Commodity Wrap - Oil, Natural Gas, Wheat, Copper (25.07.2023)

Oil

• Crude oil bounced following news of increased economic stimulus in China

• Both Brent and WTI clearly broke above the 200-session average. The last time oil broke through this average (in 2021) in response, among other factors, to falling inventories, a sharp price rebound followed. Later, we had the start of the war in Ukraine, which pushed the price from around 95 to 130 USD per barrel

• The breakout range from consolidation indicates potential for oil prices to rise to around 85 USD per barrel. Another significant resistance level can be found around 88 USD per barrel, which is marked with local peaks from the turn of 2022 and 2023

OIL broke above the 200-session moving average. Should bulls manage to hold the price above this average this week, one cannot rule out the possibility of the upward move extending towards the next major resistance in the $85 per barrel area. Source: xStation5

Natural Gas

• Temperatures in the US remain high, but this has not increased demand enough to lead to a significant decrease in comparative inventories

• Inventory growth in the US is still above last year's levels and above the 5-year average

• Oil is starting to rebound clearly when looking at a 1-year standard deviation. However, the price is still lagging significantly when compared to the 5-year average.

• Natural gas production remains well above 100 billion cubic feet per day (bcfd) despite a sharp decline in number of drilling rigs in the US

• Seasonality suggests that the current upward trend may continue

• The forward curve remains in contango, although the last rollover was negative for the price, indicating short-term increased demand. The upcoming September contract is very close in price, and the October contract is not much higher. A significant contango starts from November and lasts until January

High temperatures in the United States continue. Source: Bloomberg

Comparative inventories show that natural gas stockpiles continue to increase. Taking a look at 5-year average, situation may start to resemble mid-2020, shortly before prices took off. Source: Bloomberg, XTB

Prices are recovering after deviating by 2 standard deviations below 1-year average. Prices remain very low in historical terms and it starts to look like local lows from 2012, 2016 and 2020. Source: Bloomberg, XTB

Long-term average performance of natural gas prices as well as 5-year average performance shows that natural gas prices may continue to climb in the near-term. On the other hand, natural gas prices performed poorly at the beginning of this year. Source: Bloomberg, XTB

Wheat

• Russia attacked wheat export-related infrastructure in the Ukrainian port of Odessa on Monday, July 24th, leading to a sharp increase in prices

• Russia claims that the United Nations did not fulfill the agreement to support the export of agricultural products from Russia and accused Ukraine of sending its grain to developed nations

• Russia also indicates that fulfilling the commitments of the agreement will lead to a return to negotiations

• However, Russia is not entirely truthful in some of its accusations. One of the Russian banks still has the ability to conduct transactions through the SWIFT system, and the export of fertilizers is not blocked

• Experts in the Russian grain market believe that a return to the agreement may be possible when the grain from last year's very good season is sold from Russian warehouses and current harvests are added to the stocks. This could mean that supply shortages may persist through August and September, which is the wheat harvesting period

• Meanwhile, the quality of spring wheat in the USA is declining (the share of top-quality crops decreased from 51% to 49%). Wheat harvest is accelerating – 68% of winter wheat has been harvested, which is below the 75% 5-year average.

WHEAT tested 770 cents per bushel area but has since pulled back to the 740 cents area. This is an important resistance zone marked with local lows from 2021 and 2022. Simultaneously, a double top may be forming on the wheat market but the situation in Ukraine is highly uncertain and may continue to generate volatile moves on grains. Prices may remain at elevated levels unless Black Sea grain deal is resumed. Source: xStation5

Copper

• Promises of greater economic stimulus in China have led to a rebound in market prices

• However, when looking at hard data, there is significant weakness in China's credit impulse. If China's credit impulse works with a delay of 12-18 months, we may expect a minor rebound at first, followed by stagnation

• On the other hand, a massive increase in demand is expected in the coming years due to the development of technology related to energy transformation.

• S&P Global predicts that the current demand of about 25 million tons could double by 2035. Even current mining production of approximately 22 million tons is insufficient to meet the present demand (although it's worth noting that there is a relatively high rate of copper recycling)

• More conservative estimates suggest that copper demand could reach 28 million tons (according to IEA) by 2030. At the same time, McKinsey predicts that mine production will remain close to the current level of 22 million tons

• Interestingly, current copper inventories remain near record-low levels, similar to what was observed just before the peak around 2021 and 2022, and then at the beginning of 2023

Credit impulse in China dropped significantly and suggests potential for small gains in near-term, followed by a consolidation. Source: Bloomberg, XTB

Copper stockpiles on global exchanges have dropped significantly recently. Price lagged by 100 sessions shows quite a significant correlation with inventories, suggesting that price rebound in near-term could be on the cards. Source: Bloomberg, XTB

Price is currently testing an important resistance in the 8,666 USD area as well as the upper limit of the triangle pattern. Seasonal patterns suggest that long-term rebound may begin by the end of this month. Source: xStation5