Commodity Wrap - Oil, Copper, Soybean Oil, Lithium (29.03.2022)

Oil

• United Arab Emirates do not plan to leave OPEC in order to boost oil production

• According UAE, Russia will remain OPEC+ member

• In spite of calls from G7 countries, it is unlikely that any change will be made to OPEC+ output hike policy this Thursday

• Lockdown in Shanghai raises concerns over lower oil demand in China

• Russian oil exports dropped 26% YoY in  a week of March 17-23

• Black market of Russian oil and other commodities is booming with more vessels traveling with positioning switched off

• Transneft, operator of the Russian oil pipeline system, points that oil intake into its pipeline system will need to be reduced as storage is almost full already. It shows that export sanctions are having a real and big impact on Russian oil sector

• Taking at historical behavior of oil prices during Iraq-Kuwait war of 2007-2008 period, further price gain on oil market remain possible

• Strong upward pressure on oil price may arrive if real deficit deepens or flows of Russian oil to EU are halted

Comparing current oil price performance to the one from 2007-2008 period, we can see that there is still some room for gains and widening deficit on the oil market may provide fuel to extend the rally. Source: Bloomberg, XTB

Also comparisons made to the Iraq-Kuwait war show that further price gains. Back then a ban on Iraqi oil was imposed. Russian exports have dropped significantly already but a lot will depend on decisions made by the EU and Russia in the coming days. Source: Bloomberg, XTB

Copper

• 25-delta skew for copper futures with May delivering jumped from 0.6 to above 2.0%. Positive option skew signals that investors are willing to pay more for call options than put options - demand for upside protection increases

• On the other hand, one cannot forget about looming slowdown in China, which may lead to lower demand for industrial commodities, like oil or copper

• China holds around 80% of global copper stockpiles

• It is expected that Chinese manufacturing PMI for March will drop to the contraction zone below 50 pts. Morgan Stanley expects a drop to as low as 48 pts

Positive option skew on copper market can be spotted since the beginning of March, signaling that investors are more interested in upside than downside protection. Source: Bloomberg

On the other hand, a thing to consider is that we are past the peak of a current credit impulse cycle in China. Correlation between Chinese credit impulse and copper price is clear but not instant. Having said that, copper prices may remain under pressure until China decides on new stimulus measures. Source: Bloomberg, XTB

The upcoming Chinese PMI release may have a big impact on copper and oil markets. Morgan Stanley expects the manufacturing gauge to drop to the contraction zone below 50 pts. Spare for two disastrous readings during the 2008 and 2020 crises, this would be the lowest reading since the beginning of data history in 2005. Source: Morgan Stanley

Soybean Oil

• Soybean oil is the second most consumed vegetable oil (after palm oil)

• SOYOIL is a new instrument available at xStation platform

• Prices of vegetable oils jumped around the world, adding another inflationary factor 

• Soybean oil prices are highly correlated with soybean prices. The biggest producers and consumers of soybean oil are countries with biggest soybean production

• Price of soybean oil, as well as palm oil, may increase not only due to higher soybean prices but also due to Russia-Ukraine war - both countries are key producers of sunflower oil

Soybean oil is the second most consumed type of vegetable oil. Source: Statista

China, the United States, Brazil and Argentina are the biggest producers and consumers of soybean oil. Source: USDA

In spite of SOYBEAN price holding firm, SOYOIL experienced strong declines recently. 70 cents per pound area is a key support to watch. Usually, soybean prices are more volatile than soybean oil prices. Source: xStation5

Lithium

• Lithium prices rallied in the past few months as demand increased and supply was limited

• Lithium is a commodity that is being traded all around the world but there is not single global public market for lithium trade. Lithium, and more precisely its compounds, are being traded only in China. However, as majority of transactions is made directly between suppliers and end-consumers, it is hard to develop a lithium price benchmark

• Investors can get indirect exposure to lithium market on xStation platform, via for example Lithium Americas Corp (LAC.US). This company is involved in lithium and potassium extraction mostly in South America

• Significant increase in lithium or nickel prices may lead to demand destruction for electric vehicles, according to Morgan Stanley

Lithium Americas Corp (LAC.US) has been recovering since mid-March. Previous correction was driven by strong declines on the overall US market, even as lithium prices increased. Source: xStation5

Lithium in China trades above $70,000 per tonne. However, the latest pullback on the nickel market to $30,000 area may encourage substitution of lithium batteries for batteries based on nickel or other metals. Source: Bloomberg

The biggest producer of lithium (lithium oxide in this case) is Chile while Asian countries are the biggest consumers. Source: OEC