Commodity wrap - Oil, gold, sugar, wheat (26/05/20)

• Significant spread reduction between Brent and WTI crude oil with upward pressure on the market (spread below $ 2)

• According to Russia, market balancing will take place in June, which will lead to further price increases
• The Russian Minister of Energy indicates that supply has been reduced globally by around 14-15 million barrels today, and the oversupply is around 7-12 million
• IHS indicates that demand in China has returned to 92% compared to last year's levels. Demand in April reached 12.7 million barrels per day. The year 2020 is expected to end with a fall in demand at 1.2 million barrels per day
• Chinese private refineries operate at the highest levels in history
• Road traffic data indicate a return to normality in the United States and Germany, an upward trend can also be seen in other countries
• Oil reserves in Cushing return to the 5-year average, there are currently no storage concerns

Mobility data show a return to normal in many economies. In Italy, traffic is currently only 1/4 lower in comparison with the baseline period of February and January. Source: Apple

 

• Gold holds high mainly due to investment demand and central banks activities
• Consumer demand related to jewelry sector is currently at a record weak level
• China imported only 4.7 tons of gold in April compared to 159 tons from the same period last year
• A huge increase in money supply in the world, especially in the United States, may lead to higher inflation. Therefore the demand for inflation-protecting assets may increase significantly
• ETFs have been increasing the amount of gold they have for 22 days in a row. This year, the amount of gold owned by the ETF has increased by 20%  to almost 100 million ounces. The price of gold has increased by around 15% this year.
• The number of open positions increases (this is usually a positive aspect for prices). Net positions are stabilizing

 

Sugar:
• The forward curve for the coming months is very flat, which indicates that speculators will not be able to use contango to store raw material
• The Brazilian Real has strengthened in the last 2 weeks, therefore a continuation of the upward correction is still possible
• Implied volatility has been stable for over a month, which indicates that the market is calming down (statistically, high volatility is unfavorable for the price)
• Sugar prices in Europe are starting to recover
• Long positioning begins to bounce back from the local bottom

 

• The quality of wheat crops in the US is declining, the risk of drought in the US and Europe
• A similar situation in terms of crops took place in 2017 - until July we observed a price rally
• Statistically, we should be in an upward trend at this point, which should last until July
• Net positioning has been decreasing recently, we now have a short net position (speculators)