Commodity wrap - Oil, Soybean, Cocoa, Copper

In this week’s commodity wrap we present you 4 markets that look interesting or/and have posted some major price moves: Oil, Soybean, Cocoa, Copper.

Oil:

• Oil begins to rebound in response to production cut rumours

• Oil inventories would need to rise sharply into the year’s end to justify current low valuations

• Current deviation of oil prices looks similar to the one we saw at the end of the first and second quarter - potential signal for rebound

• From the technical point of view recovery during the year’s end is still possible with a chance of prolonging into early-2019

• High levels of output from each and every major oil producer

• In case OPEC+ decides to cut production the US oil may experience higher demand

Comparative inventories do no point to such low price levels. Source: Bloomberg, XTB Research

Production cut from OPEC+ countries should result in moderate bounce higher during the year’s end. Source: xStation5

Soybean:

• Goldman Sachs does not expect trade agreement between China and the United States to be reached during G20 meeting - the Bank points to neutral tone from officials following the meeting

• Low crush spread levels (strategy consisting of taking long position at futures market and short in soybean-manufactured products) point to relatively low level of demand

• US soybean exports to China are virtually zero

• Drop in prices of the Brazilian soybean in USD terms makes commodity from country attractive option for Chinese buyers

• Nevertheless, current situation indicates limited downside risk

• Prices could reach 830 cents before year’s end but rebound should occur over the medium term

Decline in the crush spread points to lacklustre demand for soybean. Source: Bloomberg

US soybean exports to China fell to almost zero what can also be ascribed to some extent to seasonal factors. Nevertheless, the situation suggests that there is limited downside potential. Source: Bloomberg

The US soybean may look cheaper than Brazilian commodity at first glance but if we adjust the price for the impact of tariffs it is way more expensive. Source: Bloomberg

Cocoa:

• Despite huge expected supply there is a chance that cocoa market will find balance this year

• Significant rise in production in Ghana and Ivory Coast compared to previous year

• Floods in Nigeria pose a threat of cocoa yields being 20% lower compared to previous year

• Higher pace of cocoa processing hints at rise in demand

Cocoa prices remain depressed but net positioning started to rebound. Amount of long contracts remain low but speculators begin to cover short positions. Source: Bloomberg

Cocoa prices are significantly below 5-year average. Given increase in positive news concerning demand the commodity may be undervalued over the short and medium term. Source: Bloomberg

Technical situation on the cocoa chart looks interesting. We are currently observing forming of the right arm of the potential inverse head and shoulders pattern amid decreasing volume. Source: xStation5

Copper:

• Prices of other industrial metals, especially iron ore, decline

• Earnings of Chinese enterprises began to drop

• Global growth seems to be slowing down

• Potential for further drop in credit activity in China

• Copper may be overvalued over the short term with potential range of declines at 6000 USD per tonne

Credit activity in China is limited and may indicate further declines on the copper market. Source: Trading Economics