Commodity wrap: Oil, Gold, Natgas and Sugar (03.09.2024)

Oil:

• Libya has partially relaunched its oil production to satisfy its own consumption. With most of the exports staying on hold, we could expect shortages of up to 1M barrels per day.
• According to external sources, oil production has fallen by more than 300 thousand barrels per day in OPEC countries, driven mostly by Libya’s cuts.
• Worth noting that from October onwards, OPEC+ plans on bringing 180 thousand barrels per day back to the market, which would balance out the arbitrary cuts by September 2025.
• According to some OPEC+ sources, Libya’s situation and rate cut expectations support the promise of production’s return.
• Exxon believes that the demand for crude oil will remain strong in the following years, surpassing 100M barrels per day. Company’s study shows that even with each car sold after 2035 being electric, the demand for oil would hold on the level of 85M barrels per day, calling out an insufficient extraction investment.
• Exxon estimates a natural decline in oil production of 15% per year without additional investments, while the IEA comes up with the estimate of 8%.
• Without additional investments, Exxon estimates a 400% price increase between 2030 and 2035, should declining production be not replaced.
• Oil prices have fallen to levels close to those at the beginning of the year, and inventories have dropped quite significantly. However, it's also evident that we are nearing the seasonal low for inventories.
• Crack spread in the US suggests that fuel demand is not particularly high at the moment and is falling below the local lows from November, suggesting potential further pressure on oil sales.

OIL.WTI  is near this year's local lows. Theoretically, we are approaching the seasonal bottom, and the price peak is expected to occur either at the beginning or the end of November. Source: Bloomberg Finance LP, XTB Research

Oil inventories have dropped to near seasonal lows and are even higher than last year. Source: Bloomberg Finance LP, XTB Research.

Crack spread, the difference between the price of the finished product and crude oil, has significantly decreased, indicating potentially limited demand for fuels in the U.S. Source: Bloomberg Finance LP, XTB Research

OIL.WTI is once again testing a key support zone below $73 per barrel. However, the crack spread suggests that the price could drop to local lows from November or even May 2023. Source: xStation5.

Gold:

• Gold’s price remains high, but is retreating below 2500 USD per ounce.
• Worth noting that September is historically the worst month in terms of seasonality for gold, considering the last 5-10 years period.
• The future trajectory of gold will highly depend on the US dollar, which plunged significantly even after cooling rate cut expectations until the end of 2024.
• The risk of Fed’s unwillingness to impose a rate cut of 50 bp might further appease aggressive rate cuts expectations, potentially dragging further on gold’s price. At the moment, the markets bet on a 30% chance for 50 bp cuts in September.
• The newest NFP report might drive volatility on gold on upcoming Friday and determine the scale of September rate cuts. Improved labor market data may strengthen the dollar and initiate a September correction in gold. Conversely, weaker data—such as employment growth around 100,000 or lower, or even an increase in the unemployment rate—could heighten investor confidence in a drastic rate cut.

Seasonality in gold prices suggests a local peak at this time and a potential correction that could last until November. Source: Bloomberg Finance LP, XTB Research

The likelihood of rate cuts by the end of the year has slightly decreased. A drastic reduction in cuts to three this year could drive a correction in gold down to $2,400. Source: Bloomberg Finance, XTB Research.

Natgas:

• Gas prices continue to rise as the substantial contango in the market decreases. The contango between the October and November contracts has fallen from 22% to 16%. The valuation of the November contract indicates a level of around $2.50/MMBTU.
• Recent data showed increased gas consumption compared to 5-year highs, but this occurred after a period of reduced demand. Currently, gas demand is returning to the 5-year average range.
• Production remains close to 5-year highs, but gas drilling rigs continue their sharp decline and are at their lowest level since 2021.
• Seasonality suggests that the local bottom may already be behind us. However, further increases could be tied to the shape of the curve. The upcoming roll will take about 15%.

Demand for gas has recently been slightly above 5-year highs, but this increase followed a period of subdued demand. Weather forecasts indicate a cooling trend in the near future, so gas demand is expected to rebound later in the fall. Source: Bloomberg Finance LP, XTB Research.

Seasonality suggests that the local bottom is likely behind us, but further gains may be linked to the shape of the curve. Source: Bloomberg Finance LP, XTB Research.

Sugar:

• Sugar market deficit for 2023/24 season aims to reach 200 thousand tons, according to the latest ISO (International Sugar Organisation) report. Previously the estimates were around 3M tones of deficit, with the change being driven by new production estimates.
• ISO indicates, however, the deficit of 3,5M tones in 2024/25 season, caused by the production falling, compared to the current season. This concerns primarily Brasil (up to 3M tones decrease).
• Situation in Brazil will dictate the sugar market in the coming months, unless there is an improvement in production prospects in India, which could lead to a reduction in export restrictions from that country.
• The weak real has been putting pressure on sugar prices in recent months, although a stronger Brazilian economy should lead to a recovery of the real. However, it is important to remember that the recent weakness of the real was also linked to the unwinding of many carry trades due to the strengthening of the yen.
• Sugar prices remain under pressure due to the weakening oil, which lowers the rentability of transforming sugarcane into ethanol in Brazil

Patrząc na 1-roczną średnią, ostatnio wygenerowany został sygnał nadmiernego wyprzedania cukru. Źródło: Bloomberg Finance LP, XTB

Looking at the 1-year average, a signal of oversold conditions for sugar was recently generated. Source: Bloomberg Finance LP, XTB

Net positions have dropped to the long-term average, which has also aligned with the medium-term oversold zone. As seen since the beginning of the year, there has been a noticeable lack of buying activity. Source: Bloomberg Finance LP, XTB

Sugar has been recovering for the past three weeks, but since the beginning of the year, it has lost about 7%, which is in stark contrast to what is happening, for example, in the coffee market. Source: xStation5