Commodity Wrap - Oil, Silver, Natural Gas, Coffee (04.10.2022)

Oil

• Media rumors suggest that OPEC+ may decide on an output cut that exceeds 1 million barrels per day, not including voluntary cuts

• Such a situation shows that OPEC+ production could be 4.5 million barrels below current goal

• OPEC+ canceled meeting of technical committee that was expected to review compliance with quotas, suggesting that major changes in policy may be made

• It should be noted that United States will stop releasing oil from strategic reserves in November, what combined with OPEC+ decision, may result in total 2 million barrel drop in oil supply

• Monthly data from the United States showed that demand for oil and oil derivatives in July was stronger than suggested by weekly estimates. Moreover, production data was revised lower

Oil maintains a downtrend structure, but strong OPEC+ output cut can lead to breakout and a move towards the 50-session moving average that has not been targeted since the turn of July and August. Source: xStation5

Silver

• Silver market benefits from news of the UK government scrapping the idea of tax cut for high earners. GBP is recovering while USD and yields are dropping 

• Funds increased negative net positioning on the silver market but there are rumors about short covering at the start of this week. On the other hand, non-commercial speculators decreased bearish bets

• For comparison, positioning on pallad increased to 6-month highs and it is the only precious metal with positive net positioning, what could be seen as a signal for gold and silver

• It should be noted that only 30% of silver supply comes from direct mining, the remaining is a byproduct of other metals' mining. It means that silver supply may be impacted in case of global slowdown

• It should also be noted that over half of silver demand is industrial demand. According to Silver Institute Survey, amount of silver ready to investment is the same as in case of gold (around 2.5 billion ounces) in spite of silver having 17 times bigger total supply

• In case of change in trend on the market, especially in investment demand trend, silver may experience a stronger upward move. Green energy is currently an important theme

• Silver Institute research shows that supply in the current and previous year increased at a slower pace than demand. Moreover, we can observe a significant increase in demand from PV, which already is as big as 2/3 of jewelry demand while 10 years ago it was just 1/4

Primary silver mining accounts for less than 30% of new silver supply. Source: Silver Institute

Silver market balance in recent years. Demand increases more quickly than supply therefore it cannot be ruled out that silver price is near local lows. Source: Silver Institute

ETFs have been selling out their silver holdings for some time already. Amount of silver held in COMEX inventories is also declining. It should be noted that COMEX inventories are two times smaller than ETF holdings. This suggests that the physical silver market may be really tight. Source: Bloomberg

All non-commercial investors decreased the number of bearish bets against silver, which may suggest that a turning point on the market is near. Source: Bloomberg

Silver price increased more than 15% in recent days. Moreover, price broke above the August highs, painting a higher high in downtrend structure. Source: xStation5

Natural Gas

• Natural gas prices reacted to a bigger than expected increase in US stockpiles, and a testing levels of local highs from the end-2021

• Seasonal patterns suggest that price rebound may occur around mid-October

• Positioning is dropping to an extremely low levels

• Weather forecasts suggest that US natural gas consumption may be moderate in nearby futures. However, consumption is increasing in Europe after continent experienced one of the coldest Septembers in years

US natural gas prices (NATGAS) continue to drop after breaking below the neckline of head and shoulders pattern. If price drops below $6.5 support, a move towards a lower support in the $5.3 area may be on the cards. Source: xStation5

Coffee

• BRL gained after the results of the first round of Brazilian presidential elections. Market hopes for Bolsonaro to win another terms but his opponent da Silva looks to have more market-friendly policies

• Coffee prices erased some of recent gains but remained above 200-210 cents per pound support

• Coffee stockpiles on exchanges dropped to slightly above 400 thousand bags, what should act as a bullish driver for prices amid risk of shortages

• On the other hand, situation starts to resemble one from 2014 when continued drop in coffee stockpiles, coffee prices still dropped from around 200 cents to 120 cents per pound

Coffee stockpiles dropped to just around 400 thousand bags. It is less than one day of consumption. Source: Bloomberg

Coffee failed to hold onto gains tied to BRL strengthening. However, bulls managed to defend an important 200-210 cents per pound support. Source: xStation5