Commodity Wrap - Oil, gold, gas, cocoa (15.10.2024)

Oil:

• The Washington Post reports that Israel has no plans to attack Iran's oil infrastructure, which has led to a drop in oil market prices of more than 6% since the beginning of this month
• OPEC decides to cut its demand forecast for 2024 and 2025. According to the cartel, demand this year will increase by 1.9 million barrels per day, a forecast that is just over 100k lower than previously. This is the third consecutive downward revision of demand expectations. 
• OPEC is also lowering its demand growth forecast for 2025. It now points to growth of 1.6 million barrels per day with a forecast from July or August, when it still expected growth of 1.8 million barrels per day 
• The OPEC report also shows that still countries such as Iraq, Kazakhstan and Russia are producing more than the production cut agreement would imply
• At this point, OPEC+ is expected to start raising production from December 1. The enlarged cartel is also expected to meet on the same day to discuss production policy for 2025

Backwardation has declined noticeably in just a few sessions. Source: Bloomberg Finance LP

WTI crude oil has broken through an important demand zone and is trading below $71 per barrel, the lowest since early October. It is worth remembering that the futures rollover will take place on October 17. Source: xStation5

Gas:

• The price of gas has fallen to $2.5/MMBTU for the November contract, just ahead of the October 17 futures rollover. The next contract is trading approx. USD 0.4 higher. It is worth noting that after the January contract we will have several months of backwardation
• The current situation is all the time reminiscent of last year, when the October contract neutralized the initial increases, followed by a few more days of growth after the rollout
• Seasonality shows that in late October and early November we should be bracing for potential declines
• The declines will depend on the weather situation. Last year, November and December were very warm, which led to a drop in gas consumption
• We are now seeing a decline in gas consumption to around the 5-year average
• Gas production has returned to the 100 bcfd level

Gas consumption has fallen, while production is stabilizing around 100 bcfd. Source: Bloomberg FInance LP, XTB

The price of gas fell sharply earlier this week, just before futures rolled over. This is reminiscent of the situation last year. Then, after the rollover and initial increases, declines began in early November. Source: xStation5

Gold:

• Gold continues to hold near historic highs, despite the strengthening dollar and rising bond yields
• ETFs continue to buy back gold, although in a historical context the volumes are still quite small. Record amounts of gold in ETF vaults exceeded 100 million ounces
• We have recently seen a decline in central bank balance sheets, due to the Fed's continued balance sheet reduction and the BoJ's still hawkish stance
• The projected effective rate at the end of this year from the Fed is 4.4%, a marked increase from September, when 4% was priced in. 
• Gold rallied in September for the first time since 2016. Last year, gold rose 7.3% in October, but historically it was not the best month. Seasonally, December and January usually perform best
  Implied volatility in the gold market is falling, which may also be a factor indicating a slight exhaustion of the uptrend

ETFs continue to buy gold, but not in large quantities that would significantly change the balance sheet in Q4. Source: Bloomberg Finance LP, XTB

Central bank balance sheets have increased recently, which may suggest a slight overvaluation of gold in the short term. Source: Bloomberg Finance LP, XTB

Bond yields have risen sharply, reminiscent of the situation earlier this year. Gold was then in consolidation for 3 months. Source: Bloomberg Finance LP, XTB

Implied volatility in the gold market is starting to drop noticeably, which may also suggest a slight overvaluation in the short term. Source: Bloomberg Finance LP, XTB

Cocoa:

• Cocoa deliveries from October 7-13 totaled 87,304 tons. Since the first of October, deliveries have totaled 100,264 tons, which is below last year's deliveries of 114,000 tons.
• Intense rains in West Africa raise hopes of a longer-term recovery in terms of yields, but at the same time may lead to a delay in the upcoming harvest
• October is not a month when such intense rains have occurred in the past. Many roads have been flooded, leading to delays in grain transportation
• Many farms have decided to spray more to prevent the spread of tree diseases
• Cocoa stocks continue their decline and are at their lowest in a dozen years. Failure of cocoa stocks to rebound on exchanges could put them at risk 

Cocoa stocks are the lowest since 2008. Source: Bloomberg Finance LP, XTB

The futures curve has risen over the past month, but the price for the December contract remains essentially unchanged. Backwardation has eased slightly, however, indicating less concern about cocoa availability in the near term. Source: Bloomberg Finance LP

The expiration of the October contract led to a marked decline in the number of futures contracts on the market by about 10,000. New contracts are not being opened, showing little investor involvement. The previous such situation occurred in June. Source: Bloomberg Finance LP, XTB