Commodity Wrap - Oil, Natural Gas, Gold, Wheat (10.10.2023)

Oil

• Oil gained noticeably following the outbreak of the conflict in the Middle East. If there were to be a further escalation and the situation spills over into other countries, a significant supply of oil would be at risk, especially oil from Iran.
• Iran currently produces around 3.0 million barrels per day and exports (officially) 1.2-1.6 million barrels per day, primarily to China. Sanctions on Iran still apply, but they have been somewhat overlooked so far. In addition to this, there is unofficial export, which may total over 2 million barrels per day.
• Recent declines in the oil market have been attributed in part to the situation in the futures curve (significant differences between annual contracts) and potentially low demand for gasoline (implied by the gasoline supplied to the market)
• Gasoline supplied to the market has dropped to the lowest levels in many years for the given period, but all petroleum products supplied to the market (implying demand for all fuels) are within a 5-year range
• The still tense supply situation in the oil market suggests the possibility of prices returning to the range of $90-100 USD per barrel

Gasoline supplied to the market (implied demand for gasoline) dropped below 5-year range for the period, suggesting weakness of US consumers. Source: Bloomberg Finance LP

On the other hand, total fuels supplied to the market (implied demand for all fuels) is within 5-year range for the current period, above 19 million barrels per day. Source: Bloomberg Finance LP

Iranian exports started to rebound off near zero levels a year ago. Nevertheless, this exports could be in danger if situation in the Middle East continues to escalate what may put upward pressure on oil prices. Source: Bloomberg Finance LP, XTB Research 

Natural Gas

• The futures curve is increasing more strongly on the short end, suggesting increased demand in the near future. The upcoming rollover should push prices up by approximately 20 cents
• Seasonality indicates that there may be increases in the October-November period, partly due to positive price rollovers
• The Natural Gas Supply Association (NGSA) in its latest report predicts record demand for gas during the upcoming winter, although high inventories and high production will prevent reserves from falling to extremely low levels. 
• NGSA forecasts 3.7 trillion cubic feet of reserves, compared to 3.5 tcf the previous year
• Winter demand is expected to be 121.4 billion cubic feet per day, representing a 3% increase compared to the previous winter
• NGSA also indicates that 10 GW of coal power plant capacity is being phased out, to be replaced by gas-fired power plants and renewable energy sources
• In Australia, strikes in LNG companies are once again being planned, although the government will be participating in negotiations
•  It is expected that, in part due to these strikes, Australia will lose its position as the world's leading LNG exporter as early as this year
• Additionally, the Israeli government has ordered Chevron to shut down production on the Tamar platform due to increased security risks, while the Leviathan platform will continue to operate. Israel is one of the largest gas producers in the world

Comparative inventories continue to decline, potentially giving fuel for price increases. However, those would still mostly be driven by changes in the futures curve. Source: Bloomberg Finance LP, XTB

Futures curve suggested an increased demand in the near-term. Source: Bloomberg Finance LP

It should be noted that price has been dropping significantly around this time last year but started to recover after October's rollover. The next rollover on NATGAS should occur in approx. 10 days. Source: xStation5

Gold

• Gold is ending its decline associated with the significant yield rally following the outbreak of the conflict in the Middle East
• However, we continue to observe further selling of gold by ETF funds. Since positioning data is lagging, we have not yet seen the funds' reaction to the recent events.
• Yields have slightly decreased, which is reflected in the price of gold, but there is still a significant divergence between the price of gold and the 10-year US yields
• Looking at the price of gold adjusted for inflation and then adjusted for current prices, it's worth noting that the last time we had such high yields, gold was trading at around $1000 USD per ounce (inflation-adjusted price). Historically, gold has almost always reacted positively to a drop in yields, so the key factor for gold will be the expectation of a clear reduction in long-term market interest rates

10-year yields are pulling back slightly, allowing for gains on gold. Nevertheless, gold continues to trade in a significant divergence with yields in long-term, even though there was quite a strong correlation between the two since May this year. Source: Bloomberg Finance LP, XTB Research

ETFs continue to sell out gold holdings. It should be noted that funds were net buyers of gold in March what supported a price rebound back then. Source: Bloomberg Finance LP, XTB Research

Gold reacts to 50-week moving average. It should be noted that EURUSD bounces off the similar levels as it did in January 2017 and March 2020, what highlights that 1.0500 area is a key long-term support for the pair. In both those cases gold price recovered after EURUSD recovered. Source: xStation5

Wheat

• The price is returning to declines after testing a significant resistance zone around the level of 578 cents per bushel
• We continue to observe a reduction in speculative positioning in wheat. Seasonality suggests a possible price rebound in the next two weeks, followed by declines
• There's a notable divergence with oil prices. In the past, divergences have been at least partially closed when there was a reversal in the oil market or during corrections, which is happening now
• Import prices in Russia are falling due to reduced demand for cheap wheat from the country. Wheat sales in the previous week were the weakest since July
• Despite weaker wheat harvests in the current season compared to the previous one, Russian farmers have decided to sow more acreage than last year
• Wheat production in the USA also surprised with growth. The production level of 1.812 billion bushels was 3% higher than August forecasts and 10% higher than last year's harvest

WHEAT has been dropping recently what can be linked to news of harvest in the United States and Russia, as well as news on weakness in short-term demand. On the other hand, a negative outlook for harvest in Australia, Argentina and Canada this year as well as in the next seasons could help prices recover later on. Source: xStation5