Commodity wrap - Oil, gold, coffee, CO2 emissions (20.05.2021)

Oil:

• Significant progress regarding a potential US-Iran nuclear deal is putting downward pressure on the crude oil market
• The potential increase in oil production from Iran could be as high as 2 million barrels per day. Production will resume gradually, but this will distort the current deficit situation
• On the other hand, criticism has been raised about the lifting of Iran's sanctions over the recent conflict in the Middle East
• The current talks will probably not lead to the signing of the agreement by May 21, but the pressure on the oil market is visible
• A drop in WTI price below 62.5 could raise concerns about deeper short-term declines. Another strong support is located around $61 and $60 a barrel
• However, the potential increase in EURUSD above 1.23 should alleviate the current concerns about higher supply
• The recent significant increase in CO2 allowance prices could significantly reduce refining margins, indicating a potential reduction in demand and higher prices for the consumer. The cost increase ranges from 40 cents to $ 1.5 a barrel for European refiners, according to Bloomberg's calculations.

The price of oil broke below the short-term upward trendline. The  50.0 Fibonacci retracement of the last bearish wave is very important for market bulls. If the price doesn't return above it, then the next target for sellers will be the 38.2 retracement and the support at $ 61 a barrel. Source: xStation5

Gold:

• The recent sale-off seen on the stock market and cryptocurrencies, has restored investors' faith in gold
• JP Morgan points out that the recent cryptocurrency sell-off has led to Bitcoin being abandoned by major institutions in favor of gold. On the other hand, it is worth remembering that JP Morgan is still skeptical about the cryptocurrency market, and voices from the market also say that the sale on the cryptocurrency market was created precisely so that institutions could buy digital assets cheaper.
• The gold market, however, still remains significantly larger than the cryptocurrency market. Currently, ETF funds hold approximately 100 million ounces. The value of all these ounces is roughly 10 times less than the entire cryptocurrency market capitalization. It is worth emphasizing, however, that ETFs are only a small fraction of the entire gold market.
• TNOTE finds a fragile support around 132 points, a drop below this level may extend the current correction in gold prices
• Currently, the first major support is located around $ 1,850 and is marked with the lower limit of the Overbalance structure. Next support can be found at $ 1,833 and coincides with 23.6 Fibonacci retracement  and a upward trendline
• Currently, gold almost accurately reflects the movements of the US dollar and this will be one of the key aspects in the short term
•  Behavior of ETFs changed recently - the last week of April and the first week of May are net purchases among funds
• Potential end of the convergence of short and long positions when looking at CFTC data. Speculators rebuild long positions, contributing to a clear rebound in net positions from the lowest levels since 2019

ETFs bought gold at the turn of April and May. Source: WGC

Long positions start to rise, short positions are reduced. Net positions bounce back from the local low, the lowest since 2019. Source: Bloomberg

The key support for gold is located around $ 1,850 an ounce and is marked with the lower limit of the  Overbalance structure. Source: xStation5

Coffee:

• There is increasing uncertainty about the coffee harvest in Brazil and in the rest of South America
• The price broke again above 150 cents per pound, and is approaching the 2016 highs.
• The opening up of economies, and the catering sector in particular, should support the demand for coffee
• On the other hand, inventories on the coffee exchanges are still clearly growing, two-thirds of the recent decline has been reduced
• Large disproportion in the behavior of investors in the contract market - the number of selling commercial investors (hedging) is growing. This situation creates a backwardation in the market. Producers and other commercial market participants want to secure a price for themselves should fundamental factors change. The speculators themselves are not that extremely positive (speculators usually have the opposite positioning to commercial participants)

Coffee inventories are rising. In the past, the situation where the price rose along with the level of inventories did not last long. Nevertheless, the current rally is fueled by expected production problems and a significant recovery in demand. Source: xStation5

A very big difference between commercial sellers and buyers. There are no such disproportions among speculators. Nevertheless, the lack of big changes from week to week means the current rally is not in danger in the short term. Source: CFTC

EMISS:

• Emission permits lost sharply during the two previous sessions
• As we pointed out in last week's article, prices may have been exposed to declines due to the start of the British emissions system, which could induce local traders and speculators to close their positions
• British emissions prices started from £ 50 per contract
• The European Union is considering introducing an "emissions tax" on the import of products from countries that do not have a carbon reduction regime. Such a situation would reduce the negative position of European companies and accelerate the energy transformation, which could reduce prices in the long term. On the other hand, the fundamentals and future prospects support carbon prices, both in the EU and in the UK​​​​​​​

The British ETS was launched yesterday (May 19) and the price tested 23.6 Fibonacci retracement of the recent upward wave. Additionally, the Overbalance structure of the last major correction remained intact. Source: xStation5