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.
Contact:
landoftradingATgmailDOTcom, Blog: landoftrading.blogspot.com
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