Commodity Wrap - Oil, Natural Gas, Gold, Coffee (21.11.2023)

Oil:

• The oil market experienced a significant rebound following reports that OPEC+ may decide on another production cut
• Comparative inventories have rebounded noticeably recently, coinciding with a decline in oil prices. This situation indicates that the supply in the United States is not necessarily low
• On the other hand, comparative inventories relative to the 5-year average have not rebounded strongly, providing the possibility that the situation may change in the coming weeks
• Production among the three largest producing countries globally remains relatively high, influencing the rebound of OECD inventories. This implies that Russia and Saudi Arabia must consider whether they can afford to continue losing market share to the United States, which already has a production 4 million barrels per day greater than both Russia and Saudi Arabia
• According to Goldman Sachs and ING, oil prices have fallen to "low" levels, suggesting possible intervention by OPEC+ in the form of production cuts
• It is worth noting, however, that the United Arab Emirates and Iran are planning to increase production, despite a recent significant decline in exports
• Traditionally, oil tends to lose value towards the end of the year, and the current positioning does not provide much room for a significant rebound in the coming weeks

Comparative inventories have clearly rebounded recently, explaining declines in oil prices. Source: Bloomberg Finance LP, XTB Research

Output from 3 largest oil producers remains elevated in spite of relatively low production from 2 OPEC+ members. The question is for how long Saudi Arabia will be willing to give up its share of the market. Source: Bloomberg Finance LP, XTB Research

US oil production climbed above 13.2 million barrels per day according to weekly estimates. Meanwhile, number of oil rigs continues to drop. Source: Bloomberg Finance LP, XTB Research

Oil is no longer overvalued in relation to 1- and 5-year averages. Source: Bloomberg Finance LP, XTB Research

Natural Gas:

• Natural gas is falling below 3 USD/MMBTU, but it's important to consider the rolling process, which is likely to lead to prices returning above this level
• Comparative inventories over a 5-year period have started to rebound, indicating that the market is still experiencing significant oversupply
• Natural gas production in the USA remains at a very high level, even with a decline in drilling rigs
• The weather in the US is generally favorable – temperatures are expected to drop, but they won't be extremely cold, providing a chance that the "seasonal" peak for this year is already behind us. Of course, there's always the possibility of rallies in response to significant temperature drops in January and February

Natural gas production remains at record highs, even in spite of a significant drop in rig count. Source: Bloomberg Finance LP, XTB Research

Comparative inventories (in relation to 5-year average) began to rebound, what may suggest that price rally is about to be halted. On the other hand, inventories are still weaker than they were a year ago. Source: Bloomberg Finance LP, XTB Research

A temperature drop is expected in the United States in the near future, but temperatures are not expected to drop to extremely low levels. Source: Bloomberg Finance LP, XTB Research

The seasonal peak (although not from an annual perspective) occurred on November 23 last year. We then had a further increase in December. Price should return above $3 after contract rollover, but current fundamentals do not indicate a major rally in the near future, although, of course, any significant movements will depend on the weather. Source: xStation5

Gold:

• Gold is striving to close the month above $2000, which would be the first such situation in history
• The rebound in gold is occurring in tandem with the weakness of the dollar and a decline in yields
• The Federal Reserve is most likely not going to raise interest rates anymore
• Seasonality shows a potential for a price rebound in December and January
• Looking at previous monetary policy tightening cycles, gold doesn't move significantly during the first 100 sessions after the last hike. However, increases can be quite substantial over a 2 years following the final hike
• Additionally, there are signs suggesting that sell-off of gold ETF holdings may be nearing an end

ETF funds have ceased selling gold. If funds also start flowing into gold ETFs, we could get the "last" piece of the puzzle for positive fundamentals in gold. Source: Bloomberg Finance LP, XTB Research

Bond yields have already dropped from around 5% to 4.4%. The long-term assessment for the Fed interest rate is 2.5%, so even with a very high risk premium, pullback in yields should aim for at least around 3.5%. Source: Bloomberg Finance LP, XTB Research

Coffee:

• Volatility in the coffee market is increasing due to growing concerns about the availability of the commodity in the coming months
• The occurrence of the El Nino weather phenomenon is threatening production prospects in Brazil and other South American countries
• The National Meteorological Institute in Brazil has indicated that, following a recent period of increased temperatures, there may be excessive rainfall and flooding, which could impact coffee cultivation in the world's key producer
• Coffee reserves are at an extremely low level, but changes in inventory recognition are expected on December 1 (old stocks will not be able to be replaced by new, fresher ones
• Seasonality suggests that coffee typically rebounds towards the end of the year.

Coffee stockpiles are at extremely low level. Source: Bloomberg Finance LP, XTB Research

Seasonality patterns suggest that coffee may see a price rebound towards the end of the year. Source: Bloomberg Finance LP, XTB Research

COFFEE struggles with a break above the 175 cents per pound resistance, marked with a 50% retracement of the last major upward impulse. It should also be noted that speculative positioning is rising. Source: xStation5