May 28, 2017 - Weekly Commodity - tough week for commodities, crude, industrial metals, soybeans down, corn and wheat traders still hesitant

Last week the Bloomberg Commodity index fell 0.8%. One of the reason was that traders were disappointed not getting any juicy surprise from OPEC on Thursday. While precious metals gained, industrial metals fell on both supply and demand news and downgraded China. Soybeans dropped on possible decline in imports to China and Sugar fell on surprise year on year rise in Brazilian sugar production. Corn and Wheat still waiting for direction as Crop Progress report on Tuesday will show where the sowing and quality estimates are currently. So plenty of interesting topics, let’s look deeper at some of them.

Crude oil

The market participants were disappointed by the OPEC agreement despite the fact that the headline news came out as expected, the cartel extended the output cut by another 9 month. However this was already well priced in and there were no more buyers to jump on after the announcement and investors took some profits after the rally of the previous week. The market was waiting for something more, some positive surprise not mentioned earlier, like a deeper cut or a limit to exports as we mentioned in our Story of the Week piece. Still, the agreement will limit crude supplies more than in the first half of the year due to higher demand and lower crude stocks expected. So now after the market digest over the weekend the agreement we can easily see a continuation of the Friday rebound.

My key note on this is while US shale is more effective and can further increase production, the pace of increase will slow down next year. On the other hand the next year for Saudi Arabia is very important due to the planned Aramco IPO, and they are too smart to let crude stay where it is now.

Corn

The indecision in the corn (and wheat) market lasts for 5 weeks already and this is clearly visible if you look at the weekly candlesticks, small bodies, long shadows… So what’s next? Well the coming week will be important as the USDA will release its Crop Progress report on Tuesday and the data can cause a volatile reaction both ways. According to the last report the corn sowing was just slightly behind the 5 year average, however there are more and more rumours that farmers needed to replant corn in many areas. Given the huge hedge fund shorts the upside move could cause short liquidation. I will try to find some time to prepare a short overview before the release, what to watch. Short term this is the main data of the week which will very likely move the market.

We also have to take into consideration the excessive moisture on the North America causing problems not only in the US but in Canada too. The market last week ignored the latest Cattle on feed report which came out at 1.85 mil head, which is  11% above 2016. This means the demand side of the corn market is rising.

Soybean

I dont like to write about too many commodities but this time soybean is worth to mention. The complex was hit by rumours that China may cancel imports from US as the soybean crush margins are still negative and the situation is worsening. The crop broke the key support at 930 which opens room to further decline and even the test of 850 level could not be ruled out give the increasing compention fro Argentine and Brazil. 

Sugar

Raw Sugar futures fell to 13 month low after Brazilian fuel prices were cut last week. Lower gasoline prices mean pressure for ethanol prices and this means that the ethanol parity is declining. This is pushing the key support for sugar well below $15 as it makes sugar more profitable for the sugar mills to produce sugar. Adding to this last week, Brazilian sugar mills crushed more cane than expected and produced by 35,000 tonnes more raw sugar year on year during the first 2 weeks of May versus the expected drop of 225,000 tones... Given the weakening real I’m wondering what keeps sugar prices still above $15 (there is no daily price limit on ICE). We maintain our downside view which could be offset by weather shocks of course so proper money management must be in place.

Good Luck and remember to watch your risk and be consistent

Mr. Tech Man

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