Oil Crisis? Should We Now Buy Gold?

Ladies and Gentlemen

With a 17% fall in Oil since the start of 2016, the possibility of $20 oil becomes a real target for Investors, as we see major Hedge Funds exit the commodity.

Gold since August has been swung around in a tug of war, with Chinese equities on one side and a strong USD on the other. This pendulum has been relentless in the recent months, however with new lows in Oil prices, Gold continues to hold well in retaining it's safe haven status.

Gold has climbed 3.4% already in 2016 and investors risk aversion does not seem to be letting up. Geopolitical tensions persist in the Middle East and North Korea, as well as concerns about China's growth forecasts.  However, with a persistent strength in the USD forecasted for 2016, some analysts still call for sub $1,000 (per oz) Gold... as a "Competition for Gold" increases.

With Oil prices reeling from oversupply and Gold getting a small boost, Brent crude is now at the cheapest relative price in almost a generation.

Gold Vs Oil

But what is a "Safe-Haven"?   By Economic definition (as pointed out by James Steel, of HSBC) The Safe-haven inspired demand for Gold (and other precious metals) rests on the interconnection between  the state of the Gold Market and the Financial Markets of countries with long-term structural arguments for Gold accumulation (i.e. China and India) - and with this being said, HSBC forecast average Gold prices of $1,205 this year.

Mr Steel is looking more with a long-term view, as accumulations continue to rise. We always tend to think about Gold being a hedge on safety, however recently Gold has been more about uncertainty and a reflection of anxiety. Gold in a deflationary environment, may actually be likely to continue it's slide down.  2016 could well be the story of Central Bank delivery, especially as we are now risk-off as we strength in the Yen for example... but we hear nothing about the BOJ pushing back.

So Is Gold still a mark of uncertainty? Well the recent shocks coming from China did Send Gold immediately higher, which is reassuring to see.

I personally am long Gold, as I think it's safe-haven status will be the trend for 2016 but in the short-term we may remain bearish. I wish you all the best of luck with your Metals trading and as we all stay tuned to this theater of events in the World markets, I wish you safer trading.

Anish8Fx @ Atom8.com

Commodities Decay Boosting The USD - How Do I Trade This?

Ladies & Gentlemen,

This Commodity bloodbath continues with Oil falling below $40 and Iron Ore posting 2009 lows- The Mining Sector is feeling the heat today, with $BHP and $RIO posting losses of 5-6%.

Investors are now questioning how long could this slump actually last for? Will we be able to pick a bottom? Will Geo-Politics & Inflationary pressure continue to threaten the Economy? Will Chinese Demand pick up?... We edge closer to the FED meeting on December 17th for the next Market Correction/Continuation?

There is really no let-up in the onslaught of Commodities and these fears have been fairly priced into the FX landscape. The current commodity collapse we are seeing around the world is a big factor for FX Traders, especially when we focus on the "Commodity-Block" currencies : AUDUSD, NZDUSD, CADUSD & NOKSEK.

The Aussie Dollar short is an extremely interesting trade to look at, especially as Iron Ore is the biggest export from Australia - we find the AUDUSD trading above 72 cents and some could look at this level as being overvalued, especially against a resurgent USD.  This is my top trade for this month :

Will we ever see what the Real Economy looks like? What about the inflation story? .. As a start, we have to look at the FED & the BOE, both expecting to hike and Investors through the course of 2015 have been continuously disappointed waiting for the hike. However, we are now getting clearer guidance of a December Hike from FED members and I don't think it will derail the FED tightening cycle but what it may do now... is put more pressure on other Central Banks to ease further, like the ECB & the "Commodity Block" Banks, like the RBA, RBC...etc.

The USD dynamics are dominating other currencies and Policy divergences created from easing derived from the FED disappointment... The USD only looks to further drive the next few years and investors are slowly migrating towards this train of thought, rather than trading the Euro or Yen weakness as a primary mover.

So will the USD continue to rally? - Yes... Certainly, yes! I think we will see parity by Q3 2016. Will there be more from Draghi? Well, potentially also yes! He will probably look to work his way through his monetary policy toolbook - battling inflation. Eurozone growth is actually ok, but inflation is the key problem and if Inflation expectations continue to remain low (helped by lower Oil prices) this will put more pressure on Draghi to do something more.

Best of luck guys!

Anish8FX@Atom8.com

The Commodity Bloodbath

Ladies & Gentlemen,

As we begin to make sense of the shocking lows in Commodities across the board, we must turn our eyes onto the Macro picture to find reasoning for the short-term and also look to consider the worst-cases for the coming years.

The "Demand-Destruction" story begins in China. The Chinese Economy is slowing down and the demand for commodities forming from the Chinese manufacturing sector is also on it's way down south - with the fall led by Material/Energy companies in the Asia Pacific (falling this year circa 13%).    This Market slump has shown the World how strong the in-elasticity of demand on price from China actually is.

Key Chart 1

Copper is trading at 6-year lows (chart below) & Nickel (the biggest loser on the LME) is at 12-year lows.

Key Chart 2

$BHP & $RIO all fell yesterday to 10-year lows as producers continued to slump across the global equities amid the bloodbath. $BHP is now looking at the prospect of having its credit rating downgraded in the next 12 months in response to further possible falls in Iron Ore & Oil prices. 

Another major reason behind the Commodity-glut is due to the Market concerns about further USD strength, starting with the first hike in December. Countries who do not use the USD as their primary currency will feel further heat as their currency begins to weaken amid prospective USD rallies. This will then make is cheaper to produce and create further over-supplies!

Will OPEC do anything about the Over-Supply in Oil? Well, further to comments made by the Saudi's yesterday - they are keen to work with other OPEC countries in stabilizing the market - however the facts remain & there is no quick fix! We will find out more on Dec 4th, when the OPEC heads all get together.... Meanwhile, the Glut continues as people talk about the biggest decline since the fall of the Soviet Union.

Can we really find a bottom?.. Let's take it back a notch. If we look at some charts, we can see stability over the last few weeks. and it is important to remember that the Commodity business is extremely cash intensive and producers will not be looking to cut supply but rather costs. Major Commodity producers still need the revenue.

I personally think, the actual effect of this fall will truly depend on how fast the US Economy can accelerate & how long the FED Rate Hike cycle will last for.

Take out your 3D Glasses and watch the rest of 2015 unfold.

Best of luck

Anish8FX @Atom8.com www.atom8.com

The Vicious Cycle Of Oil

Ladies & Gentlemen

Oil once more trades at a near 2-month low and as vicious as it has been, the oil price collapsing cycle does not look to be over just yet. However, large institutions and Central Banks further seek a longer period of stability, especially in the eyes of the Bond Markets.

The US are still heavily over-supplied and refineries continue to close down, due to mounting costs  from a alack of productivity. The big players are still looking at holding sub $50 and hedging their risk with the Futures Markets... These "players" may be the ones the Central Banks turn to in the near future to assist in the un-cuffing of this downward spiral.

OPEC have been heavily pressured by Venezuela (Country with the World's largest known Oil reserves) to do something about the Oil price and have been supported by one of Africa's biggest Oil producer, Algeria. Contrary to views from the Gulf who are welcoming the lower prices, seeing it as a chance to reform & these contrast of views continue to bear onto a larger Geo-Political issue. But how big is this issue?

Saudi Arabia, the world's largest Oil mover has been doing things recently, that in the last 30 years have been unimaginable ;
1. Withdrawing money from overseas;
2. Delaying contract payments; and
3. Taxing lands.

So how does the Market quantify these issues?.. Let's pause for a second and cast our mind backs to mid 2007 when the Oil price hit $145.00 per barrel and the Gulf generated more money that they knew what to do with & the fact remains that Saudi's Debt:GDP ratio is still less than 2% and in the next 10 years is estimated to stay below 7%... The main Gulf states could actually live comfortably for several years from these revenues built.  So contrary to the "Geo-Politics" - Investors are more focused on the supply-side issues and may be more keen to ignore the political nature surrounding the MENA regions.

Storage is still reaching tank-tops and if this trend continues, we may see for the first time in 20 years - oil investments declining for two consecutive years and this may be an indication for future oil markets.. as they look to continue their downward spiral.

Optimists still seek a bottoming level - looking at Iran supplies for next year to help boost $60+ for 2017 (perhaps a fascinating new dynamic for the near future), however the fundamentalists outlook is further lower to find a strong re balance in the market.

Best of luck

Anish

The Royal Rumble of US Crude

US Crude rallied over 6% yesterday - marking the biggest single day gain for 7 weeks -  despite the prospect of sanctions being lifted on Iranian exports & also despite storage levels being maxed out! (As discussed in post : Is Iran about to flood the Oil Market?) 

Let's take a step back to Thursday, when top analysts from Goldman Sachs & Morgan Stanley remained very bearish and did not expect any real turnaround in the price of Oil. 

The Boost for Stocks 

This morning the FTSE 100 was lifted by the major Oil Stocks and the US Future exchanges are also trading higher of the back of this lift. 

The Stock Market has been affected by the bullish US $ and this brief relief has become a catalyst for the gaining energy sector - as also yesterday's 2% rise in the S&P Energies showed. 

Why is a weaker USD & rising Oil better for Stocks?

The rising USD has been putting a dent on the earning of multinationals - affecting the major corporations! Hence the reason why we saw a nearly 3% decline in earnings season for the last quarter - For the first time in 6 years!  

The Oil Price collapse did not help the Stock market either - However, the recent rallies in Oil have supported more bullish traders searching for a technical bottom in this greasy commodity. 

Post NFP turnaround? 

Probably the most highest miss of recent times was Friday's NFP result - around 120K less than expected!  - Traditionally NFP sets the tone for monthly trends & we saw some of this "worse than expected" NFP being priced from the ADP release. However, did we really expect it to be that bad? 

However, as last noted by Mrs Yellen - even though payrolls may disappoint - the average hourly wage has been increasing by nearly 0.5%. 

In this case, what is the real unemployment rate?... (I will leave that one for you to ponder)... 

April Crude Forecasts 

I think that (despite my recent postings) the Oil markets are likely to slowly churn along until the end of the year. Shale production is expected to slow down in December & the Bank's latest reports suggest that $50 will remain a benchmark before increasing to $58-$60 by September this year. 

Although, we are still in an OVER-SUPPLIED market and this does not look like slowing down. The US reached another record high at the end of March with around 471 million barrels in storage. 

Oil producers have most definitely been the most effected - feeling the full impact of falling prices & with Iran set to finalise on a decision at the end of June... are we about to see more World Supply? How will OPEC control this?  Adam Longson from Morgan Stanley thinks that no real impact of the Iran deal will be felt until 2016..

A bullish move past $60 a barrel will for sure set the tone for a bull move & we could expect to see Stocks rally further. However, there is no real instability in the USD & not really on the cards for the near future.... A tough one! 

Welcome to the Royal Rumble of Crude!

But then why will Oil rally? Will OPEC allow for a $10-$20 per barrel Oil Price? 

The Spectacular Collapse of Iron Ore

Falling commodity prices and a weak outlook for growth have increased the chances for a rate cut by the RBA next week - further applying downward pressure on an already weakened AUD. 

The ASX 200 fell over 30 points last night, as the prices of Iron Ore continue to feel the impacts - with mining & energy stocks leading the way. 

BHP has lost 2.2% & Rio Tinto ended the session 1.4% lower today.

Iron Ore at 10 year lows

The recent $13bn purchase of a Chinese owned mine in Australia have most definitely awakened this bear. Dubbed the "Sino Iron Project" it has been heavily criticized by the industry - as the Chinese plan to pump millions of tons or Iron Ore into an already over-supplied market.  

China in Peru, Africa & now Australia 

On Tuesday, Iron ore fell to $51 per metric ton. That is the lowest it has been since 2004. This now forces the likes of Rio Tinto & BHP to curtail output to boost prices. However, China is not stopping - as the state owned firm citic are planning a 30 year project expanding Worldwide. Even despite the Chinese GDP slowdown, the country still aims to protect it's future needs. 

Realities 

The iron ore price would have to hit about $30 before the two major corps would risk losing money. 

Many voices in the industry point towards a wall around $45... but let's see what happens following next weeks prospective rate cuts. 

Meanwhile... Iron Ore continues to slide... 

Thank you for reading.

Any feedback or comments would be greatly appreciated.

- Anish

$20 Oil by 2016?

Dear Readers

From our highs of $110 last year... We have seen the price of oil fall to uncharted territory - Lows not seen for 6 years & it looks like there is no stopping this fall... But what is the driving force behind the decline? & why are prices not being absorbed into our REAL Economy? Why are Petrol prices not falling & why are my flight tickets more expensive than last year? 

Let's try and break this down...


Key Economic Facts 

• The value of WTI/Brent has fallen over 50% in under 12 months;
• US Oil Production is at record highs; 
• US Hoarding levels are at all-time highs (Storage with the anticipation of a price hike); 
• Refineries are due to be offline for repairs in Spring...Storage levels set to increase further; 

Source : DailyFX

Political Uncertainties 

Let's take Iran for example... the falling Oil price has probably hit Iran more than others, given their export sanctions & talks of relaxing their sanctions have driven down global prices...

Why is Iran so important?

• IRAN has almost 10% of the world's proven reserves; 
• Iran has 37 million barrels of oil in storage ready for IMMEDIATE export

Relaxing sanctions would significantly support the European economies (who are becoming more reliant on trans-Atlantic Crude) & also ease the black-market issues which lurk in the background. 

The US Economy would also infact benefit!

However, actual oil production has dropped over 60% in the last 3 years; and Financial sanctions have made it extremely difficult for Iran to attract FDI to actually pump Oil out of the ground. Back in late 2014, India was importing 350,000 barrels of Iranian oil per day... That has now fallen to 50K.


What will happen now? 

Yesterday, Oil prices began their fight back on the back of a weaker USD... but this could easily be short-lived.

As Oil Storage capacities continue to deplete, it becomes more likely that prices could drop significantly. However, this also depends on the extent of production....

As all of this occurs, demand for domestic crude in the US declines... pushing prices down & forcing more into storage....

"WTI could drop to $35 per barrel in the coming months" Projection from Societe General.

Could Oil become the Most Lucrative Investment in Modern History?

As populations continue to exponentially increase... there is no doubt demand will rise... However, a renewed bout of weakness in the oil markets, notwithstanding this week’s price gains, was further backed up by comments from the Saudi Arabia’s OPEC governor Mohammed al-Madi, who said on March 22 that a return to $100 per barrel would be hard to reach. Saudi Arabia’s Oil Minister Ali al-Naimi reiterated that position, blaming non-OPEC producers for their unwillingness to cut back on production. He said that OPEC will not do it alone, and even revealed the fact that Saudi Arabia recently boosted its oil production to 10 million barrels per day. “The production of OPEC is 30 percent of the market, 70 percent from non-OPEC...everybody is supposed to participate if we want to improve prices,” al-Naimi said.

Trading Oil with Atom8 - Coming soon for April 2015

Hope you enjoyed the read. Any comments, Feedback would be largely appreciated.

Peace & Love 

Anish @anish8fx