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Commodities did not join the past days’ financial-market risk relief rally. While equities gained and yields rose, the benchmark Bloomberg Commodity Index dropped, mainly on the back of lower oil and gold prices. While returning investor optimism pressured the latter, resurfacing concerns about the persistent supply glut weighed on the former. Yesterday’s official weekly oil market statistics produced headlines of a substantial inventory drop, which however should not be misread as evidence of a tightening process. US refinery activi-ty has climbed to a fresh all-time high with operations already exceeding the levels usually seen during the summer peak driving season. Incremental demand for gasoline and diesel largely comes from exports to Latin America. US oil demand is plateauing after years of strong growth with the economy close to full employment and fuel economy gains offsetting additional car and truck driving. We see oil prices dropping below USD 50 per barrel, not least as the reviving US shale boom partially undermines the Middle East’s supply deal. A deal extension looks likely but bears the taste of a face-saving exercise. The cuts so far were less effective than intended and quota compliance is prone to suffer going forward.
The commodity asset class is missing out on the risk relief rally, not least as resurfacing supply concerns pressure oil prices. The oil market’s supply glut is unlikely to disappear swiftly. We stick to our near-term bearish view and short position as prices are at risk from further profit-taking.