Commodity wrap: Coffee, aluminum, oil, gold (02/06/2020)

• Coffee prices have fallen below 95 cents per pound, the lowest level since October 2019
• The harvest season of Arabica began in Brazil, Colombia and in several other countries
• Brazil is one of the world leaders in terms of the number of infections, coronavirus may cause a delay in harvest
• A survey among producers in Latin American countries indicates that production may be 10% lower than originally planned due to the difficulty realted to employing seasonal workers
• Record- weak Real has led to increased coffee exports in recent months (March, April, May). On the other hand, all global coffee exports have been hit recently.
• On the other hand, the recipients of the highest quality coffee are mainly cafes and restaurants, in this case the demand could fall up to 50%, based on surveys
• ICO expects a supply surplus in the 19/20 season of 1.85 million bags, indicating that in the worst case scenario, due to the pandemic, oversupply could reach 3.42 million bags.
• Currently, the demand for Arabica has fallen relatively to Robusta, which is also confirmed by a strong increase in exports from countries such as Vietnam or Indonesia
• Coffee inventories are still declining and are the lowest since 2017
• Arabica narrowed the divergence with Robusta, which has been rebounding moderately since mid-April

Net positioning is relatively high,  both short and long positions are rebounding. Long positions, however, remain quite low. No specific signal from positioning side.

Coffee inventories levels continue to fall further. However, expectations for high production in Brazil and weak demand do not encourage investing in the coffee market at this time. Source: Bloomberg

Arabica narrowed the divergence with Robusta. The largest companies that deal with the sale and distribution of coffee (Nestle, Starbucks) are consumers mainly Robusta, whose price rebounded since mid-April. Further price increase could also stimulate demand for Arabica. Source: Bloomberg

The price of coffee (Arabica) has fallen even below 95 cents per pound. On the other hand, thanks to the weak Real there is a chance that prices will rebound in the near future. However  it is worth remembering, that the fundamental situation does not support a sharp rebound at this time. Source: xStation5

Aluminum:

• Significant price divergence between the markets in London and Shanghai, which may be due to an increase in industrial activity in China
• The situation used for arbitrage, a strong increase in aluminum imports to China expected in May-July
• Inventories in Shanghai are falling, while LME stocks are the highest since the turn of the year

Premium in China has returned to the aluminum market. It can be seen that the situation that prevailed in China in 2015 initiated a rebound of prices on the London Stock Exchange. Source: Bloomberg

Looking at the market dynamics, prices behaved very similarly last year. However, it can be seen that the price in China has risen strongly since the beginning of April. Price in London began to rebound only from mid-May. Source: Bloomberg

Oil:

• The oil price has risen sharply in anticipation of the OPEC + group's production cut
• However, it turns out that in May,  OPEC + cuts reached 77% of the intended target (mainly through Iraq and Nigeria)
• On the other hand, Iran, Libya and Venezuela are still cutting production
• The United States reduced production faster than expected, however production was restored in some places after the price returned to 35-40 USD per barrel.
• Still, drilling activity in the US is very low. The rebound in oil drilling activity may be a sign of the end of the rebound in the oil market

Drilling activity in the US remains very low. The number of completed wells has dropped dramatically. Source: Bloomberg

Oil breaks through the highs of March 11, following a sale-off related to the termination of an earlier OPEC + agreement. Source: xStation5

Gold:

• Option market investors are not afraid of drastic price increases in the near future. Large divergence with risk-reverse indices
• Copper to gold ratio has rebounded significantly, while the copper to silver ratio remains very low. Yields on 10-year US bonds remain "in the middle" in terms of the dynamics. This may be a sign that silver is taking the lead, but also that the rebound in industrial metal prices was too strong.
• Gold to silver ratio falls below 100

Option market investors have remained neutral recently. They are not afraid of the risk of a sudden increase in gold prices. Source: Bloomberg

Copper to gold ratio increased significantly, while copper to silver fell. Silver has been in a strong upward trend recently. Yields in the US remain low due to central bank activities, although the lack of a clear rebound may also indicate that the rebound on industrial metals (copper) was too rapid. Source: Bloomberg