Commodity Wrap - Oil, Natural Gas, Cotton, Gold (05.10.2021)

Oil

• OPEC+ decided to maintain its policy on output increases

• OPEC+ production will increased by 400k bpd in November

• United States and India called for bigger output hikes

• According to S&P Platts, oil market deficit is expected to reach 1.2-1.5m bpd in October and 0.8-1.0m bpd in November

• OPEC+ assumes that demand increases will slow in the final quarter of 2021

• OPEC+ does not want to increase production by too much as risk of demand hit from the fourth wave of Covid-19 pandemic remains real

• BofA expects oil price to hit $100 per barrel in case of a cold winter

• JPMorgan claims that current investments into new projects are low and may not be enough to cover demand increases expected by 2025

• JPMorgan also sees a possibility of increased demand for oil due to high natural gas prices

• Jump in fuel prices in the United States makes Wall Street worried about a more persistent inflation and potential action from Fed to fight it

• OPEC has a lot of spare capacity therefore scenario of oil hitting $100 is real but should not last long

• Iraqi oil minister said that current oil price levels start to be an issue for consumers

OPEC+ policy assumes that output will be increased until October 2022. The chart above shows that recent output increases were actually smaller than OPEC+ allowed. Source: Energy Context

According to JPMorgan, the average deficit in the 2022-2025 period may be as high as 1.7 million bpd. Having said that, market balance may depend not only on the pace of output increases in OPEC+ countries but also in countries like Venezuela or Iran. Source: JPMorgan

OPEC has a lot of spare production capacity. Source: Bloomberg

Oil futures curve is getting more and more steep, signalling an increase in short-term demand. Source: Bloomberg

Natural Gas

• Natural gas prices in Europe continue to rise and have reached €110 per megawatt-hour (MWh)

• JPMorgan expects demand to start shifting from natural gas to oil and coal

• On the other hand, coal is very expensive and its availability on the market is currently limited 

• US natural gas inventories increased significantly last week. On the other hand, natural gas production in the US remains quite insensitive to recent price increases. Such a situation shows that price rally still has fundamental backing

Natural gas prices in Europe continue to rise, while prices in the United States move sideways. However, US production still has not been fully restored following recent hurricanes. Source: Bloomberg

Cotton

• US exports to China have diminished significantly recently

• Oil prices continue to have a large impact on cotton prices, due to increases in prices of cotton alternatives

• Interestingly, crop quality in the United States is deteriorating but still holds above 5-year average - weather conditions in southern states remains solid and may improve outlook for harvest

• High cotton prices will also continue to fuel inflation in the United States and around the world, and support it at elevated levels

• Futures curve for cotton is in backwardation. Year-ahead prices are lower by around 15 cents per pound

US cotton exports to China spiked in recent weeks. Source: Bloomberg

Current situation starts to resemble the one from 2010. In case oil prices continue to rise and weather turns out to be unfavourable for harvest, cotton prices may skyrocket. Source: xStation5

Gold

• Gold market volatility has been high recently

• Monetary policy prospects suggest that gold price should find itself under pressure

• Speculators reduce long positions, ETFs begin to sell gold holdings

• Bitcoin resumed upward move, Nasdaq is underperforming - gold does not necessarily has to act as safe haven during market turmoil, especially if US dollar strengthens

• Yields remain a key factor for gold prices going forward

ETFs are selling out gold. ETF gold holdings dropped to a year-to-date low. Source: Bloomberg

Yields remain a key factor for gold prices. Source: Bloomberg