Commodity: Sometimes, things just do not improve – RBC CM

Research Team at RBC Capital Markets, suggests that across commodity markets, we are reminded that sometimes, things just do not improve.

Key Quotes

“While some of the recent oil supply outages that have driven the global total to multi-year highs are transitory in nature, others are shaping up to be structural. For example, with every passing day, Venezuela, the most imperiled producer, moves closer to the brink of a political and economic meltdown.

Often in the oil market, we think of sovereign OPEC producers as the source of unplanned outages, however, the resumption of Canadian Oil Sands production was hit by further delays as ‘Mother Nature’ once again threatened operations this week. The 1.2 mb/d that is offline will prove ephemeral, but the situation in Nigeria (which now has outages totaling 800 kb/d) will likely get worse before it gets better. The 1.1 mb/d offline in Libya remains a long-standing disruption that is unlikely to improve short of an end to the ongoing civil war.

Global outages north of 3.8 mb/d may lead market bears to argue that improvement is the only way, but persistent outages in places like South Sudan and Yemen are good reminders that sometimes, things simply do not improve.

In gold, we have repeatedly cautioned against doubling down on the one-legged investor-led rally that has pushed gold higher thus far this year. Absent physical follow-through, the trend looks difficult to sustain in our view, and the post-FOMC minutes ratcheting down in gold highlights the fragility of this single legged rally. The recent dip came on the back of the FOMC minutes which underlined the possibility of rate hikes this year, saying “most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen and inflation making progress toward the committee’s 2% objective, then it likely would be appropriate for the committee to increase the target range for the federal funds rate in June.” To be clear, we do not think that this necessarily spells the end of the recent gold rally in of itself, however, it highlights its fragile nature.”