Volatility set to spike oil and metals markets

Volatility is back in crude oil, and prices are at unsustainable levels for now as last week heralded a challenge to the bullish market view that has taken hold of the market of late, due to cuts in global oil demand estimates.

Signalling falling global oil consumption, the International Energy Agency revised for a fourth time in four months their oil global demand while Opec joined the chorus and also cut their estimates. But despite these bearish announcements light crude oil is still hovering close to $125 per barrel for now. This is, in part, due to the recent, high demand for light, sweet crude as heavy crude barges from Iran could not find buyers on the market. Volatility was at a peak in last Thursday's trading session as crude oil lost $6, only to recover by the close. Movements such as these reveal that prices have reached such levels, that oil traders feel a correction could come at any time.

Oil's recent, strike-fuelled price hike has also been fuelled by non supply-demand factors and by potential inventory misperceptions. A weakening dollar and investors' desire to be exposed to real assets are in fact, the key factors behind the increasing inflows into oil from passive long term investors. For several weeks we have recommended selling WTI June Crude Oil around $126/bbl area and this week maintain that sell rating, however, we do expect the choppy trading to continue and do not rule out a re-test of the highs and we will see oil set a record.

We maintain our bullish bias in the energy complex for Nymex Natural Gas. Last week we saw June natural gas (ngm8) end lower on news of an unexpectedly large weekly inventory build. Thursday's 93bcf stockbuild was above the consensus estimates and nearer to 85bcf and the five-year average build for that week, of 79bcf. But despite this short-term, slightly bearish news, the overall picture looks bullish. Natural gas should sustain well, with US National Weather Service forecasts for below-normal temperatures in the east and above-normal temperatures in western and Gulf Coast states, providing good support for gas demand.

In the current economic environment investors are flocking to alternative investments and inflation hedge products, with this trader psychology driving the gold market at present. Precious metals have been characterised by seesaw trading, but we are not seeing much change in terms of price compared from week to week.

June Gold (gcm8) is still under an important resistance zone at $890 area and a weekly close above $887 would brighten the picture short term and open the way towards reaching $920.


Serge Laureau is a senior commodities analyst at Saxo Bank.

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