Commodity Wrap - Oil, Gold, Coffee, Natural Gas (06.07.2021)

Oil

• No agreement among OPEC+ members. Group's output is likely to remain unchanged in August at 5.8 million barrels per day. No new date for talks has been set yet

• This can be seen as a positive scenario for oil prices as it hints at persistence of large deficit

• Lack of agreement is positive in short-term but over longer horizon it creates risk of countries, like United Arab Emirates, boosting production significantly

• Somewhat similar situation occurred in 2011. WTI price dropped from around $100 to $75 over 3 months, after OPEC failed to reach agreement

• The Delta variant poses a potential threat to oil demand recovery

• Iran talks still in play

• United States calls on OPEC+ to reach an agreement, showing that it is dissatisfied with current energy prices. On the other hand, Biden administration is unlikely to be as aggressive in its rhetoric as Trump's

• Saudi Arabia decided to boost export prices for Asia, Europe and the United States after no agreement was reached

• Moreover, Saudi Arabia plans to make change to oil import and export regulations, what may further deteriorate ties with the US

• Relatively flat backwardation allows producers to hedge a large part of production. It should lead to lowering of prices over the long term

While the short and long end of the futures curve is relatively flat, backwardation in the 1.5-year horizon reached $5 per barrel! However, such a situation did not last long. Source: Bloomberg

Current fundamental situation is, in theory positive, for prices. On the other hand, should OPEC alliance fall apart, members countries may decide to boost output significantly, putting pressure on prices in the process. It should be noted that WTI broke slightly above the 2018 peak. Source: xStation5

Gold

• Gold breaks above $1,800 mark in spite of USD strength

• Situation can be related to sell-off on the cryptocurrencies market triggered by PBOC warning

• PBOC warned companies not to service entities involved in cryptocurrencies

• Relatively low gold prices were used by central banks to boost reserves. Serbia and Thailand purchased gold recently

• HSBC signals that central banks will continue to increase gold reserves. However, levels from 2018 or 2019 are still far off

HSBC signals that central banks will increase gold purchases this year and the next. Source: Bloomberg

Yields are dropping. Fed does not feel the need to signal any quick changes to monetary policy. THose two combined have a positive impact on gold. The near-term resistance to watch can be found in the $1,840-1,850 area. Source: xStation5

Coffee

• Coffee reacts to the recent declines in the Brazilian real

• The Brazilian Real may be losing due to the risk of the 4th coronavirus wave. The fourth wave may lead to another collapse in coffee demand

• In addition, it is worth noting that there is currently no risk related to a shortage of coffee stocks for delivery on exchanges

• However, the pandemic poses a risk of a supply collapse in some regions of the world (excluding Brazil). Despite the higher prices, farmers do not receive higher prices for their crops, which means that they can give up the cultivation of coffee.

• The latest WASDE report showed that production in the 2021/2022 season will be 11 million bags lower compared to the previous season and will reach 164.8 million bags, which is mainly related to drought in Brazil

The seasonality shows that we may experience a sideways trend with a possible short term price pullback. Nevertheless, greater price increases are possible at the end of the current quarter. Major support is located around 147-148 cents per pound. Maintaining this level should result in price trading in the range of 165-170 cents per pound in the following weeks. However, should break below occur, then the downward move may accelerate towards 130 cents a pound. Source: xStation5

Natural gas

• Gas prices continue to rise amid expectations of a heatwave in the United States

• Gas exports from the United States are also rising

• Seasonality indicates that this may theoretically only be the beginning of an upward move, although prices are approaching the 2016 peaks, when we saw a similar situation

• Meanwhile, gas prices in Europe are reaching levels unseen since 2009! This situation may increase the demand for LNG from the United States

Gas prices continue to rise. According to some forecasts,  prices will rise to at least $ 4 MMBTU due to the current US weather conditions. Seasonality points to further increases. The number of net speculative positions increased slightly. Source: xStation5