Commodity wrap: Gold, oil, corn, sugar (25.03.20)

Gold:

• The decision of the South African authorities to close the economy, including all metal mines, leads to reduced liquidity on the gold market
• A huge, unusual divergence between the spot price and the futures contract has appeared on the market. This situation was quickly used as an opportunity for arbitration and prices are currently at similar levels
• South Africa is already a minor producer of gold in the world, but a very important producer of platinum and palladium. However, the demand for these metals in the era of global car production closure will be negligible in the near future
• Further significant reduction of long positioning, along with the reduction of short positions. This means the continued demand for cash around the world
• Possible stabilization of the world situation and very cheap money can move gold prices to record high levels

At the beginning of the week, a disproportion between the futures contracts and the spot market began to form. Source: Bloomberg

Further reduction of positions on contracts. On the other hand, ETFs are still increasing the amount of gold in their vaults. Source: Bloomberg

Oil:

• The oil market may remain under supply pressure due to lack of change in the foundamental perspective
• Possible decline in demand at 10 million barrels in the first quarter of this year (losses are however limited by strategic purchases from governments such as the US or China)
• Demand will clearly decrease throughout the current year - the history of the previous financial crisis shows that demand has fallen by over 4 million barrels per day over two years
• At that time the reaction was very strong and  we saw a significant reduction in production, however now producers behave quite the opposite. Production growth from OPEC and Russia may reach 2-4 million barrels per day

If the demand scenario from the last financial crisis will repeat itself, then the demand may fall by 4-5 million barrels per day within the next few quarters. Source: Bloomberg, EIA, XTB

Even by averaging different scenarios regarding the creation of the balance sheet, it can be seen that oil may remain at low levels for a longer period of time. Source: Bloomberg, EIA, XTB

Corn:

• Ethanol prices in the United States are falling to a record low - similar prices were seen in 2005, when a bushel of corn was paid 200 cents
• Low ethanol prices are associated with a huge drop in prices on the crude oil market (petroleum products are an alternative, although it is worth mentioning that ethanol is also part of fuel mixtures - therefore the decrease in fuel demand has a double impact on ethanol)
• During the financial crisis, the demand for fuels dropped drastically and remained low for two years, and then fell even lower - this is also not a good omen for ethanol
• Currently, the importance of ethanol on the corn market is about 40%. During the previous crisis it was 30%
• It is possible that price will drop to around 300-330 cents per bushel if the production in the United States will remain on the high level. A level of 400 cents per bushel is a potential target in case of production problems during the season.
• Seasonal rebound may occure around May-June. Later scenario will depend from the global situation

Demand for fuels is likely to fall, as it did during the last financial crisis. Ethanol prices are at their lowest levels in history. This may discourage ethanol producers from continuing their production. Source: Bloomberg

The price of corn may rebound seasonally in May-June. However, in the absence of an improvement in the global situation, possible declines to around 300-330 cents per bushel. Source: xStation5

Sugar:

• The price of sugar rebounded from 11 cents a pound. The low oil price is not very good for sugar due to the cheap alternative to biofuels.
• During the last financial crisis, price of sugar did not react sharply, however the subsequent rebound in the oil market, led to huge price increases in the sugar market. A bottom in the oil market may prove to be an important signal for the sugar market
• The forward curve indicates possible supply problems in the coming year, not very large contango in the long term

Sugar rebounded from 11 cents a pound. If the scenario from 2008 will repeat itself, than this will indicate broad consolidation over the next few months, followed by a clear rebound of several hundred percent. Source: xStation5

The forward curve suggests that we may experience supply problems in the short term. The low price may discourage sugar producers, which in the long run could translate into a similar rally as we saw in 2009. Source: Bloomberg