The Commodity Price Rally is Built on a House of Cards: Barclays

copper prices impact exchange rates

Barclays are arguing the current commodity rally is built on a ‘house of cards’; whilst the charts continue to see strong upside potential - who will be proven right?

Commodity currencies, especially the Canadian and Australian dollar, have been having an extraordinary year so far, as a result of the massive gains seen in oil, iron ore, precious metals and even now, potentially softer commodities.

As a consequence, these currencies have rallied, broadly, because their economies are still highly dependent on revenue from the sale of raw materials and industrial products made from commodities, such as copper wire, steel girders, plastics and petroleum.

Now the debate amongst analysts is very much about whether commodities can extend much further, with the implication that if they can then these currencies will also be able to hold onto their gains.

The charts are by and large still looking bullish for oil and silver, for example, as confirmed by the quote below from broker Charles Stanley’s chart technician Bill Mcnamara:

“The rally in the oil price remains an ongoing phenomenon and, contrary to expectations, Brent simply shrugged off last weekend’s lack of agreement among oil ministers in Doha, posting a rise of 4.6% for the week.”

Brent crude has broken above a key long-term trend-line, which is a very strong bullish signal for a substantial move higher, at the very least to the 50 dollars per barrel region.

Normally when prices break above the trend-line they move the same distance higher as was below the trend-line, and this could indicate a move all the way up to the 55 dollar mark as illustrated by a weekly chart below.

CrudeApr25week

“This advance confirms the break above downtrend resistance that I referred to last Monday and, as the chart illustrates, the 200-day moving average has now been breached for the first time since July 2014 (and note that this move was achieved on the back of robust volumes, as shown at the bottom of the chart).

As for an upside target, Mcnamara is more cautious and sticks his pin in the chart at 48 dollars a barrel:

“Although the price is starting to look stretched on most indicators there is, as yet, no evidence of divergence and the overall impression is that there could yet be scope for further near-term gains. The next area of possible resistance is at $48 or so, which would represent a 23.6% retracement of the previous decline.”

CrudeApr25

Silver’s break above a multi-year trend-line which has been penning price in for almost five years is another bullish sign, not just for itself but for precious metals in general, since silver has a habit of leading the rest of the precious metal crew:

Silver25Apr

Although the Charles Stanley analyst does not make a concrete forecast for the commodity, he does suggest a medium to long-term uptrend evolving:

“Silver has become fairly overbought on a short-term view (the oscillator is at a three and a half year high). However, the fact that such a significant trend-line has given way should mean that there is scope for further upside in the medium to longer term.”

Barcap See Commodity Rally as “House of Cards”

Barclays Capital’s analysts present an antidote to the bullish technical charts of commodities, in particular for oil, which they see as being vulnerable to weakening in the medium to long-term:

“We are not yet convinced that prices will remain here or go even higher this quarter. Though physical indicators are supportive, oil market participants seem to be caught up in a broader risk-on attitude.”

They cite continued high inventory levels, increase in Saudi and Iranian supplies and more non-OECD supply coming online as potential fundamental reasons to expect Oil prices to fall in coming months.

They do, however, see delay in downside risk materialising, expecting it to hit in the second half of the year and 2017:

“The market sentiment and fundamental shift may not align and may not come during this quarter anymore, but might instead come at the end of the summer. This scenario might present upside risk to our Q2 forecast and downside risk to our forecasts for the balance of the year and for 2017.”

Barclays Capital also see Copper prices stalling and reversing their gains. The rise in the commodity had been explained as a result of a resurgence in demand from China as a result of the stimulus response there taking effect, however Barcap argue the recent supposed Chinese ‘stabilization’ is built on sand, and will in time probably crumble: 

“Then, as now, the price recovery in copper has been argued as evidence that China has turned and a new stimulus driven recovery is at hand. However, having reviewed the most recent China downstream copper demand data, we are yet to find evidence of a permanent turn, albeit we see signs of stabilization.”