Commodity Wrap - Oil, Gold, Natural Gas, Cotton (06.12.2022)

Oil

• EU and G7 impose a price cap on Russian oil at $60 per barrels

• Agreement will be adjusted every two months to make sure price cap remains 5% below market price

• Russia reiterated that it will not supply oil to countries that embrace price cap even if it means cutting domestic oil production

• However, it should be noted that Russian Urals oil benchmark currently trades below the agreed price cap

• Apart from price cap, EU embargo on seaborne imports of Russian crude was also introduced on Monday, December 5. This means that Russian oil exports may drop by as much as 1.5 million barrels per day

• European countries like Germany, Poland, Czech Republic, Slovakia, Hungary and Austria import Russian crude via pipelines. However, majority of countries plan to drop such imports by the end of 2022

• EU embargo on imports of Russia oil derivatives is expected to go live at the beginning of February 2023 and may see Russian oil exports drop by a total of 2.2 million barrels per day

• Europe is struggling with a shortage of oil derivatives, especially diesel fuel, and demand for such products tends to increase during winter months. As such, prices of those products may be set to jump as EU embargo looms large

• IEA expects that Russian oil production will drop by around 1.4 million barrels per day in the aftermath of EU and G7 actions

• Such a big drop in production may cause instability on the global oil market

• As a number of tankers are registered in G7 countries, the West hopes to enforce price cap by banning insurance services for Russian oil purchases above $60 per barrel

• OPEC+ decided to leave its output goal unchanged at slightly below 42 million barrels per day. However, countries are under-complying and current production is said to be just slightly above 40 million barrels per day

• OPEC+ decided to scrap monthly meeting in favor of meetings in February and June only

• This likely hints at a stabilization in production policy but one cannot rule out that majority of OPEC members will continue to struggle to produce in-line with quotas

• Saudi Arabia lowered export prices for Asian deliveries, suggesting that the Kingdom expects Asian countries to be flooded with Russian oil after EU and G7 sanctions go live

Brent (OIL) paints a potential inverse head and shoulders pattern with weaker US dollar providing support for crude prices. Impact of the latest EU and G7 actions on supply remain uncertain but lower supply going forward looks likely. If demand fails to drop amid economic slowdown, oil prices may be set to move towards $100 per barrel again. Source: xStation5

Gold

• Investors slowed share purchases and turned to ETFs while speculators boosted their net positioning on gold

• Rebound in net speculative positioning was, however, mostly driven by drop in open short positions rather than opening of new long positions

• It should be noted that an extremely rare situation occurred on gold speculative positioning - net position drop to negative levels what is uncommon and often pointed to a turning point on the gold market

• Should Fed decide to slow pace of rate hikes at a meeting next week, one may expect terminal rates in US to be around 5.0%

• In such a scenario, US yields should move towards a neutral rate level of 2.5% over a medium- and longer-term horizons

• Seasonal patterns suggest that the second half of December and the first half of January should be positive for gold prices

Net speculative positioning on gold recovers and ETFs halted gold sales. Source: Bloomberg

Gold experienced a solid rebound. However, there was no major move on TNOTE. Seasonal patterns point to a possible upward move in the second half of December. A strong correlation between gold, US yields, USD and US equity markets can be spotted at press time. Source: xStation5

Natural Gas

• Natural gas prices drop significantly, in-line with seasonal patterns

• Drop in natural gas prices is driven by latest changes in weather forecasts, that signal much higher temperatures in the United States than average for this period of the year

• Moreover, deliveries to Europe have been dropping recently as the world struggles with shortage of shipping capacity. This means that there is more supply available domestically in the US

• US natural gas production remains at elevated levels given current weather conditions (low temperatures make it hard to boost production)

Weather forecasts for the United States are improving, what points to a lower gas consumption and smaller withdrawals from stockpiles. Source: Bloomberg

Natural gas prices are dropping hard and one cannot rule out pullback towards $4.9-5.0 per MMBTu area, where a long-term upward trendline can be found. Source: xStation5

Cotton

• Cotton price is testing an important resistance zone, marked with the upper limit of the upward channel

• Future trend on cotton may depend on performance of oil prices - a pick-up on the oil market may push cotton prices towards 96 cents per pound

• On the other hand, outlook for the global economy and potential global economic slowdown suggests that cotton may resume the downtrend

• Simultaneously, seasonal patterns point to a possibility of the upward move that may last until mid-February

• Net speculative positioning point to an expectations of a continued drop in prices - number of long positions is reduce while number of short positions increases

Net speculative positioning on cotton points to a rather bearish bias among cotton traders. Source: Bloomberg

An increase in oil prices could give some hope for demand recovery on cotton. Source: xStation5