The main story this week was the OPEC meeting and the failure of its members to reach an agreement on how to deal with high oil prices that now pose the risk of destabilising the economic recovery.
Broad based gains on the week
The Reuters Jefferies CRB index rose again in the process retracing 50% of the May sell-off. Gains as shown below were broad-based with different sectors represented at the top while the losers were primarily grains, apart from corn - more about that later.
The Reuters Jefferies CRB index rose again in the process retracing 50% of the May sell-off. Gains as shown below were broad-based with different sectors represented at the top while the losers were primarily grains, apart from corn - more about that later.
OPEC split down the middle
Returning to oil, what separated the two blocs was, apart from political differences, the near-term outlook for demand with Saudi Arabia forecasting a third-quarter deficit of nearly 2 million barrels per day. The other bloc, led by Iran, which needs high prices and is already operating at full capacity, argued that demand for oil is set to soften due to weaknesses in the U.S. and other economies.
Returning to oil, what separated the two blocs was, apart from political differences, the near-term outlook for demand with Saudi Arabia forecasting a third-quarter deficit of nearly 2 million barrels per day. The other bloc, led by Iran, which needs high prices and is already operating at full capacity, argued that demand for oil is set to soften due to weaknesses in the U.S. and other economies.
Hearing a Saudi minister saying this was “one of the worst meetings we ever had” clearly rattled the market with the price of crude jumping as a result. OPEC, which produces 40% of global oil and holds most of the spare capacity, seems to have lost some of its unified ability to control prices. The power seems to have moved to countries with available spare capacity such as Saudi Arabia, Kuwait and the United Arab Emirates and this split could actually keep a lid on prices short term as Saudi Arabia has shown a willingness to act if it feels the price is hurting economic activity. Compliance to quotas has been thrown out of the window for now and a unilateral decision by the Saudis to increase production is now likely should we see further rises in crude oil prices.
The next meeting is now scheduled for December but an emergency meeting could be called at any time before then, should it be required. The above mentioned estimates of 2 million barrels per day deficit in Q3 have led to some nervousness at the International Energy Agency and it has raised the prospect of governments releasing strategic reserves. Such a move would be viewed by the market as a desperate measure and could potentially be counterproductive and not have the desired effect, given the forward looking nature of the market.
Attention turns to summer peak demand
What is clear now is that despite ongoing supply uncertainties, especially with Libya, traders’ attention will turn to the demand side over the coming months in order to ascertain what kind of impact the current downtrend in economic activity will have on demand. The price of Brent crude has moved up to the lower end of the previous $120 to $125 range. The spread over WTI crude has moved above 18 dollars with WTI crude still stuck around 100 as expected increased supplies into Cushing (the delivery hub for oil traded in New York) keeps the price under relative pressure.
What is clear now is that despite ongoing supply uncertainties, especially with Libya, traders’ attention will turn to the demand side over the coming months in order to ascertain what kind of impact the current downtrend in economic activity will have on demand. The price of Brent crude has moved up to the lower end of the previous $120 to $125 range. The spread over WTI crude has moved above 18 dollars with WTI crude still stuck around 100 as expected increased supplies into Cushing (the delivery hub for oil traded in New York) keeps the price under relative pressure.
It also highlights the pressure on demand for high quality crude. The removal of 1.4 million barrels per day of light and sweet crudes from Libya has triggered extra demand for limited quantities of Brent crude. Refineries therefore compete for limited supplies as Middle East oil is of a lower quality and therefore costlier to refine into sought after products like gasoline. The near-term worry is whether Saudi Arabia will be able to raise output high enough to meet peak summer demand and the focus is now on how much of an impact the recent economic downturn will have on this peak demand over the coming months.
Natural gas showing signs of life
The price of U.S. natural gas has begun to show some signs of life after having traded sideways for the best part of three years. The chronic short position by hedge funds due to the positive carry on holding short positions, also called Contango, has begun to dwindle in recent weeks. Recent hot weather, following the extremely cold winter, combined with increased nuclear power outages and increased industrial demand has all helped trigger a reduction in storage levels below seasonal averages. For now though the market is stuck in a $4 to $5 range with the upcoming hurricane season adding an additional factor to the equation.
The price of U.S. natural gas has begun to show some signs of life after having traded sideways for the best part of three years. The chronic short position by hedge funds due to the positive carry on holding short positions, also called Contango, has begun to dwindle in recent weeks. Recent hot weather, following the extremely cold winter, combined with increased nuclear power outages and increased industrial demand has all helped trigger a reduction in storage levels below seasonal averages. For now though the market is stuck in a $4 to $5 range with the upcoming hurricane season adding an additional factor to the equation.
Corn outperforming on the back of dwindling stockpiles
Grain markets are caught in a similar problematic situation like that experienced in 2010 as dry weather has hampered planting prospects of wheat from China and Europe to the U.S. The main sufferer, however, is corn where flooding in key areas of the U.S. corn belt has disrupted plantings. The United States Department of Agriculture released its most recent estimates which showed that lower acreage and higher Chinese demand would bring global inventories for 2011/12 down to lower levels than previous forecast.
Grain markets are caught in a similar problematic situation like that experienced in 2010 as dry weather has hampered planting prospects of wheat from China and Europe to the U.S. The main sufferer, however, is corn where flooding in key areas of the U.S. corn belt has disrupted plantings. The United States Department of Agriculture released its most recent estimates which showed that lower acreage and higher Chinese demand would bring global inventories for 2011/12 down to lower levels than previous forecast.
As a consequence we have seen the price of corn rise to the costliest level relative to wheat for more than 50 years as production is struggling to satisfy demand from both feed users and ethanol producers. Recently we have seen an additional pick-up in ethanol production due to high gasoline prices. The outlook for wheat supplies has improved, especially for low qualities that can be used to feed livestock. The USDA estimates that U.S. stockpiles of corn will equal just 5.2% of consumption in 2011/12 while wheat stocks will be somewhat healthier at 30%.
Precious metals consolidating
Gold and silver spent last week consolidating with energy and grain markets receiving most of the attention. The summer months historically tend to be a weak period due to seasonal slowing demand and this year we have the added spice of QE2 finishing at the end of June. These factors could have an impact on investor behaviour but whether this will remove new found support after the May correction remains to be seen. The overall factors like strong central bank and investor demand, negative U.S. real yields and general uncertainties continues to put a floor under the market.
Gold and silver spent last week consolidating with energy and grain markets receiving most of the attention. The summer months historically tend to be a weak period due to seasonal slowing demand and this year we have the added spice of QE2 finishing at the end of June. These factors could have an impact on investor behaviour but whether this will remove new found support after the May correction remains to be seen. The overall factors like strong central bank and investor demand, negative U.S. real yields and general uncertainties continues to put a floor under the market.
The ratio between gold and silver, which shows how many ounces of silver it takes to buy one ounce of gold, has stabilised since the May correction settling into a 40 to 45 range. At the peak of silver’s rally it reached a low of 30 compared to 65 a year ago but still below the five year average at 57. A break out of this range could give a hint about the next move with silver tending to outperform in either directions. In other words a move below 40 signals overall strength while a move above 45 could signal additional consolidation.
Sugar higher but for how long?
The price of sugar has managed to retrace back up to 24 cents per pound which corresponds to 50% of the dramatic sell-off from February to May. Stronger demand combined with lower than expected supply from Brazil and Thailand has triggered the move. The feeling however is that once this near-term demand has been met supplies should continue to increase, especially with Indian production looking healthy on the back of a good start of the monsoons.
The price of sugar has managed to retrace back up to 24 cents per pound which corresponds to 50% of the dramatic sell-off from February to May. Stronger demand combined with lower than expected supply from Brazil and Thailand has triggered the move. The feeling however is that once this near-term demand has been met supplies should continue to increase, especially with Indian production looking healthy on the back of a good start of the monsoons.
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