Commodity Wrap - Oil, Gold, Silver, Coffee

Oil

• Investors wait for OPEC+ video meeting (Thursday). Output cuts will be discussed

• Donald Trump raised hopes for a cut of 10-15 million barrels per day

• Russia and other non-OPEC producers, in order not to lose market share, may want the United States to participate in cuts 

• Demand destruction in March and April may range from 15 to even 30 million barrels per day

• Demand for gasoline in the United States dropped by around 2-3 million barrels per day

• The most optimistic forecast assume 6% drop in demand compared to pre-crisis forecasts

• Oil inventories in the US rise amid lack of demand and drop in exports. Meanwhile, US production sits at around 13 million barrels per day

US oil output will start to fall in coming weeks or months due to high operating costs and low drilling activity. Source: Bloomberg

US oil stockpiles jump amid lack of domestic demand and drop in exports. Source: Bloomberg

Gold

• ETFs continue to increase gold holdings. Buying is being fuelled by low interest rates and capital accumulation at times of uncertainty

• 2020 may be slightly different than 2008. ETFs are acting completely differently as they keep buying precious metal in spite of rising prices. Nevertheless, one should keep in mind that at the end of 2008 a 3-year long rally on the gold market started.

• Significant reduction in the number of long positions on gold was accompanied by reduction in the number of short positions. Similar situation occurred in the second half of 2017 when gold price pulled back. On the other hand, the end of 2017 was very good for gold

• 2020, or at least the first half of it, will be hard for the jewellery demand as societies remain locked. On the other hand, mine production should also be limited

ETFs keep buying gold. We are currently near the local high and taking a look at the timeline of previous crises, the situation looks similar to 2008. This could be an important test for bulls. Source: Bloomberg, XTB Research

Reduction in the number of long and short positions is similar to the one observed in 2017. Source: Bloomberg

Silver

• Silver remains undervalued when we compare it to copper or 10-year US yields. Gold looks to be fairly valued

• Taking a 2008 as a proxy, declines on the silver market may not be over yet. Previous crisis hints that low may be reached within the next 2 months

• Number of long positions sits at an extremely low level, what hints at metal being oversold in the near-term. Weakness of the USD could be treated as buy signal

Copper-to-silver ratio (white line) is relatively high. US yields are very low (green line). Copper-to-gold ratio (yellow line) is priced in line with yields. Source: Bloomberg

Low on the silver market may still be ahead of us. Using 2008 as a proxy hints that low should be reached within the next 2 months. On the other hand, central banks were much quicker to act in 2020 than 2008. Source: Bloomberg

Number of long positions on silver decreased, which may be treated as a contrarian signal. Source: Bloomberg

Coffee

• Futures curve flatten significantly in comparison to the previous month. Currently annual contange amounts to around 5 cents per pound, down from 12 cents per pound a month ago

• Closures of ports may pose challenges for deliveries

• Coffee processors from around the world begin coffee purchases

• Harvest in Brazil may be impacted unless lockdown measures are eased. Coffee harvest is very labour intensive

• Coffee stockpiles continue to fall

Coffee stockpiles continue to decline, what can be related to purchases made by processors from all over the world. In spite of cafe closures, demand for coffee remains strong due to increased purchases at shops. Source: Bloomberg