Market Opinion Commodities

Commodities... On The Ropes

If this gives way, which we think possible, we would expect a sell-off towards major trendline support around US$56.00/b.

Prices slipped during weekend electronic trading, with the market being opened to allow for trading as damage from Hurricane Rita is assessed. However, as we write, it appears that damage as been less than feared, and that refineries on the Texas coastline may have escaped the worst of the storm, with Rita having been downgraded to a category 3 hurricane. Indeed, the US Department of Energy is cautiously optimistic that refineries in Houston have suffered minimal damage, but nevertheless stated that it is too early to determine the exact effect of the storm. The International Energy Agency (IEA), which co-ordinated the release of 60mn barrels of strategic oil reserves after Katrina, has not yet made a decision on whether to expand the effort. Still, the extra oil supply, a large percentage of which is refined products and the additional 2mn barrels per day to be released by OPEC, should help cool the oil market for now.

That said, we still expect oil prices to remain high in general, and would anticipate strong support in the mid-50s before a resumption of the uptrend. Demand from the global economy for energy products is still extremely strong, and ongoing geopolitical risks in the Gulf are a constant supply-side risk. Indeed, the situation in Iraq seems to be deteriorating on a weekly basis, while tensions between the US and Iran are on the rise. The UN nuclear watchdog has now recommended reporting Iran - the world’s fourth biggest oil producer - to the Security Council over the nature of its nuclear programme. This is a worry.

As for gold, it has had a volatile week. Having first spotted the potential for upside on the move above US$440/oz, our excitement at the break above US$456/oz was justified, as the precious metal soared to US$475/oz at one stage. However, this proved a resistance point too far, and the subsequent drop to US$462.80/oz spells further weakness ahead. In fact, we would not be surprised to see a fall all the way back to the US$450/oz area. That said, we feel that the correction is short term in nature, and believe that the gold market is in a medium-term bull run, not just in dollar terms, but also in euro and yen denomination.

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