Apr 23, 2017 - Weekly Commodity (Commodities under pressure)

The commodities had a rough week as Bloomberg Commodity Index fell 2.5% percent in only one week. The already nervous markets were we had a serial of negative news in several commodity sectors caused that Money Managers cut some of their elevated exposures ahead of French Presidential Election on Sunday. Some of the bad news were the 1.5mil barrel rise in US Gasoline inventories, rise of US oil rig count, the bigger than expected wheat planting in Canada, huge stocks of wheat in the black sea region and the improving weather conditions in South America.

CRUDE

As geopolitical worries are fading oil prices fell more than 6% last week on concerns that US crude production rise will offset the impact of OPEC’s output cut. We have seen the biggest weekly drop in a month with oil loosing 2% just on the last trading day of the week. Key data that forced out investors of their bullish bets ahead French Elections were:

• EIA Weekly Petroleum report first didn’t move the market much due to the headline decline in US crude inventories by 1.0mil barrels. However soon after the sell-off started as the total gasoline stock increased by 1.5 mil barrels. Refineries increased operations as they are running at 92.9% of their capacity vs 91% a week which should be supportive to the prices.
• Baker Hughes US Oil Rig Count released on Friday showed an increase again the 14^th consecutive week which means the US production will most probably grow further. The US crude oil output was rising the last 9 months and its now at the highest level since August 2015. This in big part offsetting the OPEC output cut

What could support oil is an extended production cut from the OPEC and Non-OPEC countries on their meeting on 25th May. However there are already speculations that due to the positive effect of OPEC output cut on the US shale producers there will be no extension. Also the expected seasonal decline in crude inventories in April-May should bring support for Crude. Another support may come from Iran after the country cleared his tanker storages and its exports are expected to significantly decline in May.

GRAINS

The grain sector is really out of investors favour. After a promising week the sector got further hits this week. Main drivers of the sell-off were:

• Canada reported bigger than expected wheat and canola planting which could have direct impact on US market.
• The improved weather forecast will help South American grain producers. Despite the earlier fears of destroyed production in Argentina and some areas of Brazil, it seems that the damages were less significant. In Brazil after soybean harvest is almost finished and corn harvest behind the door, there are growing concerns of insufficient storage places which is a repeating problem of the countries farmers. What is fuelling these worries is that corn and soybean prices in Brazil are below production cost and farmers are not willing to sell their production at current prices.
• The similar situation could develop on Eurasian wheat markets. According to the local USDA office in Russia and Ukraine, the production will not drop enough to offset huge stockpiles built up during last season in the region. When the new harvest will need storage place, farmers will likely throw the old stocks on the market which will bring further pressure to wheat prices.

While there was seen some profit taking at the end of the week, the outlook seems to be still strongly bearish. The near record net shorts of hedge funds are still keeping alive the story of possible short squeeze if any meaningful change in weather will appear.

SUGAR

According to USDA local office in India despite the rebound in production by 18% this year, India will keep importing sugar the next season too. The increase in planting will be most probably offset by the rising demand which will keep the country being next importer of sugar the next season too. Brazil is also still in focus due to the ongoing cane crush in the country where a record sugar production is expected despite a decline in sugar cane production.

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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