Commodity Wrap - Oil, Natural Gas, Gold, Wheat (21.02.2023)

Oil

• US oil inventories have climbed above a 5-year range for this period of year, signaling a significant oversupply of the commodity

• There is chatter on the market about need to hedge oil at current prices, what may suggest about an expected drop in oil prices in the coming months

• Demand in China disappoints following the reopening. China is using up its own inventories in the early phase of economy recovery. If economies rebounds, oil demand should climb in the second half of the year

• Russia claims that its production in February was unchanged compared to January and that planned 0.5 million bpd production cut in March is expected to be one-off decision and it is not year known whether it will be extended beyond March

• It looks like Europe has managed to cope without access to Russian fuels, thanks to high inventories and significant boost to imports from Middle East

Natural Gas

• US natural gas prices break below the lower limit of $2.35-2.625 trading range

• A downside breakout does not need to herald a strong downward impulse but at the same time, one cannot rule out a pull back towards $2 per MMBTu area given current fundamentals

• Nevertheless, current situation resembles the forming of a local bottom which we have  seen in December 2021. Back then, lower limit of the range has also been violated a few times as the bottom was forming

• Fundamentals remain slightly bearish. Gas inventories remain 8% above 5-year average and 16% above last year's levels

• Contrarian signals would surfaces once inventories rise to around 20% above 5-year average. In case of 1-year comparative stocks, surplus would be needed to be 40-80% to flash an oversold signal

• Weather remains very mild what limits gas consumption

• Freeport LNG terminal is not increasing exports yet and operates at 20% capacity

• The first cargo from Freeport terminal will arrive in Germany in the coming days, what will be the first cargo German received from this US port

Natural gas looks strongly oversold when we take a look at 1-year deviation with price deviation by a magnitude of 2 standard deviations. As far as 5-year deviations are concerned, natural gas looks only slightly oversold. Source: Bloomberg, XTB

NATGAS broke below trading range but remains close to the lower limit. Taking a look at regression line from the last month, price should reached $2 per MMBTu at the turn of February and March should current downtrend and its pace continue. Source: xStation5

Gold

• Very strong bullish signal appeared on the gold chart last Friday, however during Tuesday's session a large part of the upward movement has been erased

• Buyers need to defend  key support marked by 38.2% Fibonacci retracement 

• At the moment, we are still observing sharp appreciation of US dollar and rising yields

• Recent US data remain strong and markets expect that rates will be lifted above 5%, which caps potential upward move 

• The CFTC has not released new positioning data since January 26, so the only demand indicator at the moment is the behavior of ETFs which continue to sell gold.

• Since the beginning of the year, ETFs have sold 1% of their gold holdings

• However,  gold may receive a boost if Japan decides to abandon its yield curve steering program. In this scenario policymakers will need to search for other instruments that are "anti-dollar". Resumption of the downward move by the USDJPY pair should be positive for gold

The correlation between USDJPY and gold is very strong. If the new head of the BoJ sparks a revolution, it may be negative for the dollar, but positive for gold. Source: xStation5

Wheat

• Wheat positioning remains at a potential oversold level as number of short positions increased sharply in the last several weeks

• It is expected that in March Ukrainian grain export agreement will be extended. Other outcome could spark a massive moves on the market, looking at the strongly negative positioning of speculators

• One year on from Russia's invasion of Ukraine, concerns regarding another Russian offensive are growing, which could lead to increased volatility

• Global weather forecasts remained optimistic, however heavy rainfall in the spring is required in order to maintain a positive production outlook

Seasoning is at an extremely low level - back in 2020 price rebounded from these levels. On the other hand, oil prices, which are an important cost component, are not providing any support at the moment. On top of all that, fertilizer prices remain low thanks to the recent gas sell-off. Source: xStation5