Commodity Wrap - Cocoa, Oil, Natural Gas, Silver (19.01.2021)

Cocoa:

• The latest ICCO report showed that final cocoa processing in 2020 was lower than expected due to coronavirus pandemic

• First two months of a new season (October and November) showed highest deliveries on the Ivory Coast but also a significant decline in Ghana

• In spite of additional payouts, farmers on the Ivory Coast threatened to launch a strike amid very low prices. Blockage of ports could be one of the ways to express dissatisfaction

• A lot of farmers had to sell product below minimal price because of the coronavirus pandemic

• Chocolate goods producers say that additional payouts aimed at offsetting losses for farmers ($400 per tonne) has led to an oversupply. Suppliers are looking for cheaper alternatives

• Cocoa is one of the few commodities that did not experience a bull market. Having said that, upward move cannot be rule out in case we see supply side issues

• End of GBP struggles should favour cocoa prices

A slight backwardation can be spotted on the cocoa market. It means that demand-side may be in advantage over the short-term. Source: Bloomberg

Positioning on cocoa does not give any clear-cut signals. Nevertheless, we can see that amount of open long and short positions is relatively small. Source: Bloomberg

Returning demand may lead to more price gains on the cocoa market, especially if we see GBP strengthening along. Source: xStation5

Oil:

• Oil market rally is experiencing short-term demand issues, what may lead to smoothing out of the backwardation

• IEA lowers demand forecasts for Q1 2021 but still sees demand being higher than supply throughout much of 2021. Q1 demand forecast was lowered by 0.6 mbpd while forecast for full 2021 was lowered by 0.3 mbpd. Global supply is seen to be 1 mbpd higher

• Market share of OPEC+ has been falling throughout previous years and the trend has accelerated during coronavirus pandemic. Will OPEC try to regain lost market share? This could weight on market balance in the second half of the year

• Given ongoing actions of producers as well as persisting positive moods on the oil market, we can assume that new highs will be reached in the first half of the year. Brent could jump to $60-65 per barrel. However, situation should change in the second half of 2021

IEA is the least optimistic about demand rebound this year. Nevertheless, forecasts still point to a significant deficit this year under the assumption of 100% compliance with OPEC+ deal. Source: IEA

Market share of OPEC+ has diminished in recent years and has reached multi-year lows in 2020. Will supply remain pressured by the output cut deal in the second half of 2021 if demand recovers as indicated on the chart above? Source: EIA

Brent failed to break above an important supply zone ranging between $56 and $59. Taking a look at the ongoing upward move started by the end of October, current pullback has not exceeded sizes of the previous largest correction. Key support level to watch can be found in the $53 area. As long as it holds firm, an upward move looks to be the base case scenario. Source: xStation5

Natural Gas:

• Wave of arctic weather around the world may be heading towards the end and natural gas prices may no longer be supported

• The latest forecasts for end-January period show above-average temperatures (Tweet below)

• Natural gas prices failed to reach 3.00 area, what may hint at strong resistance ahead

• A broad head and shoulders pattern may be building up but it is hard to define neckline. It may lie in the 2.2 area and this would be a target of the downward move fuelled by forecasts assuming improved weather conditions

• Natural gas stockpiles change in-line with seasonal patterns. Inventory declines in the previous year were similar but accompanied with lower prices

Above-average temperatures are forecasted for the end-January period. Source: Twitter, pivotalweather.com

As we can see on the chart above, prices during local peak in January 2020 were lower than now while stockpiles changed similarly. Moreover, we can see that strong supply zone can be found slightly below 3.00 area. In theory declines should last until the beginning of February according to seasonal patterns. Source: xStation5

Silver:

• Out of all precious metals, silver ETF holdings are increasing at the fastest pace this year

• Silver, as well as other precious metals, remain stuck in consolidation ranges due to recent USD strengthening

• Seasonal patterns hint that range trading may last until early-March and be followed by strong upward move

• Key support can be found in the $22-23 area. $28-30 area is a mid-term target 

Current performance of silver resembles the one from the middle of 2008-2011 rally. USD also strengthened back then. Return of USD weakness should support precious metals prices. Source: xStation5