Commodity Wrap - Oil, Silver, Cocoa, Emissions (11.01.2022)

Oil

• Rumours that OPEC+ will be unable to maintain output increases of 400k bpd per month intensify

• Recent oil price gains were results of supply disruptions in Libya and Kazakhstan. However, production in those countries has been almost fully restored already

• The United States plans to resume a policy of reducing investments in oil projects. Biden administration wants to ban issuing new permits for oil exploration projects in Alaska

• Spare production capacity in Saudi Arabia dropped to around 1.5 million barrels per day. These are pre-pandemic levels from a period when production was being reduced

• Iranian production was stable in recent months. Previous forecasts pointing to an oversupply on the oil market assumed further increases in Iranian output. Given slow progress in nuclear talks, increase in Iranian oil production looks less likely

• An expected oversupply on the oil market this year may not materialize given low spare production capacity in Saudi Arabia, issues with boosting production in Russia or bleak outlook for nuclear agreement

Saudi Arabia has only 1.5 million barrels in spare production capacity, similarly as it was before the pandemic. Source: Bloomberg

Iranian oil production has been stable in recent months and around 1.5 million barrels lower compared to the period when the nuclear accord was in effect. Source: Bloomberg

Silver

• Peru produced over 3 million kilograms of silver in January-November 2021 period, marking a 23.9% YoY increase

• Silver ETFs are experiencing the longest streak of quarterly sales - 3 quarters

• Silver used to gain during rate hike cycles in the past. However, it should be noted that those were mostly moderate gains starting from low levels (around $10 per ounce). Current market price is over two times higher

Silver used to gain during US rate hike cycles. However, gains usually started from much lower price levels than now. Source: Bloomberg

ETFs were net sellers of silver during the past 3 quarters. Current quarter may be mixed amid expectations of rate hike increases. Source: Bloomberg

Cocoa

• Net speculative positioning on cocoa increased recently but remains negative. This was led by a bigger drop in the number of open short positions than drop in the number of open long positions. Total number of open positions also dropped

• Weather conditions in Nigeria during mid-season are rather poor. Lack of heavy rainfalls since November may lower outlook for production

• On the other hand, production outlook for key cocoa growing region - Ivory Coast and Ghana - remains solid

• Cocoa inventories at the beginning of a new year sit at the highest level in 10-year for the period. However, inventories were dropping at the end of the previous year

Cocoa stockpiles are very high at the beginning of a new year as demand was lowered due to the pandemic. Demand should start to recover as pandemic recedes. Source: Bloomberg

Cocoa price has been trading in a wide range since 2018 and in a narrower range since the end of 2020. It should be noted that speculative positioning is rebounding from a very low level, what used to be followed by price recovery in the past. Source: Bloomberg

CO2 Emissions

• SEB expects CO2 emission prices will average at €100 per contract in 2022 and 2023

• High natural gas prices, especially in Europe, make it more profitable to use coal for heating, even amid high emissions prices

• Schieldrop, chief commodity analyst of SEB, points that coal will remain the cheapest fuel until 2023

• He also thinks that only political intervention can lower emission prices

• Imposing emission taxes in various place in the world may boost volatility on the emissions market

• Lack of wind in Germany becomes an issue

Wind power generation in Germany dropped to the lowest level in at least 3 weeks and sits near the lowest levels in 3 years. Source: Bloomberg

Natural gas prices in Europe dropped but remain at elevated levels. Ratio of natural gas to coal price is also much lower than it used to be in December, suggesting that emission contracts should trade in the €70-75 range. Nevertheless even the latest rebound in coal prices may not derail the uptrend on emissions contracts as natural gas inventories will drop more steeply amid colder weather. Source: Bloomberg

Forecasts point to an average EMISS price of €100 per contract in 2022. However, should natural gas prices drop and weather gets warmer, a price correction towards the €70-75 area cannot be ruled out. Source: xStation5