Two weeks of steep losses have seen the Bloomberg Commodity Index once again trade close to a one-year low with all sectors apart from precious metals suffering  losses this past week, not least energy and soft commodities, not least energy and soft commodities.

One week on from the Opec and non-Opec agreement to extend production cuts by nine months and the market has taken quite a negative view on how successful this deal will be in bringing down global inventories. Rising production from Libya, Nigeria, and the US (to mention only the biggest contributors) is slowing the process. Adding to this, we have president Trump's goodbye to the Paris climate deal leading investors to speculate as to whether this could lead to an even greater supply of US fossil fuels.
 
Precious metals reversed some the recent strong gains before an across the board ugly US job report helped send both gold and silver higher. A potential break of the multi-year downtrend could attract renewed buying interest from funds currently holding a neutral position.

The short-term focus has switched to the June 14 Federal Open Market Committee meeting where another rate hike is expected. Following the weak June 2 US jobs report, speculation will grow that the FOMC may deliver a dovish rate hike, i.e. reduce the expected number of future rate hikes.

Industrial metals remain troubled by signs of fading demand, especially from China where stalling credit growth and tighter monetary policy have raised concerns. This was backed up by a private gauge of Chinese manufacturing showing a contraction for the first time in 11 months. Nickel led the rout, dropping to a one-year low as iron ore futures traded in Shanghai hit a seven-month low following a 40% price collapse since the February peak.  

Soft commodities were mixed with a slump in sugar to a 13-month low more than offsetting gains in cocoa, coffee, and cotton. A strong start to the Indian monsoon season and the weakness of the Brazilian real have been the latest negatives.

Overall, the International Sugar Organization is forecasting production surpluses in both 2017-17 and 2018-19. It goes to show the relatively short cycle of agriculture commodities compared to others with a high price in one year often leading to a strong recovery in production and lower prices the following.

Sugar has now reversed all the strong gains that made it one of the biggest winners in 2016.
 
Opec and non-Opec producers went into the recent meeting in Vienna with the objective of maintaining market stability. They were operating in the belief that a seasonal rise in demand during the second half would help accelerate the reduction in global supplies.

The weakness following the announcement to extend production cuts showed how the market has been growing increasingly impatient. The risk of reduced compliance during the coming months remains elevated while the lack of an exit strategy post Q1'18 also poses a challenge.

It has left the market nervous that increased production will hit the market at a time when US producers continue to add extra barrels on a weekly basis.

Oil prices currently appear immune to positive news with the weakness this past week being driven by an intense focus on increased supply. Production surveys for May carried out by Reuters and Bloomberg pointed to an increase of between 250,000 and 315,000 barrels/day.

This is due to increased production from Libya and especially Nigeria, both nations being exempt from cutting production. These rises more than offset continued high compliance from other members.

Additional weakness was seen following the weekly Petroleum Status Report from the US Energy Information Administration. This came despite a bigger-than-expected inventory drop in both oil and gasoline.

The market instead focused on the continued rise in production which, when combined with a jump in US exports to a record high of 1.3 million barrels per day (b/d), further added to the concerns about global inventories not drawing down fast enough.

 Adding insult to injury, president Trump's decision to step away from the Paris climate deal has raised concerns that US fossil fuel production growth could accelerate even further. This concern was recently highlighted by the CEO of Russia's Rosneft who said that the US could add 1.5 million b/d to global production next year, thereby nullifying the impacts of the Opec/non-Opec deal.

The oil market is once again in for a lower-for-longer situation and only a slowdown in US production in response to recent price weakness and/or a strong pick up in demand will prevent sellers gaining the upper hand. The technical picture has deteriorated once again with some highlighting $42/barrel as a potential target for WTI crude oil.

Unless hard data in terms of rising demand and lower supply come to the rescue, oil remains at risk of suffering deeper losses still. We hold the view that data will support and that should lead to a second half recovery... but probably not beyond $55/b before focus on rising Opec and US supply in 2018 once again hurts sentiment.

WTI crude oil is currently stuck in a wide range between $53.50/b and $43.75/b. A break below $47/b could signal an extension, initially towards $43.75 and possibly as far as $42/b, the November low.

 
Precious metals reversed some of the recent strong gains before an ugly US jobs report for May helped the sector to recover. The initial weakness this past week occurred after gold once again failed to break the downtrend from 2011, this despite the biggest weekly surge in hedge funds buying since 2007.

Despite this latest surge in investment demand from hedge funds as seen below, the net-longs remain close to its long term average. Not least silver where we recently saw a record net-long being cut to a 16-month low within five weeks.

With gold looking to the Fed for guidance, renewed weakness in commodity prices and the ongoing concerns about the strength of the world's two biggest economies could see the FOMC risk skew towards fewer not more rate hikes. Political risks persist with president Trump increasingly on course to isolate the United States.

The strong dollar theme has disappeared during the past few months as European and Japanese growth have surprised to the upside.

On the back of these factors we maintain a bullish outlook for gold above $1,230/oz, neutral below, and only a break below $1,190 would force a change towards a negative outlook. The eventual break of the trendline, currently at $1,272/oz on the monthly chart and $1,278/oz on the weekly, could see the market shift higher as momentum and fund buyers will react to the improved technical outlook.

Prior to that, however, some additional profit-taking is likely to emerge ahead of the FOMC meeting. The previous three rate hikes all saw gold weaken ahead only to rally strongly afterwards.  

Ole Hansen is head of commodity strategy at Saxo Bank a leading multi-asset trading and investment specialist.