Commodity wrap - Oil, gold, coffee, corn (16/06/20)

• After 7 weeks, we have the first week of declines in the oil market
• The decline occurred after the OPEC + group reached agreement (extension until the end of July)
• In the near future supply may rise, especially that drilling activity returns in the United States
• In July, some OPEC countries will not continue with the additional production cuts
• From August OPEC + will cut production at 7.7 million barrels per day
• There are still considerable doubts about the fulfillment of the agreement by Nigeria or Iraq. On the other hand, Iraq reports a significant cut in exports to implement the OPEC + agreement
• The latest DOE report showed a strong increase in oil, gasoline and petroleum products. On the other hand, the quantity of products delivered to the market (demand proxy) gives hope for improvement
• We expect a continuation of the correction in the oil market to the range of $30-35 per barrel depending on the benchmark (WTI-Brent)

US oil inventories have risen to a record high. Source: Bloomberg

The amount of petroleum products delivered to the market by US refineries is the highest since mid-March. This is indirectly reflected in demand, although it is worth noting that in the previous week inventories of all products increased significantly. Source: Bloomberg

Gold:

• Seasonally, gold should be in the consolidation period. The situation was similar during the previous crisis - consolidation from April to the end of the summer period, followed by increases
• Further strong increase in ETF demand. On the other hand, speculators coming out of long positions.
• Since the beginning of March, ETF demand increased by 435 tonnes, net position decreased by 445 tonnes. It is worth remembering, however, that ETFs generate real demand
• Technically, we might be dealing with another flag formation. Consolidation should end at the turn of August and September, and then the price may increase by $150.00-300.00.

On the one hand, the increase in real demand from the ETF's, on the other hand we can see a reduction of positions on the the futures market. Source: Bloomberg

After the last financial crisis, gold was consolidating during spring and summer periods. In September, the price can rise further. Source: Bloomberg

We might be dealing with the next flag formation pattern on the gold chart. Previous consolidations lasted 3-4 months, which means that the current consolidation should end in early September. Source: xStation5

Coffee:

• The harvest season is in Brazil continues. At present, crops have been harvested from over 1/4 of plantations.
• There is still considerable concern that coronavirus will cause delays in harvest and transport (Brazil is the second country in the world in terms of the number of infections).
• Nevertheless, the USDA FAS report on the coffee market indicates that production in the 2020/2021 season is to be 9.1 million bags higher and reach a record level of 176.1 million bags (60 kg)
• In contrast, coffee inventories on the stock exchanges are still in reverse. The dollar is weakening.
• In terms of market positioning, there is a reflection of long and short positions, which is not supportive for coffee prices, which is below 100 cents per pound.

Record coffee production in the world is associated with the expectations of large production in Brazil, despite the ongoing pandemic. Source: USDA

Coffee inventories  are still decreasing. Source: Bloomberg

Corn:

• Corn may be around the seasonal high
• The WASDE report points to a further increase in global supply (although the report has not changed much compared to the May forecasts). The WASDE report indicates that US corn production will reach a record level of nearly 16 billion bushels, compared to 13.6 billion bushels a year ago.
• Recent price increases may be due to a decline in US crop quality. The share of the best quality corn drops from 74% to 71%. However, this is still definitely higher than last year, when the share of the best crops was slightly above 50%.
• Government subsidies from the PLC and FSA programs should reach around USD 0.6 per bushel this year
• CFTC data show that corn is very heavily sold out, which is somewhat at odds with seasonality data.

The seasonality indicator shows a possible seasonal peak. Will the sale-off come later than usual? Source: xStation5

Corn is very heavily sold out by speculators. Theoretically, this generates a contrarian signal. However, taking into account the behavior of investors from the past, a potential rally caused by switching sides should not last longer than 2-3 weeks, Source: Bloomberg