Commodity wrap - OIL.WTI, Natgas, Cocoa, Sugar (01.10.2024)

Oil

• Oil remains under pressure as market backwardation declines
• Oil is losing even despite a significant increase in the escalation of the situation in the Middle East, where there was supposed to be a ground operation in southern Lebanon launched by Israel, which is expected to target the position of Hezbollah
• The lack of market reaction may be linked to the absence of any response from Iran or also Saudi Arabia. Western countries are calling for a de-escalation of the situation.
• The United States warns Iran against involvement, as it could result in attacks on nuclear infrastructure
• The OPEC+ group is scheduled to meet on October 2, but at this point no change in decision is expected as to when to start raising production. The timing has been set for early December
• The EIA maintains its forecast for increased production in the United States for next year. Production is expected to increase from 13.3 million brk per day now to 13.7 million brk per day next year.

Backwardation in the U.S. has again eased, which may suggest that oil prices have fallen too far. Source: Bloomberg Finance LP, XTB

WTI crude oil has fallen to levels suggested by the crack spread, which has been consolidating for several weeks now. It is worth noting that due to the hurricane in the U.S., there may have been a recent drop in fuel demand. Source: Bloomberg Finance LP, XTBToday there was a strong sell-off in the oil market from the beginning of the European session, but in the afternoon these declines are being limited. We are currently seeing a relatively low number of net speculative positions, which suggests a lot of sellers' involvement in the market. Source: xStation5

Natgas

• Gas is holding high levels after a strong rebound last week. Currently, the rebound is in line with seasonality and price behavior from last year
• Overconsumption of gas continues, based on seasonality. Production is also clearly below records for this year
• The key factor for the coming months is, of course, gas consumption during the start of the heating season. If last year's scenario is repeated, there could be strong downward pressure on prices after the upcoming rollout. However, if temperatures are lower, then gas prices could reach their highest levels since last October.
• It is worth remembering, however, that from the futures rollover alone, the price could find itself in December around $3.5-3.6/MMBTU.

Gas consumption continues to be above 5-year ranges. At the end of October, higher consumption of gas for heating purposes also begins. The relationship of consumption to the 5-year average will determine the future fate of gas. Source: Bloomberg Finance LP, XTB

A year ago, the price of the November contract (2023) was around $2.9/MMBTU. In contrast, a year ago the price of the November contract for 2024 was quoted at around $3.7/MMBTU. Although gas prices are lower than estimated a year ago, it is worth noting that a month ago the November 2024 contract was quoted at around $2.5/MMBTU. At the end of the heating season, a price of $3.6/MMBTU is expected. If gas consumption is similar to last year, then prices could fall again to the $2-2.5/MMBTU range. However, if temperatures are lower than standard, then the way will be open to a range of $3.5-4.5/MMBTU. Source: Bloomberg Finance LP, XTBThe price is holding very high, and there are about 3-4 weeks left before the contract rolls over. Nonetheless, it is worth remembering that the first reports of lower consumption at the start of the heating season could trigger downward pressure. Last year, declines began at the end of October and continued uninterrupted until mid-December. Source: xStation5

Cocoa

• Cocoa returns to moderate gains at the start of the new crop season, surpassing the $8,000 level and testing nearly $9,000, the highest level since the early August rollover. The end of September, however, brings a sizable correction and a return below $8,000
• Cocoa stocks fell to their lowest level in 15 years, indicating that still the supply situation has not improved
• The latest supply figures showed that 1.76 million tons of cocoa were delivered to Ivorian ports from October 1 of last year to September 29 of this year, which is -26% compared to the previous season. At the beginning of the season, shipments were expected to reach 2.36 million tons
• Earlier in September, the Ghanaian regulator raised the price of cocoa paid to farmers by 45% to $3063 per ton for the 2024/2025 season. However, the increase was below the 65% expected.
• For the new season, Côte d'Ivoire is raising the price paid to farmers to 1,800 CFA (francs) per ton of cocoa, which is roughly on par with the price paid in Ghana
• Ghana's regulator has also lowered its production forecast for the 24/25 season to 650,000 tons from 700,000 tons. In the past 23/24 season, production was most likely 425,000 tons.
• Côte d'Ivoire and Ghana have experienced less rainfall in the past month, which could lead to a reduction in cocoa harvests
• At the same time, production prospects are improving in Cameroon and Nigeria, which are the fifth and sixth cocoa producers in the world, respectively. However, it should be noted that Côte d'Ivoire and Ghana account for more than two-thirds of global production

Cocoa stocks continue their decline. The start of the new season will show whether the situation has changed in any way. Source: Bloomberg Finance LP, XTB

Open interest in cocoa has been rebounding since June, although at this point it is still small. Source: Bloomberg Finance LP, XTBThe cocoa price remains at relatively high levels. It is worth remembering that we will have a futures rollover in November. Prior to previous rollovers, there was clear upward pressure on prices. Source: xStation5

Sugar

• Sugar prices rose 15% in September after concerns about Brazil's sugarcane harvest next year increased
• Speculators' net positions rose to the highest level since December 2023, although net positions were negative as recently as August
• Rabobank cuts Brazil's sugar production forecast for the 24/25 season to 39.3 million tons from 40.3 million tons, due to excessive droughts linked to the La Niña phenomenon
• Brazilian sugarcane producers' group Orplana indicates that there have been up to 2,000 recent fires in Brazil, mainly in the São Paulo area, where most cane is grown. Up to 5 million tons of production is potentially at risk
• The projected deficit for the 23/24 season is just -200,000 tons, while the projected deficit by the International Sugar Organization (ISO) for the 24/25 season is as high as -3.58 million tons.
• At the end of August, India's food ministry lifted restrictions on ethanol production for the 2024/2025 season, which begins in November. India is one of the largest countries in terms of sugar consumption in the world. Earlier restrictions were related to the country's desire to tie up reserves to lower sugar prices (likely due to elections).
• India is usually a net importer of sugar, but next season will see the authorization of 2 million tons of sugar exports.
• It is expected that recent excessive monsoon rains may have led to an improvement in India's sugarcane production prospects. However, India's sugar production is expected to decline by 2.0% y/y to 33.3 million tons in the 24/25 season. At the end of September, India's sugar reserves were expected to be 8.4 million tons, against a forecast of 9.1 million tons in May
• A negative factor for prices is a significant upgrade in Thailand's production outlook. There, production in the 24/25 season is expected to rise to 10.35 million tons, an increase of 18% y/y from 8.77 million tons (the season ended in April). Thailand is the world's third-largest producer, after Brazil and India (not counting the EU as a single entity). However, it is worth mentioning that with production below 10 million tons, Thailand has fallen below China in terms of production volume.

Recently, there has been a slight increase in long positions and a further decrease in short positions. Although short positions are at very low levels, as the history of 2016-2017, 2021-2022 and 2023-2024 shows, short positions can be maintained at very low levels. Source: Bloomberg Finance LP, XTB

Sugar has retreated slightly in response to the recent rains in Brazil. However, the rains are not expected to be permanent, so further upward pressure on prices in the near term cannot be ruled out given the current La Niña weather phenomenon. Source: xStation5