Commodity wrap: Oil, Gold, Wheat, Coffee (31.03.20)

Oil:

• Reuters sees oversupply of 6 million barrels per day in Q1 and almost 10 million barrels per day in Q2, followed by a clear rebound of demand

• The rebound in China’s PMI reading suggests a rapid return of demand from China. However, oil demand may be weak in countries such as South Korea, Japan and India

• The United States is trying to talk on various fronts, not only with Saudi Arabia, but also with Russia

• Russia has agreed to talks with the US to stabilize the energy market, oil price returned above  20 USD per barrel

• The United States may ease sanctions on Russia, especially those regarding the NordStream II pipeline

• On the other hand, there are suspicions that Russia may want to cause the collapse of shale mining in the US, which could push the price to around 60 USD per barrel

• WTI Midland drops to 10 USD per barrel, similar to Canadian oil. It is expected that at such a low price level, some production in North and South America will close in the near future

• Saudi Arabia is preparing to increase exports to Europe, intensify oil flow through Egypt

Reuters sees considerable oversupply on the oil market, but at the same time a significant rebound of demand in the second part of the year. Source: Reuters

Oil exports through Egypt are expected to rise to 1.3 million barrels per day, which will later be used as an export base to Europe. Source: Bloomberg

After the oil price dropped to the lowest levels in 18 years, the price bounced back towards important resistance zone. Source: xStation5

Gold:

• Mine closures not only in South Africa, but also in Australia, Canada, Russia and Peru

• Problems with gold refineries in Europe, problems with the supply of physical gold on COMEX (400 ounce bars were not accepted by the US market, where  100 ounce bars are the standard), mine closures in South Africa caused a 70$ price difference between the contract market and the spot market

• However, the situation went back to normal now

• Further strong demand from ETFs in the gold market, the long side stopped selling gold

• Based on the experience of 2008, it can be concluded that this is not the end of declines on the gold and silver market

Analyzing the history from 2008, consolidation in the gold market is currently underway. Subsequent declines from 2008 were associated with a strengthening of the dollar. Will we now face a similar situation? The dollar could benefit in the event of further declines in the stock market. Source: Bloomberg, XTB

The situation on the silver market looks very similar to that of 2008; however at that time it was mainly associated with a strong strengthening of the dollar. Source: Bloomberg, XTB

ETFs are still buying gold; the long side has stopped closing its positions on contracts. Source: Bloomberg

Wheat:

• Commonly consumed agricultural commodities may perform better than other agricultural products (wheat and rice in relation to e.g. corn and soybeans)

• Countries around the world are beginning to accumulate the most needed goods, including wheat

• Kazakhstan prohibits the export of wheat and derived products such as flour

• The forward curve indicates a recent rebound in demand , 6 months ago we were dealing with contango, currently we are facing long-term backwardation

Rice prices have been rising since September last year and have only seen a slight backslide related to the slump on the commodity market. Further accumulation of consumer goods may lead to rebound on the futures market. Source: Bloomberg

We are currently observing long-term backwardation on wheat market. Source: Bloomberg

Coffee:

• Coronavirus can cause harvest problems in Brazil, coffee harvests are the most labor-intensive compared to other agricultural commodities such as soy or sugar cane

• Recently some problems with exporting goods from Brazilian ports occurred

• Coffee supplies on the stock exchanges are beginning to fall

• Real is still very weak, which means that Brazil is willing to export coffee

Coffee supplies are starting to decline again, which supports the continuing recovery in the coffee market. Source: Bloomberg