Commodity Wrap - Oil, Wheat, Copper, Gold (02.04.2024)

Oil

• OPEC+ is extending voluntary oil production cuts in line with earlier assumptions
• PMI index data from China and the US have exceeded expectations, indicating moderate economic recovery, which bodes well for oil demand growth this year
• Recent tensions in the Middle East raise concerns about a reduction in available oil supply in the global market
• Mexico has announced plans to slightly reduce oil exports and focus on local fuel production. This leads to further tightening of the oil market
• Ukraine conducted another drone attack targeting oil processing infrastructure in Russia
• Russia intends to limit oil production in the second quarter due to existing limits under the OPEC+ agreement. It's worth noting that Russia's voluntary supply cuts were related to export limitations
• Russia plans to reduce production by nearly 500,000 barrels per day in Q2. At the same time, Russia's Energy Minister, Alexander Novak, indicated that Russia will focus on reducing oil production and gradually restoring fuel exports in the near future

Compared to last year, current inventory levels indicate a deficit in the oil market, which may motivate further price increases. On the other hand, there doesn't seem to be a deficit compared to the 5-year average inventory. Source: Bloomberg Finance LP, XTB.

Brent price is surpassing the 50- and 100-period averages. Historically, when these averages were breached, oil prices continued to rise. The increase from the breach of the 100-period average (blue) was over 30%. Seasonality suggests upward trends until mid-year. Source: xStation5

Wheat

• Prospects for wheat sowings in the US are assessed lower than last year at 47.33 million acres. At the same time, an increase in harvested area is expected
• It's worth noting that the March report on planned sowings recently showed significantly inflated numbers compared to final sowings. Additionally, the harvest area was reduced due to weather factors
• Russia still holds very high reserves at the end of the 2023/2024 season, putting downward pressure on the wheat market. Prices in Russia have recently fallen below $190 per ton, while the latest rebound pushed US prices above $200 per ton
• Wheat reacted positively to the sowings outlook report, but the price remains below the important resistance level of 560 cents per bushel
• Analysis of historical peaks shows that price declines after reaching a new record level usually last about 600 sessions. This would mean that any rebound after the peak in February-May 2022 should occur in August/September of this year

Wheat is currently moving in line with the worst price performance of the last 5 years, indicating that declines may deepen further. The strongest signals for local bottoms are expected in the middle of the year and at the end of the 3rd quarter. Source: Bloomberg Finance LP, XTB

If wheat is currently in a similar downward cycle after reaching a historical peak, it may mean that downward pressure will persist for 600 sessions after the last historical peak. This would imply a possible rebound between the third and fourth quarter of this year, around the time of the harvest in the US. Source: Bloomberg Finance LP, XTB

Copper

• Recent increases in copper prices are driven, among other factors, by plans to limit refined copper production by Chinese smelters. Plans indicate a production reduction of 5-10%, considering limited access to ore and concentrates, as well as the relatively high production capacity of Chinese smelters
• It's worth noting that Indonesia is imposing an export ban on copper ore starting from June. Although Indonesia is not the most significant player in terms of ore exports compared to South American countries, this could lead to reduced prospects for refined copper production
• At the same time, it must be acknowledged that reducing prospects for refined copper production is associated with decreasing demand. Copper inventories on exchanges have recently increased. Inventories on the Shanghai exchange have risen to the highest level since 2020, although they still remain relatively low
• The copper market is experiencing the largest contango in 20 years. The price for delivery in June is expected to be over $100 higher than the current price. Meanwhile, the current low price is due to the persistence of relatively high inventories, and the higher future price may be associated with expectations of lower available supply
• ANZ sees the price remaining around $9,000 in the near future, and above $10,000 per ton in the 12-month horizon. However, ING indicates that the price will remain at $9,000 per ton until the end of this year but points to a very strong concentrate market deficit in 2025 and 2026
• Goldman Sachs points to $10,000 per ton by the end of this year, while Capital Economics suggests $9,250 by the end of this year

Inventories on major exchanges have increased quite significantly recently, with Chinese inventories hitting the highest levels since 2020. Although higher inventories should be negative for prices, we observe upward pressure, similar to what happened in 2020 - then the local peak in inventories coincided with the price peak. Source: Bloomberg Finance LP, XTB

Credit impulse in China still does not indicate significant recovery. On the other hand, the expected substantial deficit in the future causes a significant increase in futures prices. Source: Bloomberg Finance LP, XTB

Although contango is usually a sign of oversupply in the market, currently, investors may focus on buying the commodity for future deliveries due to current demand issues and expected future supply problems. Source: Bloomberg

Gold

• Gold remains at high levels, above $2250 per ounce, despite a clear increase in the US dollar and US bond yields
• The rise in prices can be attributed to several factors. One of them may be the negative correlation with Bitcoin. Another factor is the concerns associated with tensions in the Middle East
• Gold is not yet very expensive compared to the 1-year and 5-year averages, but continued increases in the near future may generate an overvaluation signal
• Key data for the dollar, yields, and gold will be released this Friday at 1:30 pm BST - the US job market report, which could lead to a change in the probability of Fed interest rate cuts this year
• If the probability rises again (currently estimated at 55% for June), then further price increases on the gold market are possible

Gold is starting to look overvalued relative to the 1-year average, but an overvaluation signal will not be generated until price deviates by 3 standard deviation from the 1-year average. Source: Bloomberg Finance LP, XTB

Gold is breaking through the upper limit of the short-term and long-term channel. Seasonality suggests further increases in the coming week. The positioning indicator shows slight overbought conditions over the past year, but at the same time, it does not indicate overvaluation in the long term. Source: xStation5