Commodity Wrap - Oil, Natural Gas, Gold, Cocoa (27.09.2022)

Oil

• Oil companies prepare for hurricanes in the United States - BP and Chevron limit production in the Gulf of Mexico

• Early estimates suggest that hurricane Ian will not have much of an impact on oil platforms in the Gulf and onshore oil refineries

• Iraq says that OPEC is closely monitoring oil price developments now, what may suggest that cartel is considering additional actions

• According to UBS, a major OPEC output cut would be needed to end woes on the oil market

• On the other hand, it should be noted that OPEC+ is already producing around 3.6 million bpd less than agreed-on level. Having said that, any action would likely target countries that have increased production in recent months (Saudi Arabia, Russia, Iraq and United Arab Emirates)

• EU ban on Russian oil imports is set to go live in December

• However, media reports surfaced yesterday saying that oil price cap (also set to go live in December) may be delayed amid lack of agreed among EU members

• USD trades at 20-year highs and its strength is a major drag on economies that import oil

WTI dropped below $80 per barrel. The nearest key support to watch can be found in the $73 area, where the 50% retracement of the post-pandemic jump. Source: xStation5

Natural Gas

• Nord Stream AG informed about leaks in three pipelines in the Nord Stream system. Company also said that it is uncertain when infrastructure will be repaired

• Bloomberg reports that Europe is ready for the winter season. EU gas inventories are 87% full while German inventories are already 91% full, much quicker than earlier expected

• LNG demand in Europe is more or less twice as high as contracted deliveries, meaning that a lot of commodity will still have to be purchased at spot market (chart below)

• Latest data from the United States showed increase in gas inventories exceed 100 billion cubic feet - the biggest increase since October 2021. Another similar build could put more pressure on natural gas prices

• US natural gas continues to trade below key resistance levels

Majority of LNG is contracted by Asian customers. European demand is around twice as high as currently contracted long-term deliveries. On the other hand, 'flexible supply' will be able to satisfy demand but gas will need to be purchased at a relatively high spot price. Source: Bloomberg

Natural gas prices jumped after realizing around a third of head and shoulders pattern range. Moreover, natural gas prices dropped below the regression line of the post-Covid rally. Seasonal patterns suggest that a local low may be reached by the end of this week. Source: xStation5

Gold

• There is a high chance that monthly candlestick on GOLD will close below a key $1,700 price level

• Gold price trades near a regression line of the rebound lasting from 2015 low to highs reached just ahead of the pandemic

• If ongoing declines are similar to the ones from 2012-2013, the $1,440 area should be a key support

• Gold price gains are unlikely unless bonds start to gain as well. 2003-2007 period was the only time when we could observe strong gains on the gold market accompanied by a moderate pick-up in yields. However, that period was also marked by increased interest in ETFs that generate significant demand for physical gold market

• Moreover, USD was underperforming back then while now it is on the rise along with a pick-up in yields

Strong USD and high yields pushed the gold price below key support in the $1,700 area. Price is closing in on a regression line of 2015-2020 rally, what may suggest that a low on the market is looming. However, peak in Fed rates is still ahead therefore a scenario in which gold drops to as low as $1,440 (similar to 2012-2013 scenario) cannot be ruled out. Source: xStation5

Cocoa

• Massive sell-off on GBP mrket triggered cocoa price drop towards $2,200 per tonne

• Cocoa market is highly dependant on GBP as cocoa is quoted in GBP on London exchange and as arbitrage opportunities exist

• Cocoa price has rarely been dropping below $2,200 since 2019

• Speculative positioning on cocoa suggests that the market is significantly oversold, although it is not as extreme as in 2017 or 2018

• Seasonal patterns do not suggest any clear move. However, traders should keep in mind that cocoa harvest season begins in October and may trigger increase in price volatility

• Rabobank points to big declines in cocoa inventories in European ports, what may trigger jump in demand as inventories will be refilled

• Bloomberg reports that while weather conditions ahead of cocoa harvest season are good, lack of fertilizers may limit crops in the future periods

COCOA is underperforming amid GBP weakness but the bearish price gap has been quickly filled. While weather remains good ahead of the upcoming harvest, there is significant uncertainty over crop quality. Cocoa is significantly oversold by speculators. Source: xStation5