Commodity Wrap - Oil, Natural Gas, Copper, Cocoa (30.01.2024)

Oil

• The last days of January bring an increase in volatility in the oil market due to heightened tensions in the Middle East
• A drone attack occurred in Jordan over the past weekend, resulting in the death of 3 American soldiers. There are indications of possible Iranian involvement, which could lead to retaliatory actions from the US
• Iran's current oil export stands at approximately 1.2 million barrels per day, although in previous months, it reached as high as 1.5 million barrels per day with production exceeding 3 million barrels per day. The majority of the export goes to China, but retaliatory actions by the USA could increase difficulties in shipping Iranian oil worldwide
• Iran has stated that it was not involved in the drone attack in Jordan. Additionally, Houthi militants decided to attack a tanker transporting Russian oil, further increasing uncertainty in the crude oil market
• It is worth mentioning that Middle Eastern countries account for approximately one-third of the world's oil supply
• Saudi Arabia has announced that it does not intend to increase oil production amid recent supply tensions. Saudi Aramco also does not plan to increase production capacity to 13 million barrels per day, with current estimated production capacity at 12 million barrels per day
• According to Bloomberg data, production reached around 11.8 million barrels per day just before the significant production cut caused by the pandemic in 2020

Production and export of oil from Iran. Source: Bloomberg Finance LP, XTB

Comparison of the three largest oil producers in the world. It is also worth noting that despite production cuts, inventories in the OECD rebounded quite noticeably. Source: Bloomberg Finance LP, XTB

The current situation is starting to resemble the years 2011-2014 when the price was supported by the 5-year average, and at the same time, the 1-year average acted as an axis, from which the price did not deviate by more than 2 standard deviations. Source: Bloomberg Finance LP, XTB

Natural Gas

• US natural gas prices are testing $2.00 per MMBTu at the beginning of a new week, anticipating a minimal decrease in inventories for the previous week
• The current week might even see an increase in inventories, but the weather forecast for the following week indicates a cooling trend
• However, this cooling is not expected to affect the key heating region in the US, namely the Midwest
• Gas production is rebounding strongly, returning to normal levels after the hiatus related to low temperatures at the beginning of January. The number of drilling rigs is stabilizing

Implied change in inventories for last week indicates a decrease of only 2-3 bcf. This week, there is even a possibility of an increase in inventories. Source: Bloomberg Finance LP, XTB

Weather forecasts for the next week suggest a slight cooling, but not in the Midwest region. Source: Bloomberg Finance LP, NOAA

Natural gas production in the US is returning to normal levels. Source: Bloomberg Finance LP, XTB

The price is testing the $2.00 per MMBTu area. It's worth noting that if there is further cooling in February, a similar situation to last year cannot be ruled out, when the price increased by approximately 40%, just before another strong downturn in early spring. Source: xStation5

Copper

• The price of copper has experienced a significant increase in response to the recent announcements of economic stimulus in China. Firstly, there is expected support for the stock market in China, and secondly, the People's Bank of China (PBOC) has decided to cut the reserve requirement ratio, which will take effect in early February
• On the flip side, there is a renewed weakness in the yuan, which could indicate excessive increases in the copper market
• China aims to limit copper production due to ore shortages, while copper inventories in Shanghai exchange remain relatively low
• Further strengthening of the US dollar, not only against the yuan, could harm copper, which trades at the highest level since December
• However, the long-term prospects for copper remain promising, mainly due to the development of new technologies. According to Fitch, the second half of the year may lead to a revival in commodity markets, potentially driven by possible weakness in the US dollar
• Citibank points out that an increase in copper demand by 2030, with limited possibilities for increased production, could lead to a price increasing up to $15,000 by 2025
• Goldman Sachs indicates a deficit in the copper market in the second half of 2024. According to GS, production constraints in the Cobre Panama mine and cost-cutting by Anglo-American will lead to a price increase to $10,000 in the second half of the year

If the behavior of inventories were to influence copper prices in a delayed manner (adjusting local inventory peaks from 2022 and 2023), one could expect a positive impact on prices. On the other hand, looking beyond 2023, the decrease in inventories from 325,000 tons to 225,000 tons contributed to a price rebound of approximately USD 1,000 per ton. Source: Bloomberg Finance LP, XTB

We observe a significant divergence between the price of copper and the yuan. In the short term, copper may be overvalued, but based on long-term demand expectations, copper may still be relatively inexpensive. Analyst expectations point to a possible rebound in copper prices in the second half of the year. Source: xStation5

Cocoa

• There are no changes in production prospects for the cocoa market in the upcoming season. The 2023/2024 year is expected to be another deficit season for the market
• Recent disruptions related to the blockade in the Red Sea may lead to an increase in chocolate prices, although for cocoa itself, this route is not as significant
• On the other hand, there is a noticeable increase in freight rates overall, regardless of the waterway used
• The International Cocoa Organization (ICCO) indicates that recent rains in Ivory Coast bode well for a "smaller season" in the May-June period, although production levels are expected to remain below the previous year.
• Cocoa deliveries to ports in the Ivory Coast from October 1 to January 14 amounted to 914,000 tons, representing a 36% decrease compared to the same period the previous year

The cocoa reserves noticeably declined since the middle of last year (inverted axis), but they have slightly rebounded since the beginning of this year. Expectations for this season point to a continued deficit in the market, but if there is a significant increase in cocoa production, it may exert downward pressure, similar to what occurred in 2021 or 2022. Source: Bloomberg Finance LP, XTB

The cocoa price has risen by over 120% compared to the 2020 low. Since October, there has been a reduction in net long positions in the market, but the price has continued to rise. Although in the past, there was a correlation between the behavior of the pound and cocoa, current fundamentals suggest that the pound has limited significance for prices. Seasonality indicates a local peak around mid-February. Source: xStation5

The key deviation from the 1-year average is a 3-fold standard deviation. It can be observed that the price is not yet very strongly "overbought." Meanwhile, analyzing the deviation from the 5-year average, it is evident that the deviation has been consistently around a 4-fold standard deviation from the average. Previously, the price reacted to these levels in 2008. Source: Bloomberg Finance LP, XTB