Commodity wrap - Oil, gas, gold, cocoa (06.08.2024)

Oil:

• Crude oil is under downward pressure due to demand uncertainty linked to a potential recession.
• At the same time, recent ISM data indicates an improvement in the U.S. situation, slightly reducing the risk of a sudden economic collapse in the U.S.
• However, there is a lot of uncertainty regarding future demand in China.
• WTI crude oil falls below $73 per barrel, with seasonality indicating consolidation until mid-September.
• Crude oil has lost all the premium associated with the escalation of the situation in the Middle East.
• At the same time, OPEC+ decided at the beginning of the month to maintain plans to restore production from the beginning of October this year, which could lead to a surplus by the turn of 2024/2025.
• On the other hand, if Iran decides to get more involved in the Middle East conflict or decides to block the Strait of Hormuz, oil is exposed to a rise to the range of $90-100 per barrel in the first case and even $150-200 per barrel in the second case. However, it should be remembered that these are not baseline scenarios.
• Iran currently produces 3.3 million barrels per day and exports 1.6 million barrels per day, mainly to China.

Fundamentals related to oil in Iran. Source: Bloomberg Finance LP, XTB

Crude oil inventories are significantly lower than the 5-year average. Despite this, oil prices remain low. In the near future, larger fluctuations in inventories are possible, related to the hurricane season in the U.S. Source: Bloomberg Finance LP, XTB

The price of WTI oil fell below the May lows yesterday. If the area around $72 per barrel is breached, it will open the way to the range of $67-68 per barrel, where the local lows from May 2023 are located. However, these are levels at which OPEC has intervened in the past. Source: xStation5

Natgas:

• The impact of tropical storms on the southeastern coast of the U.S. has led to a significant drop in gas production in the U.S. At the same time, there is also a threat related to LNG gas exports.
• Gas consumption has been higher recently, but exports have decreased. At the same time, production has decreased due to the hurricane season.
• Supply and demand are currently clearly balanced in the U.S., but the potential for longer suspension of LNG gas exports prevails, and the hurricane season is currently being treated negatively for gas prices. Currently, the vast majority of gas production takes place onshore from shale (similarly in the case of the oil market).
• Gas shows a willingness to rebound, based on clear candle shadows, but the trend remains downward (although seasonality suggests a clear rebound). However, it should be remembered that in about 2 weeks, there will be a rollover, which will lead to a clear price rebound, which may, in turn, lead to renewed selling pressure.
• As long as the price does not permanently break the 14-period average, a trend change cannot be expected. As history shows, breaking this average usually led to at least a several percent rebound.

Gas consumption, mainly for electricity production, has increased, and production has decreased. Source: Bloomberg Finance LP, XTB

A small deficit has appeared in the market, even despite the decrease in exports. Source: Bloomberg Finance LP, XTB

The price reacts to the level of $1.9/MMBTU. As long as the 14-period average is not broken, a trend change cannot be indicated. However, it is worth remembering that in about 2 weeks, we will have a fairly clear rollover in gas. Source: xStation5

Gold:

• Data from the U.S. labor market has led to increased concerns about a recession. This has led to pricing in over 4 rate cuts this year, including a 50 basis point cut in September.
• ETFs continue to buy gold in recent weeks, offsetting the negative impact of lower jewellery demand in the second quarter.
• Gold has seen a reduction in long positions recently, both in the U.S. and China.
• However, it is worth noting that gold was the most resilient instrument during the recent global asset sell-off, as it is not as leveraged as the U.S. stock market and is still treated as a safe haven.

Currently, over 4 rate cuts are being priced in this year! Although it is hard to believe in such a large number of cuts, reducing them to even 2 this year should not harm gold prices. Source: Bloomberg Finance LP, XTB

ETFs are clearly buying gold, which will likely have a positive impact on demand in the third quarter. Source: Bloomberg Finance LP, XTB

Speculators have recently reduced the number of long positions in the market, although they remain at high levels. Source: Bloomberg Finance LP, XTB

Gold has formed a double top around $2470 per ounce, but at the same time, support is maintained in the form of the 50-period average and the 61.8 retracement of the last upward impulse. Key support is at the level of $2300 per ounce. Source: xStation5

Cocoa:

• Traders point to a significant improvement in the outlook for the main season 2024/2025, which begins in October.
• Expectations of higher supply are reflected in the forward curve. The nearest rollover is expected to be as much as $1500. The curve then flattens out significantly and indicates prices at the level of $5500 per ton over the annual perspective.
• Exchange stocks continue to decline significantly and are about 45% lower than last year.
• The latest data shows that cocoa deliveries to ports in Ivory Coast from October 1 to August 4 amounted to 1.66 million tons, which is 28% lower than the previous year.
• The price of cocoa rebounded significantly during yesterday's session, which may be related to a revival in the markets after a significant pullback and due to data showing that cocoa supply at the moment is not improving, and we need to wait for the next season.
• Last Thursday, Hershey – the 4th largest chocolate producer in the world – indicated in its quarterly report a decline in sales and lowered sales forecasts for the entire year.
• Weather forecasts indicate the end of El Nino and the onset of La Nina, which is expected to improve production prospects in West African countries. Production in Ghana is expected to rebound to 700,000 tons from 425,000 in the 23/24 season.
• Despite reduced deliveries to Ivory Coast, exports from Nigeria show an increase of 18% y/y for June, to the level of 14,465 tons.

The forward curve shows that the nearest rollover may be as much as $1500 per contract. It is possible that after such a strong rollover, there will be pressure to buy cocoa at lower prices. Source: Bloomberg Finance LP, XTB

The price has remained within a large triangle formation. However, the price is likely to open low around $6600-7000 per ton after the rollover. Source: xStation5