Commodity Wrap - Oil, Gold, Silver, Sugar

Oil

• OPEC+ agreed to cut output by 9.7 mbpd, the biggest coordinated cut in history

• OPEC+ and G20 cuts combined with strategic reserve purchases are said to limit supply by a total of 20 mbpd

• Trump credits himself with the agreement although did not make clear statements on US production cuts (apart from taking part of Mexico's share). He also called on OPEC+ to cut another 10 mbpd.

• Saudi Arabia said it may reduce output to below 8.5 mbpd

• Massive contangon on the oil market in the next 3 months. Spread between June and May contracts exceeds 7 USD per barrel, what almost equals maximum spread from the financial crisis period

• According to Kashkari, lockdown of the US economy may be as long as 18 months

• Demand in China increased 5% YoY in Q1 2020. On the other hand, almost 80% of the global storage capacity is used already

US production rose rapidly in recent years. Russian output also increased but at a significantly slower pace. The United States is to a huge extent responsible for the huge oversupply on the oil market right now. Source: Bloomberg

Spread between May and June contracts exceeded 7 USD per barrel. Source: Bloomberg

According to Bloomberg, oil demand forecasts are too high. Demand is expected to drop by around 13 mpbd in Q2 2020 compared to end-2019. On the other hand, China is returning to normal operations. Demand for oil increased by 5% YoY in Q1 2020 in China. However, much of the demand came up from filling strategic reserves. Source: Bloomberg

Gold

• Gold reached new 7-year highs amid USD weakness and expected recession

• Futures contracts still trade at significant premium to spot price as markets are afraid of physical gold shortage

• ETFs continue to increase gold holdings robustly

• Lockdowns, increase in unemployment as well as low interest rates in the US may continue to support investment demand for gold

ETFs continue to increase gold holdings. Source: Bloomberg

The next potential target for gold can be found in the $1780 area. Local highs from October 2012 can be found there. Source: xStation5

Silver

• Silver continues to be undervalued taking into account price ratios to gold or even copper

• Strong increase in silver purchases made by ETFs

• Number of long silver positions remains extremely low flashing a contrarian signal

Silver looks undervalued in relation to copper when we add US yields and gold price into the equation. Source: Bloomberg

ETFs increase silver holdings robustly. On the other hand, long futures positions were reduced noticeably. Source: Bloomberg

Sugar

• Low oil prices triggered a shift in attitude of Brazilian producers. More sugar cane is now used to manufacture sugar than ethanol

• Sugar production is expected to increase 35% in 2020/21 season while ethanol production is seen falling 20%

• Sugar market is in contango. Futures curve was quite flat last month

• Coronavirus causes production problems in other parts of the world. Nevertheless, it should not have much impact on prices due to massive production in Brazil

Sugar market in Brazil is in contango, pointing to a big oversupply on the market. Source: Bloomberg

Very low number of open positions on sugar futures market. Number of shorts begins to rise, what may exert additional pressure and trigger falls towards 8.50 - local lows from 2007. Source: Bloomberg