Commodity Wrap - Oil, Gold, Soybean, Coffee (24.11.2020)

Oil:

• Upbeat vaccine news from Pfizer, Moderna and AstraZeneca boost "old economy" assets, including oil

• In theory, vaccination could begin in the first half of December given approvals for Pfizer or Moderna vaccines in US or UK

• However, it should be noted that pandemic is still not over and demand remains limited - mobility around the world dropped below base values from the first weeks of 2020

• Libyan production has climbed to 1.2 million barrels per day but geopolitical situation in the country became somewhat more complex (sides of the conflict cannot find agreement over distribution of profits from oil)

• Biden at the White House boosts odds for return of 2 million bpd of Iranian production and exports

• United Arab Emirates mull withdrawal from OPEC - country wants to boost output to 5 million barrels per day from current 2.6 million

• BofA forecasts oil price at $50 per barrel in the first quarter of 2020 and stabilization in later periods

• Significant shifts in the futures curve

• OPEC+ will decide on keeping bigger output cuts for 3-6 months next week (30.11/01.12)

According to Apple data, mobility around the world is declining. Source: Apple.com

Oil futures curve has changed significantly compared to a situation one week or one month ago. Positive news on changes in demand as well as supply limits flattened the curve. Source: Bloomberg

Gold:

• Gold price dropped towards $1,800 per ounce, making an almost $300 drop off the all-time highs

• A drop towards $1,650 and consolidation in the area would be a similar pattern to the one succeeding upward impulse from 2008-2011

• Real interest rates remain negative - such a situation will be present for years and gold investments should be seen as a way of hedging capital

• It should be noted that monetary easing has just begun and will last for a long time. Comparing current situation to the one from 2008-2011, there is still a lot of room for further price gains

• ETFs are selling gold at the moment - fourth quarter of 2020 can be mixed in terms of physical gold demand

Gold compared to real interest rates (calculated as a difference between Fed rate and 2-year inflation outlook). We can see that real interest rates dropped to an extreme level (inverted axis). In our opinion, real interest rates could decline further. Source: Bloomberg, XTB

Assuming that gold behaves similar to the situation from 2008-2011 period, there is still a lot of room for further price gains. Source: Bloomberg, XTB

ETFs are selling gold at the moment. Such a situation can be linked to an increased demand for equities, especially "old economy" stocks. Source: Bloomberg, XTB

Soybean:

• Soybean trades at 4-year highs

• Expectations of a shift in US approach. Increased demand from China

• China is favouring cheaper soybean from Argentina and Brazil therefore probability of return to imports levels from before Trade War looks small

• Seasonal patterns hint at continuation of an upward move

• However, speculative positioning is extremely high! Ratio of long positions to short positions exceeds 20!

Extreme positioning on the soybean market. While fundamental outlook is positive, such an extremely high positioning can trigger a massive drop via profit taking. Source: Reuters

Soybean trades at the highest level since 2016 but seasonal patterns hint at continuation of an upward move. On the other hand, positioning is extremely high. Source: xStation5

Coffee:

• Coffee price dropped almost 10 cents off the recent local peak

• Risk of plant damage coming from hurricane Iota was the main driver of recent increase

• Fitch Solution expects prices to average 110 this year and 105 in 2021

• Citibank lowered its 3-month price forecast to 107 with a neutral-bearish outlook. Big oversupply in 2020/21 season is said to be a reason (4.3 million bags)

• A number of cities and villages remain flooded following the landfall of Iota hurricane. However, coffee plantations are usually placed at an elevated terrain therefore damage can be smaller than expected

• Nevertheless, coffee supply in the Central America keeps declining

• Coffee stockpiles at Brazillian exchanges are record levels. Brazillian coffee has been accepted for delivery at ICE since 2013 but it has often been rejected. However, the situation has changed. Brazillian coffee currently ranks second when it comes to ICE inventories.

Coffee stockpiles keep increasing (inverted axis). Nevertheless, coffee stockpiles in Brazil may compensate for recent shortfalls and pressure coffee prices. Source: Bloomberg

Coffee prices have been falling recently on the back of improved weather conditions and negative fundamentals. Brazillian real weakened as well. Source: xStation5