Commodities Digest:Oil backwardation returns

Backwardation in oil for first time since September 2014The Brent curve measured from third to 12th futures months has turned tobackwardation for the first time since September 2014, signaling progress in thenormalisation of market balances. This echoes the simultaneous progression offalling inventory, narrowing contango and rising prices after the 2008-09 financialcrisis. An analysis of 1995-2016 data would suggest that modest levels ofbackwardation (less than USD 1/bbl over the 3M-12M curve) would be consistentwith 14% spot appreciation in WTI and 16% spot appreciation in Dated Brent overthe next year. In order to reach our 2018 target of USD 65/bbl Brent we wouldneed to see 15% appreciation from the current spot price of USD 56.65/bbl.

    Gold at risk of a near term correctionGold prices have continued to recover over the first two months of the year postthe Trump election victory, by and large ignoring its traditional drivers. The metalhas tracked the US 10 year real yield for the first part of this year, but since theend of January, gold prices have strengthened over and above the move in the 10year real yield. Likewise, since the middle of February, gold prices have ignoredthe rising probability in the options market, of a Fed hike both in March and May.

    The recent rally in US equity market (as indicated by a falling equity risk premium)has also by and large been ignored by the gold market. Seasonality also suggeststhat March is a bit more of challenging month to deliver positive returns in thegold market. All of these factors suggest to us that gold may give up some ofits recent gains. ETF inflows have however continued to remain strong, whichsuggests that investors are seeing rising risks in the global markets.