Commodity Wrap - Oil, Natural Gas, Sugar, Wheat (18.04.2023)

Oil

• US government agencies warned over potential breaches of Russian oil price cap
• Currently, demand for Russia oil may be inflated by relatively lower prices and limited available supply
• Comparative inventories have been dropping recently (inverted axis on the chart below) but not from extreme levels. Moreover, comparative inventories have been giving contrarian signals for the oil market when crude has been trading at lower prices, even as low as below $40 per barrel. Currently, it is more than $80 per barrel
• Simultaneously, history shows that we may witness a similar scenario as in 2011-2014 period, when price bounced off a 5-year average but at the same time it did not deviate from 1-year average by more than 2 standard deviations
• Number of open short positions on oil dropped significantly over recent weeks, what led to an increase in net positioning to the highest level since February. Correlation between speculative positioning and price has been very strong recently therefore one may expect prices to jump once number of long positions start to rebound

Comparative inventories began to drop but not from extremely high levels. Prices are relatively higher than at times when previous signals were generated. Source: Bloomberg, XTB

Price bounce off the 5-year average. Price also bounced off the level marked with negative 2 standard deviations on short- and long-term Z-score. Source: Bloomberg, XTB

Number of open short positions has been reduced considerably in recent weeks while the number of open long positions has been little changed. Source: Bloomberg, XTB

Natural Gas

• Positioning on natural gas stabilized after an increase in recent weeks. Nevertheless, we can still see that short positions are climbing along long positions. Net speculative positioning sits below long-term average for almost 2 years
• Temperatures in the United States are expected to be below-average in the end-April period but as we are already past US heating season
• Inventories are climbing but at a slower pace than the 5-year average and slower than a year ago. This is theory flashes a weak contrarian signal
• Price dropped below $2 per MMBTu but has climbed back above quickly. Such a situation is most likely driven by profit taking
• 20 April rollover will push prices higher but may at the same time encourage sellers to once again place short bets on the market
• Futures curve points to a limited near-term demand. Next rollover should push prices around $0.20 per MMBTu higher
• Production is once again attempting to climb above 100 bcf, which limits potential for decline in comparative inventories. A long period of lower prices would be needed for production to react 

Current futures curve compared to the one from 6 months ago shows not only a significantly lower price but also limited short-term demand compared to future months. Source: Bloomberg

NATGAS experienced a relatively strong rebound this week but has run into $2.30 per MMBTu resistance zone. Current situation, in terms of demand, may resemble the one from 2020 (marked with a circle on the chart). Production needs to drop for comparative inventories to keep declining and generate a stronger signal. However, a period of lower prices may be needed first. Source: xStation5

Sugar

• Sugar price surged to the highest levels in more than a decade recently amid uncertainty over output in South America and export limitations in India
• Moreover, India announced that production in the 12-month period ending in September will be 200-400 thousand tonnes lower than production goal. Production in India is expected to reach around 33 million tonnes
• India signed contracts for exports of 5 million tonnes of sugar this year, with an option to boost exports by additional million tonnes should a production goal be met. This, however, looks unlikely given that production dropped 3.3% YoY in October-March period
• S&P Global lowers oversupply projections to 4.5 million tonnes (-0.6 million) pointing to supply issues in Asia and South America. Nevertheless 2023/24 season was expected to be a moderate one after two years of large oversupply
• Moreover, higher oil prices cause ethanol production in Brazil to be more profitable and more sugarcane is diverted to it
• El Nino phenomenon is likely to limit sugar production in Brazil. However, Brazilian production estimates are still very high at 37 million tonnes

Global end stocks to use have dropped significantly, which suggests that prices could climb towards last decades' highs. Source: Bloomberg

Number of open long positions on sugar is extremely high, what should be seen as a warning sign for bulls. On the other hand, net positioning is not extremely high yet. Source: Bloomberg, XTB

SUGAR broke above 2016 highs and the fundamental situation starts to resemble one from 2011. If Brazilian production is negatively affected by El Nino, one cannot rule out the continuation of sugar price rally. On the other hand, 2011 rally on the sugar market coincided with strong gains on oil market. Currently, oil is trying to rebound. Source: xStation5

Wheat

• Wheat remains strongly oversold by speculators. Number of short positions climbed to the highest level since 2021. Wheat prices experienced a steep drop back then and a long-term recovery was launched later on
• Net positioning shows wheat being extremely oversold - the most since 2018
• US wheat crop quality sits near 2018 lows but no upward pressure on prices can be spotted on the markets
• Issues surrounding Ukrainian wheat may be source of short-term volatility on grains market. On one hand, Poland wants to block imports of Ukrainian wheat while on the other, Russia threatens to withdraw from Black Sea grain initiative

Net speculative positioning on wheat market is extremely low. Should Ukrainian exports get limited, traders may witness a short-squeeze. Source: Bloomberg, XTB