Commodity Wrap - Oil, Silver, Gas, Cocoa (10/09/2024)

Oil:

• OPEC+ decides to delay production growth by two months. This means that supply from the cartel will theoretically increase by 180 thousand barrels per day, instead of 540 thousand barrels per day
• A Platts survey indicates that OPEC+ oil production has fallen by 300 thousand barrels per day, mainly due to declines in production in Libya. Libya continues to suspend exports from its ports. Overproduction from countries with limits amounted to 327 thousand barrels per day. Overproduction is mainly due to Iraq (+0.4 mbd)
• A Kpler analyst indicates that Libyan oil can easily be replaced with WTI oil from the US, which has very similar parameters. Therefore, an increase in demand for American oil cannot be ruled out in the coming weeks.
• In August alone, WTI oil imports rose to almost 1.5 million barrels/d, which is almost a 25% rebound on a monthly basis
• Looking at the futures curve, and specifically at the difference in the nearest contracts, we see a potential signal of excessive oversoldness in Brent oil. The difference fell to USD 0.4, which generated an oversold signal twice in recent weeks
• However, it is still far from the signals from 2022 or 2023, when the difference between contracts (backwardation) fell to USD 0.1-0.3.
• In the case of WTI oil, the difference between contracts is USD 0.7, and the oversold signal was generated primarily around USD 0.2-0.3
• In turn, the behavior of the crack spread and WTI oil may indicate that oil prices have adjusted to falling margins. A rebound in the crack spread from around USD 15-16 could also be a signal of recovery

We can observe a signal of oversold Brent crude oil, which may mean that support is in the range of USD 70-72. Source: Bloomberg Finance LP, XTB

WTI crude oil has adjusted to the crack spread. With slightly lower oil prices, processors can now obtain slightly higher margins, which may encourage them to buy more oil in the coming weeks. Source: Bloomberg Finance LP, XTB

Inventories of petroleum products have fallen to around the 5-year low and last year's levels. If we see a continuation of declines in the coming weeks, it may mean that the fuel market in the US is still in deficit and this may suggest too low prices. Source: Bloomberg Finance LP, XTB

Brent crude oil has fallen to a very important demand zone in the range of USD 69-73 per barrel. Local lows from March 2022 are currently being tested. A breakout of these levels could prompt a decline towards USD 66 and a retracement of 61.8 of the entire uptrend from 2020 to 2022. However, at the moment there are fundamental indications that oil has already been oversold. Source: xStation5

Silver:

• The latest report from the Silver Institute shows that the deficit in recent years was much larger than initially thought. The deficit for this year is also expected to be quite significant and is to amount to over 6 tons
• Silver is experiencing much greater volatility compared to gold, which may still be related to the limited investment demand for silver. Since the last peak, silver has lost about 8% of its value, while in the case of gold, the price has lost less than 2% of its value
• Net speculative positions in silver remain at a relatively high level, around the peaks of 2020 and 2021. It is worth noting, however, that both short and long positions are being reduced, which is not conducive to price increases. The situation is completely different on the gold market, where long positions are still very high.
• Recently, we have been observing a much stronger correlation between silver and copper, which is of course related to the over 50% use of silver in industry and the fact that silver is mined together with copper. It is worth remembering, however, that we are observing a deficit on the silver market, while in the case of copper it is not so clear (we are observing a deficit of ore, but there is a lot of refined copper itself, which results from a large recovery)
• If support for copper is in the range of 8500-8600, it means that silver prices should not dive below 26.5 USD/oz, unless fundamentals or the market situation change.

The Silver Institute shows that in previous years the deficit on the market was larger than the initial estimates. At the same time, in 2024 the deficit is to amount to almost 7 thousand tons, which is related to growing demand from the industry. Investment demand remains somewhat subdued, looking at a strong 2022. Source: Bloomberg Finance LP, XTB

ETFs started buying silver in July, but have recently remained rather passive. Nevertheless, the Fed's initiation of interest rate cuts may change this situation, as it was in 2020. Sources: Bloomberg Finance LP, XTB

We are not currently observing upward pressure from speculators on the silver market. A drop in open interest is usually not positive for a given instrument. Source: Bloomberg Finance LP, XTB

Seasonality in silver indicates possible further declines in the next 2 weeks. At the same time, we are observing a much greater correlation between the silver price and copper than with the gold price. If silver and gold fall in the near future in line with seasonality, lower levels may seem attractive, considering the long-term behavior of silver prices after the previous interest rate cuts by the Fed. Source: xStation5

NATGAS

• The price of gas rose very strongly at the end of the previous week, reaching almost 3.3 USD/MMBTU, closing at the highest level since the first half of July. Nevertheless, the price opens with a clear downward gap at the beginning of the new week.
• The price increase last week is, among others, due to another low increase in inventories, which causes a decrease in comparative inventories
• Despite everything, the level of inventories remains at a very high level, clearly above the 5-year average
• The level of filling of storage facilities in Europe is over 90%, although recently we have observed increased pressure on the growth of TTF gas prices. However, these prices remain below EUR 40/MWh. Last year, in the July-October period, the prices of this gas increased from approx. EUR 20 to 50/MWh, which also supported moderate growth in the American gas market

Inventories in the US are already falling clearly below the 5-year maximum, but are still above the 5-year average and above last year's levels. Although the level of inventories in Europe and the US before the winter season seems safe, a significant increase in volatility cannot be ruled out in the event of weather anomalies in the autumn-winter period. Source: Bloomberg Finance LP, XTB

Net positions in gas have rebounded from the long-term average. We are observing a stabilization of the number of short positions, but long positions have been reduced recently. Source: Bloomberg Finance LP, XTB

Gas prices remain in an upward trend and a potential inverted head and shoulders formation with a neckline around 2.82 USD/MMBTU is still in play. The 50 SMA may be crossed in the near future. Previously, when we had such a situation, the price was in consolidation for 3 weeks before a very strong breakout upwards. However, it should be remembered that the upcoming rollover next week will be at least around 10%. Source: xStation5

Cocoa

• The price of cocoa clearly lost ground last week and over the last 3 months the price has already lost 25% (taking into account also the rollover of futures contracts)
• The price defends an important support level of 7,000 USD per tonne
• In the coming weeks, the cocoa harvest will begin in the so-called proper season in West African countries. Data from the first deliveries will show how the situation looks compared to the previous year and will allow us to assess the level of potential deficit or oversupply in the 2024/2025 season.
• Analysts from BMI, a company associated with the agricultural commodity market, point to an improvement in the weather in West African countries, which is expected to affect good harvest results. This may mean a continuation of the downward trend. However, it is worth remembering that the forward curve indicates a further decline towards USD 5,000-6,000 per tonne next year

Long-term seasonality related to the start of harvest suggests price declines in the coming weeks and a rebound at the very end of the year. Source: Bloomberg Finance LP, XTB

The price is bouncing off important support around USD 7,000 per tonne, but we have a downward trend line ahead of us and a retracement of 50.0, at which profits from the last rebound could potentially be realized. Source: xStation5