Commodity Wrap - Oil, Gold, Sugar, Copper (23.11.2021)

Oil

• Oil prices pulled back as markets starts to price in a potential coordinated release of strategic reserves

• According to Goldman Sachs, market has already priced in a release of around 100 million barrels, or slightly above a 1-day consumption rate

• United States wants China, Japan and India to participate in strategic reserve release. India said that it may release 5 million barrels from reserves

• United States can release 35-40 million barrels

• Democrats are once again considering ban on oil exports

• OPEC says that such actions may be inadequate when trying to balance the market. OPEC may reconsider its output policy in case strategic reserves are released

• Lack of new investment means that only 3 OPEC countries are able to quickly boost production - Saudi Arabia, Iraq and United Arab Emirates

• According to IEA data, OPEC+ production was around 700k bpd lower than planned in September and October 

• Russia is unable to quickly restore production as well

• Vitol expects oil prices to reach $100 per barrel during the winter period

US strategic petroleum reserves have been reduced in recent months. Releasing around 35 million barrels may only have a short-term impact on oil prices. On the other hand, coordinated action from a group of countries may have a large impact on prices, especially if OPEC+ decided on a large output increase starting from January 2022. Source: xStation5

Gold

• Powell's nomination for the second term as Fed chair warrants quicker policy adjustment than in case of Brainard's nomination

• USD gained following the announcement while gold pulled back from a key resistance

• Gold dropped almost 2.5% yesterday and moved close to psychological $1,800 handle

• Biden's speech today at 7:00 pm GMT and tomorrows FOMC minutes release at 7:00 pm GMT are key near-term events for gold

• ETF gold holdings increased slightly. However, it is insignificant compared to changes in holdings in recent months

• Inflation expectations based on yields (inflation 5y5y swap) are dropping slightly, what may limit potential for upward moves on gold

ETFs slightly increase their gold holdings but the scale of increase is insignificant compared to changes in recent months. Inflation expectations dropped in recent days. Source: Bloomberg

Gold price pulls back amid jump in US yields and strengthening of the US dollar. Divergence between gold and bond markets remains wide. A return above 61.8% retracement of recent upward impulse will be key for bulls. Source: xStation5

Sugar

• Sugar price move sideways since August 2021, trading near 20 cents per pound

• Sugar is also waiting for the decision on SPR release. Lower oil prices could push sugar prices off the multi-year highs

• Lower oil prices mean smaller pressure to produce ethanol from sugar in Brazil and India

• Moreover, key Indian sugar producers have contracts for exports of 2.5 million tonnes of sugar

• Sugar oversupply in India, the largest sugar consumer in the world and second largest producers, could reach around 6 millions this year

Sugar stockpiles around the world dropped in 2020 and should also be lower after 2021. On the other hand, new investments in India in 2022 should help rebuild stockpiles. Nevertheless, sugar stockpiles remain high compared to recent years. Source: Bloomberg

Sugar remains under pressure this week. The nearest support zone to watch can be found above the upward trendline in the 18.15-18.60 area. Source: xStation5

Copper

• In spite of unclear situation in China, copper prices remain below $10,000

• Situation on the Chinese spot market remains tight. Spot premium increased to as high as 2,000 CNY per tonne (current spot price is around 70,000 CNY)

• Situation can be reasoned with low copper inventories on Chinese exchanges. Inventories on global exchanges also remain low

• China wants to ease regulations for developers and PBoC encourages banks to offer loans to the sector. There are rumours that another reserve requirement ratio cut may be looming

• Municipal authorities in China ease regulations on land sales to developers

• Goldman Sachs still expects prices to increase given tight situation on the spot market

Copper stockpiles in China and in other parts of the world continue to drop. Source: Bloomberg