Commodity Wrap - Oil, Gold, Natural Gas, Coffee (05.12.2023)

Oil

• OPEC+ has decided on additional voluntary production cuts from countries such as Iraq and the United Arab Emirates. Russia will also extend its production cut
• Saudi Arabia extends an additional production cut of 1 million barrels per day, while Russia extends its export cut by 300,000 barrels per day
• In theory, the total new cuts are expected to be 1 million barrels per day, adding to the cumulative cuts of 2.2 million barrels per day since April of this year (excluding Saudi Arabia and Russian export cuts)
• However, the actual additional cut may be significantly smaller, possibly around 0.6-0.7 million barrels per day, assuming all new countries voluntarily reduce production
• In the new OPEC+ agreement, production targets for African countries were also lowered, though these nations are not satisfied with such a decision
• Saudi Minister of Energy indicated that the additional production cut may be extended beyond Q1 2024
• Brazil is set to join OPEC+ as an observer only. Brazil aims for further production growth and to become the world's fourth-largest producer after the United States, Saudi Arabia and Russia
• The oil market reacted positively before the OPEC+ decision last week, but investors do not seem satisfied with the decision itself, and oil remains under pressure

Oil price is approaching a 5-year average, what may provide support just as it was the case in 2011-2012 period. Source: Bloomberg Finance LP, XTB

Comparative inventories have been rebound as of late, but it seems that they may revert to declines given another OPEC+ output cut. A drop in comparative inventories would hint that a local low is about to or has already been reached. Source: Bloomberg Finance LP, XTB

Gold

• Gold closed at historic highs on Friday, December 1, above $2070 per ounce. Subsequently, intraday historical highs were set on December 4, Monday, near the level of $2150 per ounce.
• However, gold experienced a significant correction on Monday, dropping by over $100 per ounce from daily highs, and the price closed just above $2,000 per ounce
• High gold prices are a result of a noticeable decline in yields in the US. The 10-year US yields have fallen in recent weeks from around 5% to 4.2%
• There has also been a significant correlation between gold and Bitcoin in recent weeks, although this may also be attributed to the correlation with the US dollar and yields

Gold prices traded around 2 standard deviations above 1- and 5-year averages when record highs were reached, what may have been seen as a sign of gold being overbought. Source: Bloomberg Finance LP, XTB

Yields are at their lowest since September, and previously, prices around $2000 per ounce were justified by yields around 3.5%. Further yield declines could justify maintaining prices above the round level, although recently, we've observed an increase in uncertainty ahead of the next Fed decision. Significant easing of financial conditions in the market could theoretically prompt the Fed to make another cut and initiate a larger correction in the gold market. However, this is not the baseline scenario. Source: Bloomberg Finance LP, XTB.

GOLD finished November above $2,000 per ounce - the first such monthly close in history. However, gold price launched December with a pullback even as seasonality remains bullish. Source: xStation5

Natural Gas

• Both American and European natural gas prices remain under pressure due to high available supply, though the United States is currently experiencing significantly more downward pressure
• Data on inventory changes for the last week of November showed an increase in reserves, a phenomenon not observed in the past 5 years when considering seasonality
• Weather conditions in the USA remain very favorable. Current forecasts do not indicate the arrival of cold weather, although, of course, one cannot rule out surprises, such as the one that occurred last year at the end of the first week of December. Prices rose by around 30% at that time but then began to fall just before rollover
• Gas supply in November in the US reached a record level of over 108 billion cubic feet per day (bcfd). There was also an increase in liquefied natural gas (LNG) exports, exceeding 14 bcfd. Nevertheless, there is a noticeable return to an increase in comparative reserves in the market

Comparative inventories for US natural gas began to climb once again, what may limit room for rebound in prices. Source: Bloomberg Finance LP, XTB

NATGAS dropped by 25% off a local high, excluding futures contract rollover. A key support can be found in the $2.50/MMBTu area. Seasonality patterns suggest a period of range trading in the nearby future, followed by declines in the second half of December. Source: xStation5

Coffee

• Inventories tracked by ICE (Intercontinental Exchange) experienced a drastic decline just before the end of November, but they have currently stabilized and stopped decreasing. If inventories start rebounding quickly, it may indicate a significant actual oversupply in the market
• Wateridge from Tropical Research Services sees an oversupply of around 1.7 million bags in the 2023/2024 season, which is considerably less than the oversupply forecasted by the USDA (approximately 4 million bags). Production and global demand estimates are significantly higher than those indicated in the USDA report. Additionally, the analyst predicts a substantial increase in production in 2024/2025 if weather conditions remain favorable
• The ICO (International Coffee Organization) anticipates an oversupply of 1 million bags in the 2023/2024 season. According to the World Coffee Organization, despite the demand reaching historical highs, the growth dynamics are expected to be lower than that of supply
• Market analysis organizations focusing on coffee point to continued positive prospects for Arabica production but a decline in Robusta production, potentially increasing the divergence between benchmarks

Coffee inventories according to ICE have dropped significantly just before December 1, 2023. This month will be key in assessing whether oversupply in the coffee market is significant or moderate. Source: Bloomberg Finance LP, XTB

Coffee price is pulling back significantly since the beginning of December, what is linked to a potential return of short sellers to the markets as well as potential increase in ICE inventories in the coming weeks. It should be noted that speculative positioning on coffee reach April-June 2023 highs before prices pulled back. It should also be noted that the drop in coffee prices coincided with a weakening of BRL. Source: xStation5