Commodity Wrap - Oil, Natural Gas, Sugar, Gold (12.12.2023)

Oil

• The near-term spread for WTI has entered contango in the past weeks, which may indicate an oversupply in the market
• Contango is expected to persist in the next 6 months
• Given this situation, the recent decision by OPEC+ to implement further production cuts could be justified
• Citi indicates that, thanks to the OPEC+ decision, the oil market should remain balanced next year, and the cartel countries will aim to maintain the price of a barrel of Brent crude within the range of 70-80 USD
• If OPEC+ countries indeed go with planned, voluntary cuts, the price of crude oil may hover near a local low
• It's also worth noting that US Department of Energy (DOE) was supposed to conduct purchases of oil for strategic reserves around $70 per barrel
• Presidential elections will take place in the US next year. Historically, oil has stabilized a few months before elections, experienced a short-term decline just before, and gained in the months following the elections

Oil prices are in contango for the upcoming 6 months. Source: Bloomberg Finance LP

WTI (OIL.WTI)  recovered part of recent losses after dropping to and testing the $65-67 area. Seasonality suggests a possibility of the upward move in the second half of December. A key resistance level to watch can be found near 78.6% retracement ($73 are) as well as the upper limit of a recent correction ($75-76 area). Source: xStation5

Natural Gas

• Current December weather in the United States is often labeled as T-shirt weather, indicating that the demand for gas for heating is noticeably lower than usual.
• Meanwhile, the latest report on inventory changes showed a significant decrease in stocks, but in previous weeks, there was an increase in inventories
• High temperatures are expected to persist for at least the next 10 days, suggesting that any significant rebound might occur around the transition between December and January
• Seasonal forecasts for the entire winter indicate that temperatures in the northern United States are expected to be higher than normal
• Spread between the March and April contracts (known as the Widowmaker) has almost fallen to a negative level, indicating an excessive amount of gas and a lack of demand for gas in the final winter month
• Gas traders in the US point out that the continuation of high temperatures in the US could lead to a decline in prices to this year's lows, around $2/MMBTU

Natural gas inventories dropped by 117 bcf in the previous week, what is a bigger drop than indicated by the 5-year range for the period. Nevertheless, it may also hint that the actual heating season is just beginning (usually it starts in the second half of November). Source: Bloomberg Finance LP

Widowmaker spread (March-April contracts) dropped to almost zero, what is an abnormal situation given that demand for heating commodities is still high in March. Source: Bloomberg Finance LP

Weather forecasts for the entire US winter period. Majority of the key heating areas are expected to experience above-average temperatures. Source: NOAA

NATGAS dropped below $2.30 per MMBTu at the beginning of this week, but has recovered part of the losses later on. The $2.50 should be seen as a key resistance for now. Seasonal patterns suggest that declines may resume in the second half of the month. Source: xStation5

Sugar

• The recent significant drops in sugar prices around the world are a result of decisions made by the authorities in India regarding changes in ethanol production. Sugar mills have been prohibited from using sugarcane juice and syrups to produce ethanol in the 2023/2024 season, leading to an anticipated increase in the supply of sugar itself
• India aims to build up reserves of this commodity. As one of the largest consumers and producers globally, India is often a substantial importer as well
• Simultaneously, the decision is influenced by weather conditions. Reduced rainfall during the season is expected to result in a decrease in sugar production in India, with a 10.7% year-on-year reduction in production from October to November
• India's decision is set to boost sugar production by 3 million tons to a level of 32.5 million tons
• Sugar is a crucial commodity in India, and authorities aim to bring about a decline and control of prices for key goods ahead of the elections next year. Narendra Modi seeks to secure power for the third consecutive term
• Some analysts suggest that there might be a policy shift regarding the ban on ethanol production from sugarcane as early as mid-January. This could lead to a resurgence of upward trends in the sugar market
• Additionally, Brazil, another major producer, is showing robust data regarding sugar production in the current season

Sugar prices dropped significantly, but futures curve remains in backwardation (although smaller than a month ago). Source: Bloomberg Finance LP

SUGAR dropped over 20% off a recent high. Key support can be found in the 21 cents per pound area, near the 38.2% retracement of the upward move. It should be noted that seasonality suggests a period of range trading in the near-term. Source: xStation5

Gold

• Gold has been losing ground for almost two consecutive weeks after reaching historic highs near $2150 per ounce
• ETFs continue to sell gold, albeit at a significantly slower pace than in previous months
• The price has deviated by over 2 standard deviations from the 1-year and 5-year averages
• On the other hand, the price of silver, in relation to the averages, is showing gradual signals of being oversold
• Expectations are growing for an interest rate cut by the Fed in March. This could imply that gold may see gains in the coming months
• Seasonality suggests a resumption of upward move until early January

Gold price and deviations from short- and long-term averages (in terms of standard deviation). Source: Bloomberg Finance LP, XTB

Silver price and deviations from short- and long-term averages (in terms of standard deviation). Source: Bloomberg Finance LP, XTB

Yields ticked higher recently, but seasonal patterns suggest gold will gain until the beginning of January. Source: xStation5