Commodity Wrap - Oil, Gold, Silver, Coffee (09.04.2024)

Oil

• Crude oil opened with a bearish price gap after the weekend due to de-escalation of the situation in the Middle East. However, oil quickly recovered losses and is trading close to local highs
• Many feared the start of a full-scale conflict between Israel and Iran following the recent attack on an Iranian diplomatic compound in Damascus
• Although a full conflict did not occur, Iran warns that Israeli facilities are not currently safe
• The recent escalation in the Middle East has led to the withdrawal of some Israeli forces from the Gaza Strip, which is viewed with slight relief by the oil market
• On the other hand, OPEC+ continues production cuts in the second quarter of this year
• The Compliance Review Committee highlights the need for compliance monitoring. The Committee has not made recommendations regarding changes to the current agreement. The next important OPEC+ meeting is scheduled for early June.
• Iran is currently exporting the most since 2018
• Aramco is reducing price discounts for certain types of oil exports to Asia and Europe but maintains prices for North America
• Bank of America raises its Brent crude oil price forecast to $86 per barrel by the end of this year but expects prices to approach $100 per barrel during the summer months
• The latest EIA report indicates a significant limitation on production growth in the second half of the year, resulting in the maintenance of a deficit. The largest implied inventory declines are expected in the second quarter due to the continuation of voluntary production cuts by OPEC+ countries
• The STEO report assumes Brent crude oil at an average of $87 per barrel. 

The implied decline in oil inventories in the second quarter of this year is expected to be the highest since 2021. It is worth mentioning that the implied decline in production from Q3 2020 - Q4 2021 significantly contributed to the increase in oil prices from around $40 to over $80 per barrel. Subsequent increases were related to the geopolitical situation. If OPEC+ decides to continue production cuts in the following quarters and there is a change in forecasts regarding an increase in deficit, then forecasts indicating an average price above $100 per barrel may appear. Source: EIA

Crude oil experienced a strong pullback at the beginning of the week, but by the end of the first session of the week, losses were recovered. Nevertheless, a potential head and shoulders formation is potentially emerging on the weekly chart. However, if the $93 per barrel level is broken, the head and shoulders formation is likely to be invalidated. On the other hand, at the $95 per barrel level, a double top formation may be established. Source: xStation5

Gold

• Gold is setting new records and surpassing the $2350 per ounce level
• There is talk in the market about "FOMO," which is leading to even greater price increases
• Nevertheless, in the case of gold, the rises can be justified by significant uncertainty regarding the geopolitical situation in many regions around the world
• Additionally, we observe strong purchases of gold by central banks. The PBOC has been buying gold for 17 months in a row
• Positioning reaches locally extremely high levels, looking at almost the past 2 years
• Seasonality indicates a peak in the near future, followed by consolidation and greater increases in the second half of May and mid-year
• ETFs continue to sell gold, although in the case of silver ETFs, we observe a clear rebound in purchases
• Only 1.5 full Fed rate cuts (around 40 bps) are priced in by September. The number of projected cuts has been decreasing significantly since the beginning of this year, while gold prices are rising, indicating that gold is becoming less dependent on the dollar-related situation.

ETFs continue to sell gold. If this trend changes, as is the case with futures contracts, gold may experience another strong upward wave. In the past, the return of ETFs to buying gold has been positive for prices, although this occurred mainly in situations of interest rate cuts. Source: Bloomberg Finance LP, XTB

Expectations for interest rate cuts in the US have significantly decreased, with only 1.5 full cuts expected by September. Source: Bloomberg Finance LP, XTB

As seasonality shows, we may experience consolidation in the near future, but around mid-year, the increases should be stronger. Source: Bloomberg Finance LP, XTB

Silver

• Silver is experiencing an even stronger growth than gold recently, as it has not yet reached local peaks from 2021 and is still far from historical peaks around $50 per ounce. 
• In the case of silver, we observe a significant increase in metal purchases by ETF funds, which should further deepen the forecasted deficit this year. 
• ETFs currently hold the most silver in their vaults since last summer.

Silver ETFs are buying metal contrary to gold ETFs. This may deepen the forecasted deficit. Source: Bloomberg Finance LP, XTB

The deficit this year is expected to be one of the largest in history. In the case of silver, which is widely used in industry, this could pose a significant problem. Furthermore, if investment demand continues to grow, it could further exacerbate the deficit. Source: Bloomberg Finance LP, XTB

Silver deviates from seasonal behavior. Looking at history, we should expect consolidation over the next 2-3 months. However, the current trend indicates rather an upward movement, similar to what we observed in May-June 2020. Source: Bloomberg Finance LP, XTB

Coffee

• Overall coffee inventories tracked by ICE have risen to their highest level since May of last year, but at the same time, they are about 70% lower compared to the highs from 2021
• The significant price increases of Robusta to historical peaks potentially lead to increased demand for Arabica
• High temperatures in Vietnam may cause Robusta production to decline for another season in a row
• The price of Arabica coffee has risen to its highest level since October 2022, which is also related to speculative short positions being closed
• Currently, there is a certain anomaly in the Brazilian Arabica market, where lower-quality beans are quoted below Robusta prices.

Arabica inventories on ICE are growing but still remain historically low. Source: Bloomberg Finance LP, XTB

In recent months, the rise in Robusta prices has been very significant, while Arabica has remained in consolidation. Source: Bloomberg Finance LP, XTB

Recently, we have seen another increase in long positions on Arabica, while short positions remain extremely low. Source: Bloomberg Finance LP, XTB