Oil and copper bounce back on UK hopes

June 20, 2016

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Commodity markets were buoyed on Monday by polls showing a growing likelihood of the UK voting to remain in the EU, with oil climbing back above $50 a barrel and copper rising 1 per cent.

Investors said a broad-based “risk on” trade was supporting all volatile assets as sterling posted its biggest one-day gain against the dollar in seven years, while the FTSE 100 surged almost 3.5 per cent.

Gold, a traditional haven, fell sharply after hitting a two-year high above $1,300 a troy ounce last week.

Brent crude, the international oil benchmark, posted its first weekly decline in six weeks last week as fears grew the UK was edging towards a so-called Brexit but has surged almost 7 per cent since Thursday.

Michael Wittner, analyst at Société Générale, said commodity markets were being driven, in the short term, by external factors. Traders are also cautious about whether oil’s near 90 per cent recovery since January has gone too far.

“If there is a Brexit, the negative pressure on oil prices would be driven by risk aversion, not fundamentals,” said Mr Wittner.

“We have seen such waves several times in recent years, with notable examples of catalysts including developments in China (the equities and currency markets), the eurozone (Greece), and the US (increases to the debt limit).”

Analysts at Commerzbank said a third-straight weekly increase in drilling rigs in the US was evidence that shale oil companies have gained in confidence as the price has jumped from below $30 to near $50 but it still remains less than half the level it averaged in the first four years of the decade.

“The recovery is still too tentative to start talking of any trend reversal,” said analysts at Commerzbank. “For the time being, the decline in shale oil production will doubtless lend support to prices.”

Funds that have been betting on a recovery were also growing more cautious last week, reducing their net long position — the difference between bets on rising and falling prices — by 17,333 futures and options contracts in Brent to 371,918, according to data from the Intercontinental Exchange.

However, the position remains elevated and just 10 per cent below April’s all-time high.

“We are likely to face volatile trading in the coming 4-5 days,” said analysts at oil brokerage PVM.

A Financial Times had the Bremain and Brexit camps neck-and-neck on 44 per cent each on Monday, with the number saying they will vote to remain in the EU recovering from last week.

Pollsters broadly expect undecided voters to eventually lean towards the status quo.

Odds on gambling exchange Betfair indicated the implied probability of a British vote to remain in the EU had jumped to 78 per cent on Monday from below 70 per cent on Friday.

Copper prices rose 1 per cent to $4592 a tonne, recovering from a four-month low hit 10 days ago, while nickel was up 2 per cent at $9,235 a tonne.

In gold, hedge funds and other money managers boosted their net long positions to their highest level since 2011 as of the end of June 14, according to data from the US Commodity Futures Trading Commission.

That helped propel gold past $1,300 a troy ounce last week, along with data showing the US economy is slowing. It fell more than 1 per cent on Monday, touching a session low of $1,280.15 an ounce.

When adding in options contracts on gold, the total amount of money betting on a gold price rise is at a record, according to Adrian Ash, head of research at BullionVault, a UK online gold exchange.

“There’s a lot of hot money going into gold,” he said. Gold options and futures are a “very cheap way of taking a hedge on what is going to be a very volatile event”, he added.

Still, if the UK votes to remain in the EU, that could result in a modest unwind in those long fund positions, reversing the recent run-up in gold prices, according to analysts at Citi.

Category: Oil & Gas