June,5 2017 - Weekly Commodity: Oil and Sugar under pressure, Grains in a vacuum

Crude oil had a hangover week after OPEC meeting,  and some additional dose of pessimism supported bearsto push prices lower below 48 dollars. Grains were looking for direction from USDA Crop Progress report but there was no uggly suprise. Sugar had a tough week caused by falling fuel prices and early monsoon in India where a 25% higher sugar production is projected for this year.

Crude oil

The US withdrawal from the Paris climate deal was translated by traders into more US oil pumped out of the ground. US oil production is on the rise and we have seen something over 400k bpd added in 6 months (from last September until March). Given this pace, the US will be close to 10 mil bpd production (the levels of Saudi Arabia or Russia) in 1 year time.

The recent weakness was also supported by the spike in Libyan and Nigerian oil production. These countries are exempt from the OPEC cut deal and they are expected to increase the production further in the second half of the year.

So what could support the perspective of higher price? Well short term nothing really and it will probably oscillate between $45-50 unless there is production outage in any of producers or geoplitical tension rises in the middle east. However medium term two important events will take place that can provide support to crude. 

The first is Russian Presidential Elections 18 March 2018 where most probably Putin will win another 6 years term. However to convince voters he may need higher oil prices. The second supportive event is the planned Aramco IPO next year where the exact day is to be announced yet. Here again higher oil prices are needed to set higher price for the initial offering. The US oil production will be influenced by two things: first drilling cost inflation (expected 10-30% next year for shale oil) and second, the Feds interest rate policy (the cheap credit environment could come to an end if Fed continues on current rate hike path).

Grains

The grain market is in a kind of vacuum, hesitation continues as despite the rainy weather in the US, there are no signs of further delays in planting. The USDA Crop Progress report showed corn planting as expected above 90% but a little behind 5 year average, so no big moves… yet. While 73% of planted corn emerged, 72% is in good or excellent condition and in poor or very poor condition only 3%. 

So overall one could say that corn is on track to a good year for farmers. However there are two things we need to keep in mind. This estimate for corn is based on only 18 states producing 92% of 2016 corn acreage. The second thing is that it’s enough to miss the planed corn acreage by few percentage point to get a much lower ending stocks (some estimates talks already about 1.7bil bushels vs. the USDA estimate of 2.1bil bushels) So short term probably range trading btw 355-390 (July contract), but possible rise later the summer / in the fall when the impact of rains on final acreage and yields will be clearer (Sept/Dec contract). Therefore it’s important which contract are you watching.

Sugar 

Sugar futures in New York fell sharply last week in line with our estimation. The lower fuel and ethanol prices pushed the Ethanol parity to 13.50-14.00 which means major support now. Prices dived into this zone on Friday as early Indian monsoon helped the bears to push prices lower. Money managers positioning in the futures market was net short more than 23k contracts based on the data from last Thursday however after the sell off on Friday we can expect in the next COT report a significant change in the positioning. The light at the end of tunnel is that producers are stopping their hedging activity at these price levels, but on the other hand additional pressure from speculators may appear as they are closing their longs. Don’t forget for the bulls these weeks were very painful. 

Good Luck and remember to watch your risk and be consistent!

Mr. Tech Man

DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading team’s view of the past and current economic and capital market environment. It is not an investment advice and should not be viewed that way at all, and the creators of this material cannot be held liable for any potential losses resulting from trading, where despite this disclaimer someone would consider this material as an investment advice. All rights reserved ©2016. 

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