Commodity Wrap - Oil, Copper, Wheat, Natural Gas (06.02.2024)

Oil

• There were a series of airstrikes by the United States on positions in Syria and Iraq associated with militant groups and the Iranian Revolutionary Guard over the past weekend. Strikes were in response to a previous drone attack in which American soldiers were killed
• Retaliatory actions launched by the Iran-linked militants in recent hours resulted in the deaths of Kurdish soldiers supported by the US
• In addition to the U.S. attacks, joint airstrikes by the US and the UK targeted Houthi militant positions in Yemen
• Crude oil did not experience a significant increase in prices earlier this week, indicating a limited impact on the supply in the oil market.
• Russia is facing increasing challenges in exporting its oil and oil products, following drone attacks on its oil infrastructure in January
• Russia recorded a decline in gasoline and diesel exports to non-Commonwealth of Independent States (non-CIS) countries by 37% and 23%, respectively, in January on a yearly basis. Russia is planning infrastructure repairs
• It's worth mentioning that export issues in Russia in September of the previous year led to a strong price surge when Russia imposed a temporary ban on the export of oil products to meet domestic demand.

Crude oil is stabilizing, despite improved economic data worldwide and the ongoing tense situation in the Middle East. Meanwhile, Russia is significantly reducing its exports due to infrastructure damage, raising the possibility of an export ban, similar to what occurred in September of last year. During that time, prices increased by approximately 6% in a few days and then sharply declined in October and November upon the removal of the export ban. Source: xStation5

The futures curve in the oil market indicates minimal contango in the short term and significant backwardation in the long term. This may suggest a lack of upward pressure in the short term. Simultaneously, backwardation could also imply that buyers do not anticipate supply problems in the longer term. Source: Bloomberg Finance LP

Copper

• Copper inventories on exchanges remain low, but in recent weeks, we have observed their stabilization and an increase in correlation with copper prices (without any lags)
• Goldman Sachs points out a highly tense market, stating that it is the most strained since 2021 when prices exceeded around USD 10,000 per ton
• Goldman Sachs sees a deficit in the copper market at 428,000 tons, compared to the earlier forecast of 182,000 tons. The deficit is expected to affect the market for unprocessed copper
• On the other hand, S&P Platts indicates that after a deficit in the refined copper market in 2022 and a slight oversupply in 2023, the market is expected to enter a significant oversupply this year, which is projected to persist until 2026
• S&P Platts expects the average price this year to be around USD 8,600 per ton, and slightly above USD 9,000 per ton next year

Copper inventories remain at a very low level but have stabilized in recent weeks. Source: Bloomberg Finance LP, XTB

Following the rebound of the credit impulse in China, we are entering a period of stabilization again. Without significant stimulation in China, an increase in demand may be limited. Source: Bloomberg Finance LP, XTB

Copper is well-priced relative to the 1-year average and slightly undervalued relative to the 5-year average. Source: Bloomberg Finance LP, XTB

Wheat

• The latest data on crop prospects in the US show a significant increase in crop yields, justifying the decline in prices. However, crop yields remain below the levels of 2016 or 2020 when prices hovered close to 400 cents per bushel
• Wheat export inspections have been lower since the beginning of this year compared to the same period the previous year, down by 18.4% year-on-year, indicating a lack of interest in American wheat
• Expectations are that the WASDE report on the upcoming Thursday, February 8, will show a deterioration in exports outlook in the US
• Prices in Europe remain low, despite the ongoing conflict between Ukraine and Russia and delivery issues related to the Suez Canal blockade
• Bloomberg suggests a lack of surprises in the upcoming WASDE report this Thursday. Globally, an increase in production is expected in Argentina and a decrease in Brazil.
• Speculators are rebuilding short positions in grains. A significant number of short positions may indicate potential rebound attempts when covering short positions in the future

Wheat export inspections fall below the 5-year range. Source: Bloomberg Finance LP, XTB

The futures curve indicates significant contango, indicating a lack of short-term demand. Source: Bloomberg Finance LP, XTB

There was a significant reduction in short positions at the end of 2023, marking a local low in wheat prices. However, we now observe a slight rebuilding of short positions, which is also progressing alongside the building of long positions. Source: Bloomberg Finance LP, XTB

Natural Gas

• The volatility in the gas market has significantly decreased
• However, it is essential to note that weather changes could still lead to further declines in comparative inventories
• Forecasts for the period of February 13-19 indicate a drop in temperatures below average across almost the entire United States, which could serve as a basis for short-term changes in fundamental outlook
• It's worth noting that in 2015, despite a decrease in comparative inventories amid very low prices, inventories eventually returned to growth, and prices fell to around 2 USD/MMBTu
• The futures curve indicates a substantial increase in contango in the May-July period

Despite the decline in inventories in 2015, the price remained in consolidation relative to the previous year and then began to fall towards 2 USD/MMBTu. A similar situation may be occurring now. It's also noteworthy that despite a significant drop in comparative inventories from 2016-2018, the price remained in consolidation. Source: Bloomberg Finance LP, XTB

As seen, the second half of February is expected to be colder in the USA than usual, although these are not extreme temperature drops. Source: NOAA

The futures curve clearly shows contango from May to July. Source: Bloomberg Finance LP, XTB