Commodity Wrap - Oil, Natural Gas, Wheat, Silver (16.05.2023)

Oil

• US informed at the beginning of a week that it plans to purchase 3 million barrels of oil as part of SPR refilling. Offers can be submitted until the end of May while deliveries are scheduled for August
• This is a very small quantity compared to current SPR level of 363 million barrels (it was above 600 million two years ago). However, investors hope that as price drop below $70 per barrel, more DoE tenders will surface. Having said that, $70 per barrel area may serve as a floor for prices
• Oil market is in significant backwardation but futures curve has flattened significantly compared to a month ago situation, hinting that short-term demand is falling
• According to IEA, oil demand is accelerating quicker than previously thought, thanks to a strong demand in China. IEA points that demand will increase by 2.2m bpd in 2023, up from a previous forecast of 2m bpd increase
• IEA points that China accounts for around 60% of the demand increase. China reported record demand at 16m bpd in March data. On the other hand, it should be noted that China is largely relying on its own stockpiles and imports are not rising in-line with earlier announcements
• IEA expects OPEC+ output to drop by 850k bpd by the end of this year

Oil market futures curve remains in significant backwardation but at the same time it has flattened compared to a month ago situation, hinting at a relatively drop in demand. Source: Bloomberg

Oil comparative inventories are dropping. Nevertheless, should inventories continue to fall further, it could be a strong mid-term signal for oil price. Source: Bloomberg, XTB

Taking a look at price we can see that it manages to hold above the 5-year average. Oil looks oversold as far as 1-year average is considered as it trades 2 standard deviations below this average. Source: Bloomberg, XTB

Natural Gas

• Natural gas prices reacted positively to the drop in US drilling rigs. Drop was the biggest since 2016 while the number of drilling rigs dropped to the lowest level since the first half of 2022. This is one of the first signs of supply issues in the United States
• Simultaneously, data shows that export capacity is almost fully utilized and that use of gas in electricity generation is on the rise
• Comparative inventories are flashing a signal at a 5-year average. Should supply start to drop and demand remain elevated, it could lead to a drop in comparative inventories and provide a support for natural gas prices
• On the other hand,  1-year average in comparative inventories data does not flash any strong signal yet

A significant drop in the number of active gas rigs in the United States is driven by low natural gas prices. Source: Bloomberg, XTB

Contrarian signal, pointing to an excessive oversupply, surfaced at inventories data compared to 5-year average. On the other hand, a similar signal has not yet been flashed on 1-year average. Source: Bloomberg, XTB

Wheat

• Black Sea grain deal is set to terminate on May 18, 2023 but United Nations are still trying to secure an extension
• Politico reported over the weekend that Russia has agreed to a 60-day extension
• Grain prices remain elevated, driven by concerns over US crops. Only 10% of winter wheat in Kansas, a key production state, is in good or excellent quality. Quality of crops in whole-US is estimated at 29%, what is a slight improvement compared to a 25% record low from end-April
• It should be noted that planting of corn and soybean is progressing much quicker than it did a year ago
• Number of open short positions on wheat continues to rise but not as quickly as in case of soybean or corn
• Wheat market is in contango until 2025 and slope of the curve increased, hinting at an oversupply in the short-term

Number of short positions on wheat continues to rise. Source: Bloomberg, XTB

Wheat prices climbed amid uncertainty over the future of Black Sea grain deal as well as uncertainty over US wheat crops. Prices reached a short-term resistance zone marked with lows from March and April. Seasonal patterns hint at a possibility of a pull back in May. Source: xStation5

Silver

• Stronger US dollar and uncertainty over debt ceiling are leading to an increased uncertainty on the precious metals market
• Should US default on its debt, markets may become more volatile, similarly to the beginning of pandemic when all asset classes dropped and demand for cash increased
• Silver looks attractive from a fundamental point of view, especially when we take a look at gold-to-silver ratio which currently sits at 84. Long-term average is 57, average since 2000 is 67 while 10-year average is 73
• Next CFTC data will show whether any profit taking took place on the silver market after recent gains. If not, silver may resume climbing. Gold trading at $2,100, which is still possible, silver should trade at least at the level of 2022 highs in the $26-27 per ounce area

Gold-to-silver price ratio. This ratio sits above long-term moving averages but one should keep in mind that it tends to increase during recessions. Source: Bloomberg

Price dropped significantly last year and the drop could be overdone, at least when we compare it to performance of gold. Seasonal patterns suggest that gains on silver market may last until the first week of June with possibility of another strong upward impulse in early-July. Source: xStation5