must worry about the global outlook for growth and demand, something over which they have no control. The fact that China (the world's biggest importer of oil)and the US (the biggest consumer) are fighting a trade war is a matter of concern. This concern, however, has yet to be reflected in the official forecasts from Opec, the EIA, and the IEA. During the past six months they have only reduced global demand growth by an average of 100,000 barrels/day to 1.4 million.
Having found support at $50 per barrel, Brent crude oil is now challenging resistance at $57.50 per barrel, the November low. A break higher could see a return to the previous consolidation area around $60 per barrel.
* The author is the Head of Commodity Strategy at Saxo Bank