Commodities wrap - Oil, Silver, Soybean, Aluminium

Oil:

• Oil prices plunged below 50 USD per barrel (WTI) and 55 USD per barrel (Brent) amid expected decline in China’s demand

• It is expected that China’s demand has already sunk by 1 mbd Decline may deepen to as low as 3 mbd (20% of global demand)

• Meanwhile, China is supposed to increase  energy imports from the US to $18 bln USD in 2020 under the terms of Phase One trade deal 

• Oil imports from the US could jump once coronavirus is contained

• On the other hand, Brent-WTI spread does not bode well for the US crude

A significant drop in Brent-WTI spread does not bode well for the US crude. Source: Bloomberg

Nevertheless, one can expect that the market has already discounted all negative information. The price continues to rise after reaching 50 USD level. It has already come back below the crucial demand zone marked by 2019 lows. The next important support in line, should the price continue to fall, can be found at  123.6% Fibo level (48 USD area). Source: xStation5

Silver:

• Silver price remains relatively low in spite of potential economic slowdown caused by coronavirus outbreak

• Continued problems in China may depress copper demand even further

• 70% of silver production depends on copper, lithium and zinc mining

• Investment demand for silver remained low in late-2019. However, weak US dollar and prevailing concerns over economic downturn could help the precious metals surge, just as it did a year ago

• ETFs bought roughly 80 million ounces of silver in 2019

• Speculative positioning on silver remains at an extremely high level. This is a risk factor to potential rally

Silver production is located primarily in South America and is tied to mining of other metals. Source: CPM Group, GoldSilver

Silver seems to be overbought. On the other hand, in spite of a multi-month price decline, ETFs increased their holdings. Source: Bloomberg

Soy

• The trade agreement should not have major impact on US soybean exports

• The coronavirus crisis could diminish chances for rebound in exports in the first half of the year

• US exports to China sit below 5-year average. Soybean expectations are higher than expected  

• The number of long positions on soybean remains low

Soybean exports to China sit below 5-year average. However, China is expected to continue importing soybeans primarily from South America. Source: Bloomberg.

The number of long positions remains low. This could lead to contrarian “buy signal” surfacing. Source: Bloomberg

Aluminium:

• Temporarily closed production plants in Brazil and China should reopen. 

• Increased production capacity in Russia exerts pressure on prices

• Potential economic slowdown causes concerns over demand in the first half of 2020

• Capital Economics expects a significant demand growth by the end of the year 

• Norsk Hydro, Alcoa and Rio Tinto consider limiting aluminium production amid low prices

• Coronavirus might eventually lead to a rebound in aluminium prices 

• Base case scenario assumes aluminium market to remain significantly oversupplied this year, limiting a scope for prices rebound 

Aluminium price tests a crucial support marked with a local low from 2019 and 78.6% Fibo level. In case a break below this hurdle is delivered, next supports to watch can be found at 1600 and 1500 USD per tonne. Source: xStation5