Oil's at the Top of the Commodities Heap

Oil continues to dominate the commodities headlines. As non-OPEC countries agree to cutbacks, it seems Saudi Arabia is getting everything it wants for its Saudi Aramco IPO. Saudi oil minister Khalid al-Falih is taking a victory lap on Twitter (as victorious leaders are apt to do these days) and has said the cuts starting Jan. 1 will be substantially more than those of the Nov. 30 agreement. Russian concession of a 300,000 barrel per day cut is the main reason, but we need to wait until late January to see any transparency and compliance on these cuts. The Russian ruble, which sank to 80 in December 2014, is trading at 61 today and the VanEck Vectors Russia ETF has made new multiyear highs, up 3% today. The oil rally has been mainly concentrated on the front two months where the CTAs and funds are piling in to drive the market up over 4% (6% on illiquid Asia opening). As of last Tuesday's CFTC report, there were few shorts left in the market as net length increased by 86,200 contracts, with 64,600 of that being short-covering. The average of 2017 is above $55 and calendar 18 (backwardation 50 cent tighter today) is under cal 17, but the producer activity is starting to pick up, which could cause the contango to the front month to flatten even further. U.S. volatilities are 1.6% lower for cal 17, although the front-month volatility, which is very short dated, is higher. Canada and Mexico, which are not part of the OPEC/non-OPEC agreement, can easily offset the 560,000 barrel per day cutback by Russia and others even if it was true. The $55+ a barrel that U.S. shale producers are locking in through 2018 will spin off plenty of positive cash flow for Permian Basin producers. The Baker Hughes rig count confirms the U.S. ramp up with 27 rigs added last week, the largest increase since April 2014. Precious metals continue to be a sideshow with gold hitting its lowest level since February. The Commitment of Traders showed a decrease in net length of 1.2 million ounces through Tuesday, with most of that attributed to a 1 million ounce increase in shorts. Gold volatility has picked up a bit in the front on some chunky put buying, and the Gold Shares ETF , etc., lost a total of 12.8 tons last week ahead of the Fed. Since the start of November, GLD has had outflows of 88 tons. Unless Fed Chief Janet Yellen surprises on Wednesday with some dovish tones (possibly trying to curb dollar strength), gold will most likely have to wait until the Chinese New Year (or a frightening Trump tweet) to get some fresh inflows. We may see 1%-2% short-covering rallies like we have seen in silver today as liquidity dries up between now and the holidays. Base metals are retreating across the board on some profit-taking and a huge jump in copper inventories. The big jump (31,500 tons) was dominated by Asian warehouses, which had a load in of 20,500 tons. Copper may get some support from China's National Development and Reform Commission, calling for China GDP to grow 6.5% in 2017 with fiscal policy becoming more proactive, growing from 3% to 3.5%. The fixed-asset investment will be key to metals consumption as the Trumped-up U.S. infrastructure demand for nonferrous metals pales in comparison to Chinese consumption. The main focus for London Metal Exchange traders this week will be the mining audit from the Philippines, which is due on Friday and could move the nickel price 10% in a heartbeat. The market is positioned for a more severe production cutback. Aluminum is having a difficult time rallying above $1,750 a ton and I believe Alcoa has been enjoying a free ride with U.S. steel producers who are benefiting from a drop in Chinese steel exports. The difference is that China has rationalized some steel production while aluminum production continues to grow unabated. Chinese domestic aluminum premiums are collapsing as the backwardation on the Shanghai Futures Exchange has decreased. I think the ali price will remain subdued, which could send Alcoa back to the mid-$20s.

Oil's at the Top of the Commodities Heap

The OPEC deal remains a hot topic. Gold hits its lowest level since February.

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