Commodity Wrap - Oil, Natural Gas, Gold, Coffee (30.08.2022)

Oil

• Market starts to price-in potential OPEC+ output cuts by the end of the year

• Next OPEC+ meeting will be held on September 5, 2022 and given recent oil price gains, one cannot rule out some profit taking even if cartel announces small output cut

• According to IEA chief, further drop in strategic reserves cannot be ruled out

• Goldman Sachs notes that among the 5 most shorted US stocks, 3 come from the energy sector - Occidental, Exxon and Chevron

• Futures curve for Brent starts to resemble the one from a month ago, when pricing reflected tight physical oil market (blue and orange lines on the chart below)

• Strategic reserves continue to drop quickly while commercial stockpiles remain stable. Without continuation of strategic oil reserve releases, commercial stockpiles would drop to multi-year lows

Oil futures curve starts to resemble the one from a month ago, which reflected a tight physical market. This means that short-term upward pressure on prices may remain. Source: Bloomberg

US strategic oil reserves continue to drop while commercial stockpiles remained more or less stable for the past few months. However, if strategic reserve release is halted, commercial stockpiles may drop to multi-year lows. Source: Bloomberg

On the other hand, global commercial stockpiles and inventories of oil derivatives increased, which triggered a price drop. Inventory levels are far off long-term averages. Source: Bloomberg

Natural Gas

• Natural gas inventories in Europe are almost 80% full, with German inventories sitting at 83% of capacity. Such levels were not expected to be reached until the beginning of November

• However, it should be noted that full inventories would last for only 2 full winter months for most EU countries in case of complete halt to supplies

• Gazprom continues to reduce gas supplies to Europe. In case of Nord Stream 1 flows sit at just 20% of capacity

• French Engie says that Gazprom informed it that it will reduce gas flows further starting from today

• European natural gas futures dropped back below €300 per MWh

US natural gas stockpiles increased 60 bcf last week. Such an increase was possible, thanks to lower domestic demand. Freeport LNG terminal will resume operations in mid-November and therefore stockpiles should be able to grow more until then. Nevertheless, domestic consumption in the US remains higher than usual. Source: Bloomberg

US natural gas prices (NATGAS) painted a head and shoulders pattern in the $9 per MMBtu area. Current situation resembles the one from the turn of May and June, that was followed by a 33% drop in prices and a break below an important resistance. A textbook range of current head and shoulders pattern points to drop to around $8.40. Source: xStation5

Gold

• In spite of further increasing expectations for rate hikes in the US, gold price remains stable above $1,700 per ounce

• USD performance is a key driver for gold right now. If USD starts to underperform compared to EUR, gold may catch a bid

• EUR is benefitting from increasing odds of a big rate hike at the September ECB meeting. On the other hand, high energy prices are denting the outlook for the EU economy 

• Gold struggles amid lack of investment demand - number of long speculative positions continues to drop and is the lowest since mid-2019

• Number of short positions rebounds. ETFs continue to be net sellers of gold but holdings remain above low levels from the beginning of the year

Lack of investment demand for gold. Source: Bloomberg

Gold may invalidate an important bullish signal on a monthly chart. Bullish scenario would assume a price jump towards $1,860 while a bearish scenario, if realized, may see a price drop below $1,720 per ounce. Source: xStation5

Coffee

• Recent coffee price increases were driven by further drop in inventories, stronger BRL and lack of rainfall in Brazil, which dampens outlook for production

• Coffee struggles to break above 240 cents per pound but there is still a potential for stronger BRL

• Number of short positions has been at extremely low levels since the end-2022. Number of long positions is small but has rebounded recently

• Coffee stockpiles dropped to 600 thousand back. Earlier, 1 million bags was seen as an extremely low level. Annual global consumption is estimate at 165 million bags

• A significant delays in coffee deliveries around the world were reported recently, what is related to low levels of inventories and logistics issues

COFFEE benefits from BRL strengthening. Moreover, the fundamental situation also supports higher coffee prices. On the other hand, global recession could dampen coffee demand outlook. Source: xStation5