It was a week of swings in the commodity markets with several reports and events driving the market sentiment. The Bloomberg commodity index first jumped 1.4% and then dropped to close the week with only half percent gain. While precious metals and coffee where among the biggest winners, oil and especially grains lost the most.
Crude
According to the IEA, OPEC’s compliance rate dropped in July to a new low of this year at 75 percent. Year-to-date compliance within OPEC is 87 percent while non-OPEC countries were at 67 percent last month. The 22 signatories reduced in July about 470,000 bpd above the combined level they have committed to keep, according to the IEA. After the OPEC meeting that failed to deliver significant proof that the compliance with the cut will improve, the EIA reported another massive 6.5 mil. barrels decline in US crude inventories while Gasoline inventories on the other hand increased by 3.4 mil. barrels. Both are in the upper half of the average range. An upcomming longer term declining trend in crude inventories is also supported by the disappearance of contango in the Crude market which will result that the „buy now - store - sell in the future“ strategy won’t be profitable any more as longer expiries are at the same level as spot prices.
From technical perspective the WTI rejected the $50/brl resistance and the outside day 2 weeks ago and the negative sentiment due to the tension on the Korean peninsula, the Thursday red candle on high volume was especially warning. However while the market tried to break lower on Friday, despite the overall risk off mode it could hold levels $48 and bounced back which is a positive sign but for a few more weeks I expect range trading btw $47-50 (or wider $45-52) before oil will take off on the declining supplies, and the rally could be eventually triggered by Venezuela.
Corn
The weekly crop progress report showed little weekly worsening of the corn condition while compared to the last year the numbers are much weaker. However in the WASDE report there was a huge bearish surprise when the USDA decreased its estimated average corn yield only by 1.2 bushels. And if this wouldn’t be enough, the report suggested higher or unchanged production from the biggest players in the global markets like Russia, Ukraine and Brazil. The slump in corn prices was partially caused by wheat which got a hit from Russia where the USDA expect record production. According to some brokers however, are sceptic regarding corn and soybean data as according to their calculations the yields should come much lower. I think however bulls should be cautious at this point.
Technically the market seemed to be more determined about the direction than last weeks, with volumes rising slightly. The market closed below the 61.8% retracement from recent tops however the last price was still pretty close so there is still some hope for the bulls which may hold for the next WASDE and first harvest reports. However the disillusionment of traders could be very painful.
Sugar
The sweetener was also hit by global risk off mode and record production added to the pain. Brazilian Cane industry group Unica reported 9.5% y-on-y increase in sugar production in the Centre South, the region that accounts for 90% of the country’s sugar output. The dry weather that allowed an unusually early start to cane crushing season is now seems to be a problem. The prolonged period without rain is the main source of concerns together with prices below the ethanol parity. Both can result in drop in sugar production for the rest of the crushing season. According to Brazil industry leader Cosan, the current drop in prices is temporary and the company is expecting sugar to rebound from lows. The company’s hedging activity is declining on the other hand however it’s increasing interest in biofuel sector through its energy venture which could be another way of hedging against price drop.
Technically the inverse head and shoulders formation failed as prices dropped below the neckline testing right shoulder. The 13 cents level will be key whether prices will rebound and take another attempt to reach 16 cent levels. However if this support will not hold the next stop is 12.53 and then 12.00 where the end of our target zone from earlier this year stands. In this case we will have to look at the historical lows of 2015, 10.80-11.10 first long term support and 10.00-10.13 will serve as second support zone.
Good Luck and remember to watch your risk and be consistent
Mr. Tech Man
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