Supply, Geopolitics Rule Commodities Markets As Dollar’s Power Wanes

 | Jul 25, 2018 07:35

Supply and demand issues are back to determining the direction of commodity markets, with geopolitics playing an additional vital role in oil, after Donald Trump’s clash with the Fed over rate hikes put greater emphasis on non-currency fundamentals.

Few US Presidents have tried to tell the Federal Reserve what to do with monetary policy and it remains to be seen whether Trump will triumph.

The directionless since Friday’s sharpest one-day fall in three weeks. This is despite the manufacturing PMIs for both the US and Europe trouncing expectations on Tuesday, and the US-China trade row continuing without letup. Deutsche Bank captured the mood succinctly in its Tuesday note, saying: “After all the excitement following the various headlines at the back end of last week, the last 24 hours has proven to be fairly tame by comparison.”

With the lackluster dollar barely impacting commodities this week—compared to a week ago when the USD’s rally made owning anything from energy to metals and agriculture costlier, the focus is back to raw material inventories.

US Oil Data, Iran Squabble On Radar

In oil, all eyes will be on the US crude stockpiles data for the week to July 20, due at 10:30 AM ET (14:30 GMT) from the Energy Information Administration (EIA). The bet is for a decline of more than 2.3 million barrels – compared to the previous week, when there was a buildup of nearly 5.9 million.

Trade group American Petroleum Institute (API) bolstered oil bulls’ expectations on Tuesday by citing a drawdown of 3.16 million barrels for last week. API’s inventory sampling is way smaller than the EIA’s, and contributed voluntarily by industry members, unlike the mandatory reporting required by the government agency. While their numbers typically diverge, there have been occasions when the API has presciently called the EIA’s crude stockpile reading.

Tight oil inventories in the US and abroad have stoked investor expectations for a global supply shortage, with some market participants cautioning that even a small disruption in output could result in "dangerous" price volatility. With US crude inventories already near 3-year lows, the significance of the API being right again with its larger-than-estimated drawdown cannot be understated. Beyond sheer inventory loss, there are clear and present signs of supply disruptions from various geopolitical factors involving Iran, Libya and Venezuela. Chief among them is the US-Iran squabble.

On the demand side, China's State Council has announced increased spending, tax breaks and special bonds for infrastructure spending, again seen as positive for oil.

“With global spare oil production capacity at less than 2% of demand and the prospect for increasing demand out of China, we see the risks weighted to the upside longer term,” said Phil Flynn, energy analyst the Chicago-based Price Futures Group.

In the nearer-term, charts show US West Texas Intermediate (WTI) crude would be looking to return to the $70 per barrel level it fell under last week. Investing.com’s Fibonacci readings on a daily basis for WTI put first resistance at $68.99, second at $69.34 and third at $69.89. The pivot was at $68.44.