Commodity Wrap - Oil, Natural Gas, Gold, Copper (19.10.2021)

Oil

• Oil continues the uptrend. However, Brent has reached the first major hurdle in the $85 per barrel area

• Mercuria Energy Group points to a high likelihood of oil price reaching $100 per barrel in case of a cold winter. Should winter weather prove to be less severe, the Group expects oil prices to remain in the $80-90 range

• Number of active oil rigs in the United States is not rising. However, number of unfinished rigs is dropping significantly (construction is finished due to lower costs)

• US shale companies missed on the price rally due to oil prices being hedged at $40 per barrel. Companies are unable to lock-in current, high prices due to strong backwardation on the oil market. Situation leads to a poor outlook for higher US production

• Meanwhile, such a situation gives OPEC+ more leeway to continue to steer the market by maintaining or reducing output cuts

Similar upward impulses on the oil market lasted at least 4-6 months in the previous years. Current impulse has been in play for around 2-and-a-half months, suggesting that there is still room for prices to move higher. Potential for good weather in Europe and around the world remains a key risk as it may lower oil demand compared to natural gas demand. Source: xStation5

Natural Gas

• Natural gas prices in Europe and the United States dropped slightly. However, heating season is still ahead of us, what may lead to even bigger price swings - price gains in case of cold winter and steep declines in case of a warm winter

• Current weather in the United States is mild, what may lead to a build-up of inventories ahead of heating season launch

• Number of open futures positions dropped significantly. Reductions were made by both speculators and commercial parties

• Gazprom increased natural gas production. 93% of production capacity is being utilized now

• Temperatures in Russia are currently around 3 degrees lower than in 2020, what suggests that more gas may be used domestically. However, production continues to exceed domestic demand and export demand

• Nevertheless, further drop in temperature in Russia may limit availability of additional supply to Europe

Natural gas stockpiles in the United States have increased recently. Beginning of the regular heating season in the US and Europe is just days away. Source: EIA

Natural gas prices dropped to the lowest level since the second half of September. If recent weather forecasts turn to be right, a drop towards the upward trendline and the 100-session moving average cannot be ruled out. Seasonal patterns hint at a brief sideways move until the end of October and price peak in early-November. Source: xStation5

Gold

• Bond prices dropped around the world (pushing yields higher). Yield on US 10-year Treasuries remains at relatively low levels compared to current price growth dynamics

• Looking at year-to-date performance, bond prices drop the most since 2005

• Taper announcement has been bearish for gold historically but beginning of tapering led to gold price rebound

• Taper tantrum 2.0 may in fact be behind us already

• On the other hand, situation develops more quickly this time. Interest rate hikes may come sooner. This creates risk of gold price remaining under pressure

Bond prices dropped significantly around the world. Higher yields have a negative impact on gold. Source: Bloomberg

Bitcoin suggests that gold should be trading at lower levels. Source: xStation5

Taper announcement had just a brief, negative impact on gold in the past. Gold prices rebound later on. Situation looked similar when tapering actually began. It should be noted that subsequent gold price drops were a result of expected normalization of the US monetary policy. Source: xStation5

Copper

• Energy shortages in China have led to production being halted at some smelters, including copper smelters

• Copper stockpiles in China remain low, stockpiles on the LME dropped to the lowest level since 1998 briefly

• Speculative demand has returned to the market, as evidenced by Bitcoin price gains

• Increase in energy prices may have a positive, short-term effect on copper prices due to limited supply (smelters halting operations)

Copper trades near all-time highs. Should we see a break into uncharted waters, the next potential resistance to watch can be found near $11,750 - the 127.2% exterior retracement. Source: xStation5