Oil, Gold and Silver Prices Rise on Heightened Geopolitical Tensions

Commodity

Summary:

Outlook on WTI, gold and silver amid ongoing attacks in the Red Sea shipping lane.

WTI rallies on supply disruption fears

Front month West Texas Intermediate (WTI) futures rallied by over 6% from Wednesday's 69.41 low amid heightened geopolitical tensions in the Middle East. The futures contract is now testing Tuesday high at 73.70. A rise above this minor resistance level would likely engage the 8 November low at 74.92 as well as the September-to-January downtrend line at 75.20.

Minor support below Thursday's 72.97 low can be found around Friday's 72.67 high and also at the 72.38 mid-November low.

Gold price stems decline

Spot gold's drop from its $2,088 late-December high amid a stronger US dollar took it to Wednesday's $2,031 low from where it is trying to regain recently lost ground.

The mid-December high at $2,048 is currently being tested, a rise above which would eye the 21 December high, Friday and Tuesday's lows at $2,055 to $2,059.

Support sits at Wednesday's $2,031 low.

Silver price sell-off is taking a breather

Spot silver's swift decline from its late-December high at $24.60 per troy ounce on the back of an appreciating US dollar took it to Wednesday's $22.84 low, to marginally above its $22.51 December trough which should act as support. Below it lies the November low at $21.89.

Minor resistance can be spotted around the 9 November high at $22.99. Oil, Gold and Silver Prices Rise on Heightened Geopolitical Tensions_3

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Owen Li

Energy

Portfolio investors boosted their petroleum positions in the final two weeks of last year, as some short positions in crude were squared up, but short-covering did little to reverse the downward trend in prices.

Hedge funds and other money managers purchased the equivalent of 68 million barrels in the six most important futures and options contracts over the seven days ending on Dec. 26.

Total purchases over the last two weeks of the year were 175 million barrels, partially reversing sales of 473 million over the previous 12 weeks.

Purchases were concentrated in crude (+155 million barrels) rather than fuels (+19 million) as managers unwound previous bearish bets.

Prior to the year-end buying, the net position across all three crude contracts had been reduced to a record low of 128 million barrels on Dec. 12.

Afterwards, the net position had increased to 284 million barrels, but that was still in only the 11th percentile for all weeks since 2013.

In the premier NYMEX WTI contract, short positions betting on a fall in prices were trimmed to 88 million barrels from 128 million two weeks earlier.

Some of the reduction in short positions was probably motivated by profit-taking after prices had dropped sharply since the end of September.

Many institutional money managers will have wanted to realise mark-to-market paper profits before closing their accounts for the year.

Others will have been unwilling to carry large positions over year-end, when markets are shut for multiple days, liquidity is poor and volatility can be high.

The period also saw a cross-market improvement in sentiment as traders anticipated the U.S. central bank would cut interest rates in response to signs of slowing inflation.

Notwithstanding the short covering, crude positions ended the year on a bearish note, far below the 535 million barrels (60th percentile) reached in the middle of September.

Inflation-adjusted front-month Brent futures averaged just $77 per barrel in December, scarcely above the recent low of $76 in June and slightly below the average of $82 since the start of the century.

Refined Fuels

In contrast to crude, fund managers are sanguine about the outlook for refined fuels, where prices are underpinned by lower than average inventories in the United States and other major markets.

The combined position across U.S. gasoline, U.S. diesel and European gasoil was 98 million barrels (43rd percentile) on December 26, but there were important regional differences.

Fund managers were especially bullish about U.S. gasoline where the position was 68 million barrels (75th percentile).

Positions in U.S. diesel of 19 million barrels (61st percentile) were also above the long-term average reflecting the positive outlook for the U.S. economy and expectations of rate cuts.

But positions in European gasoil were bearish at just 11 million barrels (17th percentile) owing to the continued industrial recession in the region.

U.S. Natural gas

Similar to crude, the final two weeks of the year saw some squaring up of very bearish positions linked to the price of U.S. gas.

Fund managers purchased the equivalent of 344 billion cubic feet (bcf) in the two major futures contracts over the two weeks ending on Dec. 26.

But the purchases reversed only a small part of the 1,744 bcf sold since mid-October, according to records published by the U.S. Commodity Futures Trading Commission.

All the buying came from covering of previous bearish short positions (+376 bcf) rather than creation of new bullish long ones which were actually reduced (-32 bcf).

Even after the year-end book squaring, fund managers were left running a net short position of 654 bcf (15h percentile for all weeks since 2010) down from a net long position of 775 bcf (50th percentile) in mid-October.

In the Lower 48 states, the number of population-weighted degree days, a proxy for heating demand and gas consumption, was below the long-term seasonal average every day between Dec. 2 and Dec. 31.

By the end of the year, the Lower 48 had experienced 226 heating degree days fewer than average (-14%) since the start of the heating year on July 1.

Exceptionally strong El Niño conditions in the Pacific have led to much warmer-than-normal temperatures across the northern tier of states.

Working gas inventories were 219 bcf (+7% or +0.81 standard deviations) above the long-term seasonal average on Dec. 22 up from a surplus of just 60 bcf (+2% or +0.23 standard deviations) in early October.

As a result, futures prices for gas delivered in January 2024 had fallen to just $2.62 per million British thermal units at the end of December down from $3.89 on Oct. 13.

Inflation-adjusted futures prices have fallen to just the 5th percentile or below for all months since the start of the century which will eventually curb production and eliminate the surplus.

But unusually warm weather throughout December has postponed the rebalancing and ensured most fund managers remain bearish in the short term.

Source: Reuters

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ING

Forex

USD: Some correction risk today

The risk-off environment and coordinated bond/equity underperformance are paving the way for dollar strength. As discussed in yesterday's FX Daily, overstretched stock valuations looked likely to be tested along with hyperaggressive dovish bets at the start of the year, and good ISM manufacturing figures offset any benign effect on bonds stemming from a larger-than-expected drop in JOLTS job openings.

The FOMC minutes did not have a major market impact, but there are a few important takeaways. First, there is a broad consensus that inflation will decline, but also that the FOMC will keep rates high in case of more persistent price pressures. Markets might have been looking for some validation that the first cut may come as early as March, but the disinflation conditionality does not endorse a move this early. Still, several members saw risks of a rapid worsening in economic and jobs market conditions, which was likely reflected in the more dovish Dot Plot. The biggest surprise was, however, on a quantitative tightening exit, with the minutes showing that members found it appropriate to start discussing the technical factors to slow the unwinding of the balance sheet.

All in all, the minutes were a mixed bag. The conditionality attached to cutting rates is hawkish in the sense that it puts pressure on markets to unwind the March easing bets, but the risks flagged to the economic outlook and discussion about exiting quantitative tightening are unequivocally dovish. The contained impact on the dollar can be explained by the large swings in bond yields and equities yesterday. The dollar is once again more expensive to sell with 10-year Treasuries again close to 4.0%, and the predominance of equity/global risk sentiment as drivers for FX markets means that the dollar dynamics remain strictly tied to markets reassessment of stock market levels.

With equities futures pointing up today, there is a chance for the dollar to give up a portion of recent gains, but we suspect that expectations for a respectable payrolls print tomorrow will prevent large USD corrections. DXY may find a robust floor around 102.00. Today, the focus will be on ADP payrolls, which could move the market but have no predictive power for the official jobs figures.

EUR: Some help from inflation?

Inflation numbers start to flow for eurozone countries this morning. Germany reports regional figures first as usual before releasing its nationwide CPI numbers at 1300 GMT. France will also publish inflation figures this morning, while eurozone-wide CPI will be released tomorrow. There is a broad consensus for a rebound in headline inflation in the whole of the eurozone in the December print, although markets should primarily focus on core numbers, which are expected to keep inching lower (from 3.6% to 3.4% in the eurozone).

That said, there are some risks that a higher headline print will prompt some repricing of the highly dovish European Central Bank rate expectations. The EUR OIS curve embeds around a 60% chance of a cut in March, and 170bp of total easing by year-end. That exceeds rate cut expectations in both the US and the UK, despite the Federal Reserve and Bank of England starting from significantly higher policy rates.

The ability of the euro to benefit from some unwinding of rate cut bets must be weighed against evidence that the EUR/USD is primarily driven by equity/risk sentiment factors at the moment, and the short-term rate differentials remain heavily unfavourable for the euro. A moderate repricing in ECB rate cut bets would not change that picture: the two-year swap rate gap would still argue for a weaker EUR/USD. If anything, we could see some EUR performance emerging in the crosses in the short run but some improvement in the eurozone economic outlook remains necessary to make any EUR rally sustainable.

GBP: EUR/GBP drop may halt

Sterling is lacking domestic inputs at the moment. A plethora of data releases today (consumer credit, mortgage approvals, money supply and final PMIs) are unlikely to move the market. We'll need to wait for next week for some important data points in the UK, with GDP and industrial production published on 12 January.

We discussed yesterday how we saw room for EUR/GBP to slide back to 0.8600, and therefore welcome the drop in pair. However, eurozone inflation numbers today and tomorrow risk delaying the downtrend. Beyond the short-term, where the pound still looks healthier than the euro, we expect Bank of England rate cuts and an unwinding of ECB dovish expectations to offer support to EUR/GBP on a sustainable basis. The 0.90 mark is not out of reach by end-2024.

Cable has recovered some of the earlier-week losses, but we continue to see downside risks extending to the 1.2500 mark in the short run (due to USD outperformance) before a clear-cut upside trend is formed again.

CEE: Bond market opening

The bond market will be in focus today. In the Czech Republic, we will see the state budget result for last year. MinFin has already leaked to the media that the result is likely to be better than planned (CZK295bn). Also today (or tomorrow), MinFin is expected to publish the funding strategy for this year, which should confirm our assumption of a decline in bond issuance of around 25% year-on-year. Both should thus support Czech government bonds (CZGBs). Elsewhere, today we will see the first auctions of the year in Hungary and Romania, and in Poland tomorrow, which should test market demand.

CEE FX notched further gains yesterday despite a stronger US dollar again. PLN, in particular, rebounded and erased most of this week's losses. Rates seem to be taking over as the main driver in the region again, which should support all regional currencies. PLN should benefit the most from this perspective, as we mentioned yesterday, but it is still hard to say whether the correction of the strong long positioning is over. We are leaning towards yes, but still want to see more today. For the same reason, we should see further gains in HUF as well, but here the space is more limited, in our view. The CZK should remain flat today unless good news triggers more significant inflows into the CZGBs.

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Chandan Gupta

Forex

Traders' Opinions

Economic

Fundamental Analysis

So, the Federal Reserve, or the Fed - these are the folks who make big decisions about money in the US - they had a meeting. They talked about how they're thinking about handling interest rates. It's like a thermostat for how hot or cold the economy is. They chatted and agreed that for a bit, they'd keep the rates high. But they also said, "Hey, maybe later in 2024, we'll cut the rates a bit to give the economy an extra boost!"

At this meeting, everyone in the committee agreed to keep interest rates the same - they didn't crank them up or down, just left them be. And they drew this dot plot thing that kinda hinted they might snip the rates three times later this year.

Then, this one guy from the Fed, Thomas Barkin, said, "We're gonna keep an eye on the news and numbers coming in, especially on how expensive things are getting. If things stay super pricey for a while, we might decide to raise rates."

Now, speaking of expensive stuff, have you heard about the oil situation? There's a bit of chaos in the Middle East, which has made the price of oil shoot up. And to add to that, big companies that ship goods around, like Maersk and Evergreen, they're avoiding the shorter Red Sea route and taking the longer and pricier route around the Cape of Good Hope. It's like they're taking the scenic route, but for them, it's a pretty penny!

Now, this upcoming news about German inflation is kinda like peeking into a crystal ball. Economists think they'll find out that prices in Germany went up by 3.7% in December from 3.2% in November. That's like the cost of things jumping a bit higher.

Over in the US, there's this thing called the ADP report, which talks about how many jobs businesses added in December. They think it might show about 115,000 new jobs in the private sector. But wait, this report comes out a day before the official job numbers called the NFP. It's like getting a sneak peek at a movie before it hits the big screen!

So, in a nutshell, the Fed's talking about rates, keeping an eye on prices, oil's playing hide and seek, Germany's prices might have a surprise, and we're getting a glimpse of job numbers in the US before the main show. Phew, that's a lot, but it's like following a story with twists and turns, isn't it?

Technical Analysis

The EUR/USD, which is like the tag team of the Euro and the US dollar, didn't really do much when the December Fed minutes came out. It kind of shrugged and kept going down, hitting 1.0895, the lowest it's been since December 19th. That's like the slide at the park—it just kept going down.

Traders seemed all about taking risks, and that made the EUR/USD pair keep sliding. It's like they're in a mood for adventure, and that's not doing any favors for our Euro/USD duo.

Now, imagine this Ichimoku cloud thing and a 50-period moving average as sort of traffic signals on the trading highway. Well, our pair just zoomed past them, going below, and that's usually a signal that things might not be looking so bright. Also, they did this funky move where a price that used to be all supportive at 1.1017 turned into a roadblock. That number was a big deal back in November and December, like a huge "STOP" sign for our Euro and USD buddies.

And here's where the Relative Strength Index, or RSI, jumps into the party. It's dropped so low that it's oversold! Sounds like it needs a pick-me-up. So, what does this mean? Well, it's like when you've been on a slide for too long, and you're really low down. For the Euro/USD pair, it means things might keep being a bit gloomy, and the next stop might be at 1.0850. This number's like a checkpoint along a line that connects the lowest points since October.

So, in simple terms, our Euro and USD pals are on a bit of a downhill slide, and they've hit some roadblocks. The indicators are flashing warning signs, saying, "Hey, things might not get better soon!" It's like a story where the main characters are facing a rough patch, and we're not sure when they'll catch a break. But hey, in this financial world, surprises could always be around the corner. EURUSD: Overhyped Before Crucial NFP Report Release_1

EURUSD: Overhyped Before Crucial NFP Report Release_1

To stay updated on all economic events of today, please check out our Economic calendar

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FastBull Featured

Remarks of Officials

Richmond Fed President Tom Barkin delivered a speech on January 3, local time, the main content of which is as follows.

Inflation is currently "approaching the Fed's 2% target range", while the six-month core inflation rate excluding food and energy prices is slightly below the target at 1.9%. Inflation has come back considerably compared to the 7.1% in June 2022.

A soft landing is increasingly conceivable but in no way inevitable. There are still some obstacles, such as falling inflation and a slower U.S. economy (to a degree that does not trigger a recession). If inflation rises again, one more rate hike is possible.

There are four big risks to a soft landing: 1. The factors driving the economic slowdown could be fading and there is a risk of a rebound in growth; 2. We could experience unexpected turbulence, such as some geopolitical events or the regional banking shock seen in March last year; 3. Inflation could not reach the central bank's 2% target; 4. The landing could be delayed -- Demand could unexpectedly remain strong, resulting in persistently stubborn inflation.

Looking ahead, more attention needs to be paid to whether inflation continues to come down and whether the overall economy can keep running steadily. These two factors will be decisive for the speed and timing of interest rate changes. The data that come in this year will matter, which will determine the way forward.

Heading for a Soft Landing?

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Danske Bank

Economic

Today, focus will be on inflation data coming out of Germany and France, which should indicate the direction of the euro area inflation released tomorrow.

In the US, we will get a new round of labour market data, as the ADP employment report for December and initial jobless claims are scheduled for release.

Geopolitics will remain in focus as tensions between Hezbollah and Israel are rising, sparking fears that the war in Gaza could be spreading to the wider region.

Economic and market news

What happened overnight: The Caixin services PMI from China increased to 52.9, expanding at the fastest pace in five months. Together with the better-than-expected Caixin manufacturing PMI, the composite PMI measure rose from 51.6 to 52.6, indicating that growth is finally picking up after a very challenging 2023. However, risk sentiment in Asian markets has remained negative with broad-based declines in equity indices overnight.

What happened yesterday: The risk-off market sentiment continued yesterday as uncertainty on the outlook for monetary policy continues to induce volatility across asset classes. Yields climbed higher for most of the session, though soft US data and the FOMC minutes managed to reverse most of the move in the evening. Equities continued down across sectors and regions throughout the session.

The December FOMC minutes were overall quite balanced with both hawkish and dovish signals. Almost all members were convinced at the December meeting that inflation was coming under control, while also noting that “upside risks” to inflation have diminished. Moreover, it appeared that members were increasingly concerned about the damage that “overly restrictive” monetary policy could do to the economy. Despite the relatively dovish hints, many officials expressed some concern that the easing of financial conditions could complicate returning inflation to the target. This could warrant keeping policy unchanged longer than currently anticipated.

In respect of the ISM and JOLTs, the signals were relatively mixed. The ISM December manufacturing index was in line with consensus, increasing slightly to 47.4, yet still remaining in contractionary territory. In terms of JOLTs, the print came out roughly in line with expectations as job openings rose less than projected, while the October figure was revised higher. The labour market is gradually cooling with both hiring and the number of quits declining in November. However, it still remains fairly robust – for instance the ratio of job openings to unemployed remains above pre-pandemic averages (1.4 vs. 1.25).

Equities: Investors took home profit across the US, Europe and Nordics yesterday. Equities sold off sharply, but Fed minutes and macro data not to blame, in our view. In fact, these were still as close to goldilocks as it can get. However, it is difficult to surprise investors positively when goldilocks are already the base scenario into 2024. Hence, excess optimism and stretched short-term positioning in equities will exaggerate small disappointments to the downside. That is probably what happened yesterday. We think fundamentals are still in place for an equity overweight, but with a VIX at record lows it is inevitable that the road will be bumpier than the last two months.

Stoxx 600 and S&P 500 fell -0.9%, Nordics -1% and small cap Russell 2000 a full -2.7%. Underperformers included the December winners: Cyclicals. This brought a mixed bag of real estate, consumer discretionary, industrials and materials to the losers club. Note that not only rate sensitive sectors sold off: Yields sensitive sectors like utilities, health care and communication outperformed. Hence, this was more about a defensive rotation than Fed disappointing. Same defensive rotation in the Nordics with industrials selling off -3% to the benefit of health care (Novo Nordisk +2%), telecom and banks. US futures are unchanged this morning, so the sell-off might be levelling off today.

FI: Global yields were higher for most of yesterday’s session, though gaining some tailwinds from US data and the FOMC minutes in the last part. 10Y government bond yields in Germany and the US are down a couple of basis points, while the pricing of rate cuts from the ECB and Fed in 2024 is almost unchanged at 162bp and 148bp, respectively. The Bund ASW spread tightened further on Wednesday, now standing at 46.6 – the lowest level since early 2022.

FX: We saw continued USD-strength in yesterday’s trading, although the FOMC minutes brought on a minor retracement at the end of the session. Meanwhile, DKK and SEK suffered through poor risk sentiment, whereas otherwise risk-sensitive NOK found (relative) support in rising oil prices. Yesterday’s worst performer (vs USD) within G10 was JPY, with USD/JPY rising above 143 once again and at the other end of the spectrum we find GBP, posting a gain of 0.4% vs the USD on the day.

To stay updated on all economic events of today, please check out our Economic calendar

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Thomas

Palestinian-Israeli conflict

Latest news on the Israeli-Palestinian conflict

0:03

Iranian Interior Minister Ahmed Vahidi: "Israel is behind this terrorist act and this is a response to the attack on the axis of resistance! The response to this cowardly act will be decisive!"

Latest News on the Israeli-Palestinian Conflict (January 4)_1

0:07

The terrorist attack in the Iranian city of Kerman was the deadliest terrorist attack in the history of the Islamic Republic, killing at least 103 people (six children)!

The plan is clear: they want Iran to fire the first shot!

Iran should increase its uranium enrichment from 60% to weapons grade and signal to the United States and Israel that the ball is now in their court.

0:19

A senior Hezbollah official told Al-Arabi Al-Jadid newspaper:

Hezbollah will respond to the assassination from Lebanon, and the resistance movement is ready and ready.

But the response will be calculated because they don't want Israel to achieve what they want.

They want to drag us into war by escalating their activities and violating the rules of the conflict in southern Lebanon.

0:22

Enthusiastic netizens’ analysis of the terrorist attack in Kerman, Iran:

The terrorist attack in the Iranian city of Kerman was carried out by Israel through US proxies such as the MEK terrorist organization (or other US proxies).

The attack occurred because Iran failed to respond resolutely in a timely manner following the attacks in Syria.

However, as much as I really want Kebar Sheikhan to be in the air heading to you know where, direct retaliation does not serve Iran. Yes, I know this is not what you want to hear, and as a sad Iranian, I don’t want to hear it either. But this is the real world and we are dealing with a crazy entity.

Iran’s response should be thoughtful and painful to avoid causing further loss of Iranian lives. A direct attack on Tel Aviv or Haifa would only cost more Iranian lives.

Iran's viable options are to launch attacks from Iraq/Syria, or attack Israeli assets outside its borders, such as the Iraqi Mossad compound bombed by Fateh-110 in 2022.

Israel wants to drag Iran and Lebanon into an all-out war, but that is not good for us. Israel's Achilles heel is slow death, not immediate death.

0:31

NATO official Theo Francken tweeted support for Israel's assassination of Saleh Al-Arouri in Beirut and warned Iran and Hezbollah not to escalate.

2:05

U.S. Central Command said: "If the Houthis continue to threaten lives, the global economy, and the free flow of commerce in the region's critical waterways, they will suffer the consequences!"

2:14

Israeli national broadcaster Cann believes that Nasrallah mentioned the following two key points in his speech:

1. Hezbollah will not remain silent about the assassination of Saleh Aluri and will respond.

2. If Israel responds significantly to Hezbollah's retaliation, we could end up with a full-scale war.

2:29

The governments of the United States, Australia, Bahrain, Belgium, Canada, Denmark, Germany, Italy, Japan, the Netherlands, New Zealand and the United Kingdom have just issued a joint warning to the Houthi armed forces in Yemen: attacks in the Bab el-Mandeb Strait need to stop, otherwise the Houthi armed forces will Under attack.

3:06

Canada, Germany and Sweden called on their citizens to leave Lebanon immediately.

3:40

Serious escalation | The Middle East is on the brink of a major regional war!

Today's attack in Iran, which has officially caused more than 300 casualties so far, is just one of the major blows to Iran in the past few days.

First, Israel killed Iranian General Mousavi in an airstrike in Syria, possibly with U.S. permission. Yesterday, the leader of Hamas was killed in Beirut, the capital of Lebanon. Today, according to Iranian officials, despite Israel's denial, Mossad carried out terrorist attacks in Iran, resulting in a massacre of more than 103 people killed and many injured. The terrorist attack was carried out using briefcase bombs, which were detonated by remote control, a typical Mossad technique. It is clear that Israel and the United States are openly waging a war against Iran.

In addition, the United States and some of its client states issued a final warning to the Houthi armed forces in Yemen. If they do not stop their attacks on ships heading to Israel, they will face the consequences.

Today, the Wall Street Journal also wrote an article stating that an action plan to combat the Houthi armed forces is ready.

Currently, Iran’s Supreme National Security Council is about to hold an emergency meeting. One thing is clear, Israel has realized that it cannot defeat Palestine alone, so it will look for excuses for the United States to go to war directly.

This is why Iran is currently being provoked to the greatest extent. Currently, the situation in the Middle East is very tense.

Latest News on the Israeli-Palestinian Conflict (January 4)_2

3:49

The United States has stated that it was not involved in the terrorist attacks in Kerman, and has also indicated that Israel may not have been involved.

"Hamas cannot be defeated," White House spokesman John Kirby said. "We do not want the war between Israel and Hamas to expand in the region.

We will work to protect navigation in the Red Sea, we do not know who is behind the Iranian bombings, and we have no indication that Israel was involved in any way in the recent Iranian bombings.

Israel has the right to eliminate any threat to its security and people.

We believe that Israeli forces can reduce Hamas’s ability to launch attacks inside Israel.

Hamas still has significant capabilities in Gaza. We have nothing to do with the attacks in Beirut.

We do not believe that military strikes will eliminate the ideology of Hamas. We accept the idea that Hamas will continue to exist. Negotiations to release hostages in Gaza are ongoing and serious. We do not want to see the conflict in the region expand.