Commodity wrap - Oil, Natural Gas, Copper, Wheat (21.06.2022)

Oil

• A recent pullback in oil prices have been led by 2 factors - concerns over economic slowdown as well as potential for additional taxes to be levied on US oil sector

• Aim of new taxes is to encourage oil producers to boost production and refining - if a producer does not want to pay a windfall tax it will have to boost production

• However, imposing such tax is rather unlikely ahead of midterm elections in autumn

• Libya announced that a large chunk of its production has been restored. Production levels reached 800 thousand barrels per day, up from 100 thousand in recent weeks. However, situation in the country is volatile therefore another production halt cannot be ruled out

• US ambassador to Libya says that country is lowering its production in order to exert upward pressure on prices

• Saudi Arabia boost oil production, exports and inventories, what may be negative for prices in the short-term

• Oil market remains tight even as JODI points to demand dropping to 97% of pre-pandemic levels in May (2019 levels)

• Cushing oil inventories dropped to extremely low levels of around 20 million barrels, suggesting that short-term demand remains strong. In theory, we cannot rule out a situation when inventories run dry

• On the other hand, such low levels of Cushing inventories were observed in 2014 and 2018 when oil reached local highs

Inventories at Cushing hub are at extremely low levels at the beginning of a usually busy summer period. On the other hand, such levels in the past marked local highs on the oil market. Source: Bloomberg

Russia is not only selling over 50% more oil to China than in pre-war times or several times more to India. Russia is also still very active in the Mediterranean. Countries that agreed to embargo in a half year will likely attempt to maximize imports. Source: Bloomberg

Oil production in Saudi Arabia is over 2 million barrels higher than a year ago. However, taking a look at the peak from the beginning of 2020, the country still has some spare production capacity. Source: JODI

An attempt of WTI (OIL.WTI) to bounce off the $108 area can be spotted this week. Volatility should start to increase from today as US traders return from holiday. Source: xStation5

Natural Gas

• Russia cuts completely or partially gas supplies to another countries in Western Europe

• Gazprom says that lower gas flows are result of issues with devices used to pump natural gas into pipelines

• Russia has also reportedly threatened to cut off gas supplies via Nord Stream I pipeline, what would be devastating for the German economy

• German gas stockpiles are 40% filled. It is possible that gas rationing is already ongoing. Germany is also looking for alternative suppliers and signs long-term agreements

• Gas stockpiles in whole Europe in-line with 5-year average

• Long-term agreements should exert upward pressure on US natural gas prices in the long-term therefore a return towards $2-3 per MMBTU looks unlikely

• Weather forecasts point to continuation of high temperatures in the United States. Moreover, demand expectations signal that it should remain near 100 bcf per day during the next 03-40 days(usually 90-95 bcfd in this period of the year). This means that additional supply may have little impact on prices, even amid lower exports

Weather forecasts for the United States signal that above-average temperatures in southern and eastern states should prevail. Source: NOAA

No improvement can be spotted in the US natural gas inventories, signaling that demand remains high compared to available supply. Key data, that will help gauge whether inventories are building up, will be released on Thursday. Source: EIA

Exports from Freeport sat at around 2 bcf per day, meaning that US stockpiles should increase by around 14 bcf per week. However, elevated demand may lead to an inventory drop instead of a build in this period. Source: EIA

NATGAS reached an important technical low and seasonal as well as technical factors suggest that a local low may have been reached. Data on inventories to be released on Thursday will be a key - if inventories fail to return above 100 bcd, an upward move on NATGAS may resume. Source: xStation5

Copper

• Copper prices remain under pressure amid concerns over potential economic slowdown, or even recession

• Iron ore prices are plunging, signaling that demand from construction sector in China slowed

• Yuan stabilized, what may give some hope to bulls

• Still, there is no evidence of any major copper stockpile building

Copper price dropped below $9,000 per tonne. A lack of demand can be spotted on the markets but key support to watch is still some way off in the $8,700 area. A break below this level could herald a deeper plunge. Source: xStation5

Wheat

• Wheat prices pulled back to April's lows

• Temperatures in the United States remain higher, what may further deteriorate quality of wheat crop

• No agreement on export of wheat out of Ukraine has been reached

• The latest USDA report showed that current 2022/23 season will results in the lowest global wheat production in 4 years while inventories will be at the lowest levels in 6 years

Wheat price tests 1,000 cents per bushel area while prices of other grains, like soybean or corn, remain high. Source: xStation5