Commodity Wrap - Oil, Zinc, Soybean, Silver

Oil

• Oil pulled back amid spike in new coronavirus cases. Demand concerns remain key driver

• Outbreaks in South Korea and Italy show that pandemic is nowhere near being contained

• On the other hand, mortality rate among young persons (less than 50 years) does not exceed 1%

• Backwardation on the oil market decreased as difference between the nearest futures contract and the next series dropped

• Refineries in Shandong, China operate at just 40% of the capacity. Shandong refiners accounted for the 25% of China’s capacity

• China’s refineries process around 10 million barrels per day against 14 million barrels per day at the end of December 2019 and an average of 13 million barrels per day for the whole 2019

• Significant decline in China’s demand. Gasoline stockpiles-to-production ratio in the Shandong region stands at 35% against last month’s 15%

Backwardation on the Brent market is decreasing, what hints at weaker demand for oil. Source: Bloomberg

Refineries in China operate at less than 50% of capacity. Source: Bloomberg

Zinc

• Zinc stockpiles increase by over 50% in February

• Zinc is the least oversold industrial metal amid concerns over economic slowdown triggered by coronavirus outbreak

• Zinc is primarily used in steel production, what means that demand for metal dropped significantly in the past few months

• Chinese stockpiles of reinforcing bars reached record high. This shows that demand dropped almost completely while production stalled

• China’s M1 money supply growth (9-month lead) does not paint a bright picture for the Chinese economy

• On the other hand, business cycle and JPM’s global PMI hints that economic recovery may be looming

China’s M1 money supply growth diverges from the credit impulse, what may hint at no reasons for PMIs to rebound. Source: Bloomberg

Bloomberg’s business cycle index as well as JPM’s global PMI point to a potential recovery. Source: Bloomberg

Zinc stockpiles on exchanges grew 50% in February (inverted axis). Source: Bloomberg

Zinc breaks below the neckline of the head and shoulders pattern and trades at the lowest level since 2016. Source: xStation5

Soybean

• USDA expects China will fail to meet target for agricultural purchases this year, what may point to revision in stockpiles estimates for the coming season

• Acreage is estimated at 85 million, in-line with expectations but higher than 84 million estimated in October

• Experts say that high assumptions for soybean, wheat and corn plantings are impossible to meet in current weather conditions

• In theory, such a situation may lead to a strong speculative rebound in spring

• Depreciation of the Brazilian real also exerts pressure on US soybean prices

Further depreciation of the Brazilian real may exert pressure on US soybean price due to a drop in competitiveness. Source: xStation5

Silver

• Change in holding of silver and gold ETFs looks strikingly different since the beginning of Q4 2019

• Silver ETFs sold 823.5k ounces at the beginning of this week. The biggest one-day sale since mid-January

• Capital Economics expects further gains on the precious metals market over the short-term. However, the firm expects precious metals to trade below current levels at the end of the year amid economic recovery

• CE expects gold price at $1400 and silver at $16.50 (around 10% decline against current levels)

Holdings of silver ETFs increased just 0.5% this year while holding of gold ETFs increased 3%. Source: Bloomberg

Silver price pulls back after surging to close to $19.00. The nearest support to watch is marked by the upward trendline and the 38.2% Fibo level in the $17.50 area. 2019 highs in $19.60 area remain to be a target for the bulls. Source: xStation5