Commodity Wrap - Oil, Gold, Coffee, Wheat (20.07.2021)

Oil:

• OPEC+ unexpectedly reaches agreement on future output cuts

• Agreement was extended until the end of 2022. It was set to expire in April 2022 previously

• Group's production will be increased by 400k bpd each month until the end of 2021, for a total increase of 2 million barrels per day

• Baseline production levels for some countries will be raised starting from May 2022. This means that around 1.5 million bpd of additional supply may return on to the market

• Goldman Sachs and Citi signal that an agreement is better for the market than no agreement as it ensures longer period of upholding production cuts

• Oil prices are pulling back due to downbeat sentiment on equity markets and concerns over return of pandemic restrictions. Improvement in moods on equity markets should boost crude prices as well

• Oil and gasoline inventories in the United States remain a key, medium-term factor for oil

• Citi expects Brent and WTI prices to rise to $85 per barrel in the second half of 2021

Oil prices dropped almost 15% off a peak from July 7. Halting a drop within the large Overbalance structure is key for buyers now. In case we see a break below the market geometry, a key near-term support to watch can be found at the lower limit of the upward channel ($64-65 area). Source: xStation5

US oil inventories continue to decline. However, there are speculations that demand during summer period is lower than expected. Source: Bloomberg

Gold:

• Gold is recovering following a sell-off on many financial markets showing that moods are different than in February and May 2020

• USD liquidity is excessive therefore it is unlikely that we will see a similar sell-off to last year's one

• Daily candlestick from July 19 painted a strong demand signal

• Yields point to continuation of gains on the gold market. 10-year yields dropped below 1.2%! On the other hand, USD remains strong what may limit upside

• Bitcoin below $30,000 could be an important signal for gold as well

• Citi does not expect prices to reach $2,000 per ounce this year. However, the Bank does not expect a major sell-off either. On the other hand, Citi expects palladium price to reach $3,200 over the next 3 months

Gold price should remain supported by continued drop in yields. US 10-year yield dropped below 1.2%. Source: xStation5

Bitcoin dropped below $30,000. Given an inverse correlation in recent months, it could be a positive sign for gold. Source: Bloomberg

On the other hand, drop in cryptocurrency values did not led to an increase in demand for precious gold ETFs. Source: Bloomberg

Coffee:

• The Brazilian Real has weakened recently, which is related to the significant strengthening of the dollar in the broad market

• The price of coffee is currently consolidating, but recently buyers have failed to test the upper limit of the zone, which may indicate that the market no longer has the strength to continue the upward movement, despite uncertainty regarding production in Brazil

• Seasonality points to a sideways trend until October

• Coffee and sugar cane plantations in Brazil have been hit by low temperatures. However, the weather is improving, which can be seen as a good sign regarding production prospects

• Citi is neutral towards coffee market in the short term and expects that price will reach $ 1.75 per pound in 2022

Coffee price has recovered from recent losses, but failure to break above recent local highs could indicate a potentially larger correction. Especially that the outlook for real is a bit worse at the moment. Source: xStation5

Wheat:

• Wheat prices rebounded astronomically due to high supply concerns

• First of all, the quality of spring wheat cultivation is the lowest since 1988 in the United States

• Wheat in good and better condition accounts for only 11% of the total crop. In turn, wheat in bad or worse condition accounts for 63% of the crops!

• The harvest of winter wheat is rather unchanged, although the earlier cultivation quality was not very high.

• Additionally, demand from China is still very high, as shown by the pre-export inspections data

• Additionally, the weather factors in Europe are not very good for wheat. The same goes for Kazakhstan and Russia

The price of wheat is rising strongly due to supply concerns in the US. Weak production in September / October has a chance to boost prices even more. Source: xStation5