The Bloomberg Commodity Index traded higher for the first time in four weeks. While growth-dependent commodities such as crude oil moved lower despite renewed concerns about stability in the Middle East, it was once again the agricultural sector that led from the front. The metals sector saw gold trade higher to challenge key resistance while strike threats to supply saw palladium surge higher to record its biggest weekly gain in almost year. The BCOM Agriculture Index, which reached a record low less than five weeks ago, has since rallied by more than 22% to a six-month high. The +5% return this week was primarily driven by the three key crops of corn, wheat and soybeans. Months of rains and floods delayed or even cancelled planting across US growing areas and these developments drove one of the most spectacular short-covering rallies on record. The monthly supply and demand report from the US Department of Agriculture confirmed the impact this past week with corn leading the charge higher following a larger-than-expected downgrade to production and stocks. Adding insult to injury renewed forecasts for rain next week across the Midwest has further dampened hopes that unplanted fields can be sown in time. Crude oil experienced a tug-of-war week with Mideast tensions only partly offsetting continued worries about global demand and rising US stocks. With no end in sight for a solution to the US-China trade war, the global growth implications continue to negatively impact the outlook for crude oil, which hit a four-month low this week. The failure to build a geopolitical risk premium following the tanker attacks in the Gulf of Oman could indicate that the market is either skeptical of the narrative with regards to who did it, or that demand worries simply weigh too heavily at this stage. The monthly oil market reports from the Energy Information Administration, Opec and the International Energy Agency all showed another downgrade to world oil demand while non-Opec supply growth was kept stable at almost one million barrels/day above demand. The IEA said that non-Opec supply would, barring any geopolitical shock, "swamp" the market in 2020, thereby leaving no room for Opec to reclaim lost market share. Keeping both this and the Iranian tensions in mind, the upcoming Opec and Opec+ meetings, scheduled but not yet confirmed for late June, are likely to be challenging. Saudi efforts to keep Russia on board with production cuts beyond the second half, led alone 2020 could easily become an issue. Another significant challenge to the oil market during the past four weeks has been a continued rise in US crude oil stocks. Record levels of production combined with weaker than normal refinery demand has driven an unusual counter-seasonal increase in crude oil stocks to a near two-year high. The combined daily price drop on the day of release during these past four weeks has been more than $8/b, as highlighted by the arrows in the chart below. The short-term outlook continues to look challenging with a break below the recent lows likely to cause another downside extension in the region of $5/b. However, while longs are being reduced, we are unlikely to see any significant increase in new short positions as long the Middle East situation remains as fluid as now. — SG
