Hedge Funds Reduced Exposure Ahead of Big Rally

Hedge funds and large investors continued to reduce their long exposure to commodity futures and options last week. The data compiled 3 October showed a  4.2 percent reduction to 920,000 lots, the lowest level since July 2010.

This also helps to explain the strength of the rally that followed as funds scrambled to rebuild positions. The rally that began Wednesday was the biggest three-day rally of the year and was helped by increased efforts in Europe to deal with the debt crisis and signs that the U.S. economy may avoid recession.

The energy sector saw an increase in net longs of 20 percent primarily helped by a sharp reduction in the Natural Gas short position. The WTI crude position meanwhile continued to be scaled back, moving below 200,000 lots just ahead of the rally which began last Wednesday when U.S. inventories showed a much bigger draw than expected.

Exposure to the grains sector was cut by 2 percent to 242,000 lots, the lowest level since July 2010 and much below the 2011 peak of 890,000 lots back in February. The “World agriculture supply and demand estimates” report will be released this Wednesday and any signs of tightening could attract new buying given the sharp reduction of long positions over the last month.

The metal sector was flat on the week with a small increase in gold longs - the first in four weeks - being off-set by another increase in short copper positions.

The soft sector also saw a reduction in speculative longs as positions in sugar and coffee were reduced while the cocoa short position increased further. 

Background information: The Commitments of Traders is a report issued by the Commodity Futures Trading Commission every Friday with data from the previous Tuesday. It comprises the holdings of participants in various U.S. futures markets split into "commercial" and "non commercial" holdings. The non commercial or speculative holding are typically institutional investors such as hedge funds and CTAs. Analysts and investors follow changes in these positions because such transactions can reflect an expectation of a change in prices.

Weekly Commodities Update : Has Gold Left its Safe Haven Status Behind?

Over the past week sentiment towards riskier assets improved ahead of the monthly U.S. jobs report. In Europe two central banks provided further stimulus while officials showed increased willingness to support the banking sector after one bank in particular came very close to the edge.

Despite the somewhat improved sentiment commodity markets continue to be driven by risk aversion stemming from the financial crisis and the focus on a global economic slowdown. The market seems to be caught between two chairs for the time being as fundamentals have not supported parts of the recent sell-off while a recession, if it materialises, will trigger an even bigger sell-off just like 2008-09. The dollar has stabilised after its recent rally and it has helped commodities to recover, also taking into account how Hedge Funds have halved their long exposure over the last few weeks.

The Reuters Jeffries CRB index rose for the first week in a month as the energy sector especially staged a strong comeback on hopes that further stimulus will reduce the risk of a U.S. recession. Industrial metals also received a welcomed boost with copper staging a strong rally after having fallen by one third since early August.

 

Drop in U.S. stockpiles supportive for oil
The dramatic sell-off in crude oil over the last couple of months seems to be at odds with fundamentals as tightness in especially Brent crude is not yet being off-set by the expected slowdown in demand and increased Libyan production. The price of WTI crude reached a one-year low at 75 dollars per barrel before a surprisingly large weekly drop in stockpiles triggered a sharp recovery signalling the emergence of a new 10 dollar trading range with resistance now located at 85. U.S. crude stockpiles compared with the five-year benchmark average dropped to the lowest level since November 2008 while inventories at Cushing, the delivery hub for NYMEX WTI crude dropped to the lowest level in 18 months. This supports the narrowing spread between WTI and Brent in the months ahead as the graph below shows.

The Brent crude forward curve is still pricing in reduced demand as the economic slowdown takes hold and this will continue to be the main focus in the weeks ahead giving us a limited upside potential. Further price falls below 100 dollars on Brent crude, which is currently being priced in, will create problems for some OPEC members and Russia which requires high prices to balance its budget and this will increase the likelihood of Saudi Arabia removing excess production to balance prices.

Gold just another commodity – for now
The price of gold has settled into a range between 1,685 and 1,585 as it tries to recover from the recent sell-off. What has been interesting to observe is how the trading behaviour has changed from a safe haven play, more towards a commodity that moves in line with other riskier assets such as oil and stocks. The presence of physical buying at the lower end of the established range should help cushion any attacks on the downside.

This return, at least for now, to “just another asset” has helped other metals such as platinum and especially silver to outperform gold. Platinum at one stage traded at a discount of 10 percent to gold compared with an average premium of 30 percent over the last five years. Given this massive underperformance we could see a relatively large recovery bounce once the perception of the global economy improves.  

Financial flows are holding the key as investment demand for gold through ETFs and especially futures has been reduced by 500 to 2,700 metric tonnes during the last couple of months. Before this demand and safe haven interest returns further upside above 1,700 dollars seems limited unless we see an unexpected sharp sell-off in the value of the dollar. 

Food inflation easing further in September
The dramatic declines seen across different agricultural commodities in September have filtered through to the United Nations Food and Agriculture Food Price Index. In total 55 commodities are included in the Index which averaged 225 points in September, a two percent decline from August and a 5.5 percent decline from the peak reached in February but still higher than the value of 195 points during September 2010. The decline was lead by sugar (-3.8%), cereals (-3.0%) and oils (-2.3%).  

Grain prices stabilising after rout
The price of CBOT December corn rallied strongly after finding demand below 6 dollars per bushel which coincided with the July low. This followed a 26.5 percent correction during September where focus dramatically switched from supply worries to signs of demand destruction triggered by a stronger dollar and lower domestic demand. Speculative long positions have now been much reduced and talk that China may be falling short of a record 5 to 10 million tonnes also helped stabilise the price.

On 12 October the United States Department of Agriculture (USDA) will release its latest World Supply and Demand report for corn, wheat, soybeans and cotton. This will be viewed with much interest given the scale of the sell-off during September.

Dollar and Weak Growth Prospects Dent Commodities

Stock and commodity markets continue to focus on the impact of weak global growth conditions and the EU debt crisis. The dollar moved back to its strongest levels in months benefitting from the Swiss currency peg, worries ahead of the 9/11 ten year anniversary and an European Central Bank more concerned about weak growth than inflation.

Swiss currency floor
Foreign exchange markets lit up this week with news that the Swiss National Bank all but made good on persistent rumours that it would peg the Swiss Franc to the Euro in order to halt the dramatic appreciation of the currency which had begun to hurt the Swiss economy. The line is now drawn at 1.20 versus the Euro at which level the SNB will buy Euros at whatever quantity required to hold the CHF.

..and the potential dollar/commodity impact
 

This move could strengthen the dollar with the SNB likely wanting to buy other currencies than Euros, of which it currently holds 55 percent, in order to maintain a diversified mix of currencies in its reserves. With the dollar being the most liquid of the pack it could now have found a friendly central bank. Asian Central Banks have been selling dollars against Euros for months. All eyes will be on EUR/USD as a break of key levels would open the way for a substantial move higher. It will be interesting to follow from a commodity perspective as a stronger dollar removes some support for the asset class.

The Reuters Jefferies CRB index lost one percent over the week with most commodities bar a few being in the red.  

Oil focus on supply disruptions, Obama job plan and hurricane Nate
Crude oil markets quickly found support this week after another sell off. The recovery was driven by a bounce in equity markets and hopes that President Obama’s job creation plan could stimulate growth. But more importantly near-term is the tightness in the spot market with the loss of Libyan oil continuing. We also have outages in Nigeria, Syria and the North Sea adding up to lower-than-expected production which so far has helped offset reduced demand caused by the economic slowdown. Further, producers in the Gulf of Mexico have had to evacuate workers once again ahead of Tropical Storm Nate which is expected to become the third hurricane this season. Cushing not spilling over
 

During the week the spread between WTI and Brent crude reached a new record high of 27 dollars with most of the above supply issues impacting Brent more than WTI. One of the major reasons for this dislocation has been the belief that increasing storage levels at Cushing, the delivery hub for NYMEX WTI crude, would put downside pressure on prices. The chart below shows, however, that storage levels have been falling since May and currently stands at levels last seen in November 2010 - at which time the spread was trading below one dollar.  

What is the correct price of Oil?
One must conclude that the current spread is more related to the supply issues currently affecting Brent crude. This can also be seen by the Brent oil curve moving into a very steep backwardation with spot price trading more than two dollars higher than Brent for delivery in 3 months time. Should the bottlenecks begin to disappear we can expect prices to adjust lower within the established $118 to $108 range. The price of WTI is arguably cheep on the basis that Cushing is not overflowing, but until we see a pick-up in economic activity investors’ negative views will be expressed through WTI crude.

Gold sold off and found buyers again
Gold reached a new nominal record at $1,921 a barrel but, again, the immediate response was a $100+ sell off highlighting the increased level of volatility seen recently. The drop below $1,800, however, triggered new buying, especially out of the Far East, and a quick bounce followed. This two way battle will continue over the coming weeks but the overall direction still points higher towards 1,970 and potentially the magical 2,000 level. Hedge funds and ETF investors have continued to reduce long exposure over the last four weeks and it could be a sign of rally fatigue but, as mentioned above, the demand on setbacks looks solid for now.

Over the last five years gold has tended to correct aggressively each time it moved further than 20 percent away from its 200 day moving average. This could be the reason why gold has been struggling to hold onto gains above 1,900 recently indicating that further upside progress will be slower than during the previous couple of months. 

UN FAO food price index stable in August
The monthly Food Price Index from the Food and Agriculture Organization of the United Nations averaged 231 points in August and was nearly unchanged from July, but 26 percent higher than a year ago. The index of 55 food commodities hit an all time high of 238 points back in February on the back of steep price rises in sugar. Over the last few months prices have stabilised but world food prices are expected to remain elevated this year as stockpiles will be running low after a difficult growing season. The cereal index which includes wheat, corn and rice, rose 2.2 percent in August, primarily on the back of the rise in international prices of rice and corn. The FAO said: “A policy change in Thailand, the world’s largest rice exporter, which is set to increase the purchasing price from farmers to above market levels, served to further support this increase. Corn prices also rose sharply in August, reflecting further deterioration in this year’s crop prospects in the United States”
 

The price of U.S. rough rice has risen by one third over the last two months, still some 26 percent below the peak in 2008 which caused food riots across Asia. Meanwhile corn prices remain elevated with a highly anticipated U.S. crop report on Monday expected to confirm worries that the crop size and quality of the upcoming harvest have suffered due to a hot and dry summer.

 

Commodity Weekly Commodities Sunk by Growth Worries

The outlook for global growth is deteriorating, partly as a consequence of rising food and energy prices, and risk appetite has suffered as a consequence.

Carnage in currency and bond markets spilled over to equities and commodities this week. The world’s most followed equity index, the S&P 500 index, dropped below its 200-day moving average erasing all of its 2011 gains in the process. Investors looking for safety scrambled into the Swiss Franc and Yen before the central banks of the two nations had enough and announced measures to curb further currency appreciation. In commodities gold made a new nominal record high as investors and central banks continued to increase exposure to the yellow metal.

The commodity sector got hammered with the three major indices moving back into negative territory for the year with the base metals and energy sectors especially suffering heavy losses. The impact on global activity of a 40 percent rise in Brent crude from the 2010 average is now clear and the fragile economic recovery has not been able to cope with the price rises over the past six to nine months. Adding to this the debt crisis in U.S and especially Europe commodities in general will have a bumpy ride in the weeks ahead.

As the European debt situation continues to frighten investors they now also have to contemplate the risk of a double-dip recession in America. A third round of quantitative easing, which up until recently was dead and buried, could resurface thereby supporting tangible assets such as commodities just like it did throughout the second half of 2010.

The Reuters Jeffries CRB index is down nearly four percent on the week with just a few markets showing gains either from safe haven flows or from weather related issues. 

Going for gold
The price of gold reached a new nominal high at USD 1,681 as safe haven flows continue to support the yellow metal. It was not however immune to the selling elsewhere. The accelerating sell off-in S&P 500 on Thursday led to a quick 40 dollar retracement in gold before recovering. Silver fared worse as the 35% sell off earlier this year has left investors much less inclined to hold on to positions for longer. On Thursday this resulted in a seven percent sell-off leaving silver in negative territory on the week.

Technically gold reached the top end of the channel in which it has confided since October 2008 and in the short term that could provide some resistance with support now seen at 1,630 followed by 1,600. 

Oil prices hurt by economic slowdown
The price of WTI crude dropped to the lowest level in eight months as the uptrend from the 2009 low got broken. Having lost more than one quarter from the May high it is now only some five dollars above the 2010 average at 80 dollars. Meanwhile, Brent crude found support below 105 for the third time this year with the spread to WTI holding firm above 20 dollars. 

A slowing U.S. economy and general risk adversity caused by the stock market sell-offs had investors scaling back long positions in anticipation of reduced demand for oil in the months ahead. It certainly looks as if consumers have been hurt more than expected by higher oil prices during the past six months and the International Energy Agency stands vindicated in its decision to pump strategic reserves into the system. Tight fundamentals however should continue to support prices and prevent a major sell-off from current levels despite the continued elevated level of speculative long positions that exists, especially in WTI crude

Grains: Modest corrections compared to other commodities
Temperatures across the U.S. have been seasonally higher than normal during the month of July. This has caused the quality of the crops to deteriorate, thereby keeping prices supported despite the general level of risk adversity caused by weaker economic growth. The price of December corn, which reflects the new crop, revisited the June highs. Only a change towards more crop friendly weather will prevent prices from moving higher still as a certain level of demand destruction is required to prevent expected tightness of stock in the months ahead.

The price of new crop soybeans has been trading sideways since December roughly in a 12.90 to 14.10 dollar per bushel range. The weather during August is more important for the development of the bean as it is planted later and has a different maturity cycle than corn. A continuation of dry hot weather could therefore add some upside pressure to this crop as well. For now though near-term weather forecasts suggest that rain and more normal temperatures will return during the next couple of weeks. On that basis the established range should prevail but look out for the production and supply/demand report from the United States Department of Agriculture due August 11.

Meanwhile, the price of wheat remains stuck at the lower end of its recent range as Russia has ramped up exports in order to regain the market share lost during the export ban that lasted until July 1. Russia may export 20 to 25 million tonnes of grain this season according to the Grain Union President thereby offsetting lower production in Germany and France. Dry spring weather has been replaced by wet August weather which literally has left combine harvesters stuck in the mud. Higher corn prices however will support wheat prices as this could force an increase in corn to wheat feed substitution.

Base metals pricing in lower demand
Copper together with the other base metals fell to a five-week low after the biggest weekly drop since March. The LME base metal index fell 5.5% while a basket of European basic resource companies lost more than twice that on concerns that a faltering global economy will curb demand in the months ahead. Not helping copper either were news that workers at the world’s largest copper mine, Escondida in Chile had accepted an improved offer and would return to work after a two week strike over bonuses and benefits.

Sugar: Speculative longs heading for the exit
Sugar suffered heavy losses this week on a combination of expectations for a sharp increase in Northern Hemisphere production and lack of any supportive news from Brazil. Reduced production in Brazil, the world’s largest producer, helped the price of sugar reach a high of 31.68 cents per pound back in July before succumbing to profit taking. Since late May the speculative long position in sugar has risen strongly and this is now causing long liquidation at a time where trade houses have been reported as sellers as well.

Weekly Commodity Update : Commodities nervously awaiting Capitol Hill decision

The standoff continues between President Obama and the Republican led Congress over a deal to raise the debt ceiling. If they, beggaring belief, fail to reach an agreement to raise the government’s borrowing limit, the major ratings agencies have said they could downgrade the AAA credit rating that the U.S. currently holds. Such a move could raise the cost of borrowing and slow an already fragile economic recovery, highlighted by nasty U.S. growth data, and thereby reduce demand for energy by the world’s largest consumers.

A failure would trigger a spike in volatility and disrupt financial markets. These concerns were raised by fourteen of Wall Street’s leading CEO’s on Thursday who wrote to President Obama and Congress warning them of “very grave” consequences of a default and urging them to sort out a deal.

Meanwhile in Europe fiscal worries continue as the market fears that the Greek disease could still spread despite politicians’ best efforts to prevent this. Italy auctioned bonds this week at a very high cost and has seen its spread over German bonds rise above levels seen prior to the agreed Eurozone bail-out plan for Greece. Added to this, ratings agency Moody’s warned about a possible downgrade of Spain’s credit rating.

A month of two halves for commodity performance
Commodities spent the first half of July recovering strongly from the sell off that occurred during May and June. The last half however has been overshadowed by macro-economic concerns with the above mentioned fiscal worries in the U.S. and Europe having caused markets to trade sideways apart from safe haven investments such as gold and silver. As a consequence the Reuters Jefferies CRB index showed the first, but relative small, positive monthly return since April. 

U.S. oil demand reduced
The price of WTI crude briefly traded above 100 dollars before being knocked down with further losses following a surprisingly high increase in U.S. oil inventories. Imports of crude and gasoline into the U.S. appear to have fallen to the lowest levels in years, according to the Lloyd’s list. Whether this is a signal that demand is waning or it is caused by the release of 30 million barrels from its strategic reserves remains to be seen. The Energy Department has just begun delivering this oil with less than one third hitting the market in July and the remainder during expected during August.

WTI crude remains stuck in its July range between 94 and 100 dollars as macro economic developments either side of the Atlantic continues to be the main focal point. In Brent crude the trading remains confided to the 115 to 120 dollar range for now. The spread between the two varieties has moved back above 20 dollars following an injection of 430,000 barrels into Cushing, the delivery hub for WTI crude.

Impacts from hurricane season
The first four tropical storms of this year’s hurricane season so far have highlighted the risk to production and refineries in and along the Mexican Gulf. This week the price of Gulf of Mexico crude called Louisiana Light Sweet rose to a premium of nearly 22 dollars over WTI crude as tropical storm Don entered the Gulf carrying winds that forced companies to evacuate staff from oil rigs and temporarily shut down production.

The US National Oceanic and Atmospheric Administration NOAA have predicted 3-6 major hurricane storms this coming season. In order to cause any disruption they first of all have to come to fruition and secondly have to hit the Gulf leaving enough unknowns for the market to avoid pricing in the potential risk. Natural gas which in previous years use to see increased volatility shrugged off the news about Don and dropped 4% on the week as traders scaled back positions on the back of higher than expected weekly storage data.

Tricky week ahead for precious metals
Gold extended its recent gains and spent the week consolidating above USD 1,600. Silver meanwhile has been struggling to get a foothold above 40 dollars and has underperformed on a relative basis. Being one of the top performers during July investors have been taking some profits as the May sell-off is holding back investors from building up large scale positions similar to ones seen during the first quarter of 2011.

Gold and silver will be facing a tricky week with pressure mounting for some kind of result from the U.S. debt ceiling negotiations. Short term a satisfactory outcome could remove some of the recent support, especially considering the chance of the dollar strengthening as a consequence. Should gold manage to break below USD 1,600 it could trigger a move towards the next support which can be found in a band between USD 1,555 and 1,575.
 

Agricultural markets also had a quiet week continuing a sideways trading pattern while waiting for further clues about the potential size of the upcoming harvest. The adverse weather which had been supporting prices up to now seems to have normalised with rain across dry areas helping crops prosper.  

Back into Commodities, especially Gold and Grains

Funds and large investors have begun to move back into commodities, especially gold and grains. According to the weekly data from the Commodity Futures Trading Commission, released last Friday with data from July 12, total speculative investments in U.S. based commodity futures (ex. options) rose by 13 percent to 1.111 million lots or 92 billion dollars in nominal terms. This was the biggest weekly rise since August 2010.

Increases were seen across all five sectors with the biggest percentage change being meats, while the biggest nominal change was metals.

Gold positions rose by 25 percent to 197,600 lots as the ongoing debt crisis in Europe triggered a new record high thereby attracting investors back to the yellow metal. This was the biggest surge in holdings since September 2009. Copper also saw a 25 percent increase as recent high prices and the outlook for future demand looks supportive.

Crude oil also saw renewed interest as traders began to believe that the International Energy Agency induced sell off would not stick with focus once again switching to the potential for future demand outstripping supply.  The net speculative change on the week for WTI however was flat as an increase on Nymex was offset by a reduction on the ICE exchange.

Long positions in the grain sector recovered strongly with the soybean sector seeing most of the increase. With attention now firmly back on fundamentals, after the recent bout of risk reduction, investors have returned as hot weather in the U.S. has increased the risk of lower output.

Sugar continued to receive interest from the fund community as the strong rally back to the 30 level saw speculative long positions increase by 5 percent last week.

Investors in Lean Hogs who initially had been caught out during the recent strong rally tripled their long positions last week to 14,000 lots, still well below the 40,000 lots that was recorded when the price hit these levels last time back in April.

Background information: The Commitments of Traders is a report issued by the Commodity Futures Trading Commission every Friday with data from the previous Tuesday. It comprises the holdings of participants in various U.S. futures markets split into "commercial" and "non commercial" holdings. The non commercial or speculative holding are typically institutional investors such as hedge funds and CTAs.

 

Gold at new record on debt woes on both sides of the Atlantic

Commodities have recovered strongly during the last couple of weeks after the June washout where speculative positions were reduced across the board. All the major commodity indexes are back in black having recorded solid gains over the last two weeks with increases seen across most sectors. 

Just like other asset classes the commodity space is keeping a close eye on developments on either side of the Atlantic. The European debt crisis is still full on with politicians and central bankers fighting hard to avoid contagion towards other countries like Italy which came under significant speculative attacks early in the week. In the U.S. the government is struggling to pass a law that will raise the debt ceiling with failure carrying the risk of downgrades and default. In the middle of this the Euro and the dollar is fighting it out with no clear winner emerging as of yet. 

Oil holding up as spare capacity is running low

Half of the 60 million barrels of crude that the International Energy Agency was going to release from its strategic reserves has now reached the market and if the intention was to bring prices down it has so far been a failure. The price of Brent crude at 116 is almost unchanged from the levels before the release with bottlenecks still existing due to lost Libyan high quality oil. WTI is lower but as Brent is the benchmark for oil transaction it’s really the one that counts.

Forward prices have stayed relatively firm as the main worry is still one of reduced spare capacity as increased demand from emerging economies in the months and years ahead continues to put strains on producers to keep up. In a report this week the IEA projected that oil consumption in 2012 could grow by 1.47 million barrels per day to 91 million bpd. It also said that the economic impact of higher oil prices could reduce the forecast. 

The price of Brent crude has been averaging 111.40 so far this year which is 39 percent higher than during 2010. This increase combined with higher food prices has impacted struggling households across the western world leading to reduced economic activity with the risk of additional rises reducing activity even further.

With the Libyan crisis still unresolved it remains to be seen whether the IEA will release more oil once the initial 60 million barrels has reached the market. The decision will be made 30 days after the initial announcement, which will be by Friday next week, so some speculation about this will help drive the market in the days ahead.

Brent crude for September delivery is currently trading in a 114 to 120 dollar range with focus also firmly on the economic developments either side of the Atlantic. Should President Obama and the Republicans reach a debt ceiling agreement market focus could switch back to the European debt crisis and thereby support the dollar removing some support for oil.

Debt worries supports gold and silver

Gold made a new record high this week in several currencies as it benefitted from macro-economic news on both sides of the Atlantic. The worsening debt situation in Europe, the possibility of another round of monetary stimulus in the U.S. combined with a possible credit rating downgrade have all been playing into the hands of gold bulls.

 During the last few months the gold space has become less crowded with investors having pulled money out of gold. This is now helping gold back to record territory with investors coming back despite it being a time of year with traditionally low physical demand.

On the back of a nine-day winning streak I would expect some near-term consolidation with 1,550 USD providing support and 1,600 the resistance. As long as the macro environment stays friendly towards gold there is no reason why the year long rally cannot continue. Should we manage to break above 1,600 it could set off towards the upper end of the trading channel, currently around 1,680.

Silver also benefitted from the gold rally as it sits well below the highs reached in April. It has outperformed gold by some margin this week but is currently stuck in a six dollar range with 40 USD providing some resistance.

Grain prices higher on strong fundamentals

The significant sell off in grain markets during late June and early July came to an abrupt end with fundamentals such as hot temperatures and increased exports driving prices higher. The sell off was extended by speculators pulling out of the market in a hurry, causing a dramatic drop in long positions held by Hedge Funds and large investors. Since the peak in early February they have scaled back futures positions from above one million lots down to 400,000, the lowest level in a year. 

With such a dramatic reduction in speculative interest the markets have been in a much better position to react to fundamental news and this has caused the rise in corn, and especially wheat, during the past week. The weather forecast for the next couple of weeks across the U.S. corn and wheat belts indicates very hot and dry conditions which could hurt yields and exacerbate a tight supply outlook.

Rice surges back to 2008 levels

Rough rice traded in Chicago has rallied more than 13 percent during the last month on the back of reduced U.S. crops combined with uncertainties about the intentions of the new Thai government with regard to its rice policy. Thailand, the world’s largest exporter, could implement a minimum price to its farmers which would trigger higher export prices and thereby higher world prices. Meanwhile, in the U.S. crop projections for this season have been reduced to 6 million tonnes from 7.55 million tonnes last year as dry weather in Texas and floods elsewhere have cut production.

Sugar pauses after breathtaking rally

The price of sugar has stabilised around the 30 dollars per pound mark, after having rallied 47 percent from the May low. The market has been struggling to deal with expectations of the first fall in Brazil’s sugar production in a decade. Bad weather has hurt the sugar cane crop leading to expectations for a 2.2 million tonne drop in sugar output to 32.4 million tonnes. This should keep supplies tight during Q3 which is also reflected in the forward prices. The United States Department of Agriculture this week released data indicating a lower stock level than preferred which could trigger more imports over the coming months. The price however may now be vulnerable to a pull back as most of the supporting news seems to have been priced in.

Natural gas continues to go nowhere

The important 4 dollar level was tested again last week before a sharp bounce pulled it back towards mid range. The market is caught between expectations for a rapid growth of inventories this summer and the prospects for above average temperatures across two-thirds of the U.S., which could trigger higher consumption. Adding to this we are beginning to approach the hurricane season which also tends to keep the market supported during the duration. You can follow potential hurricane developments on www.nhc.noaa.gov .

Cotton back to earth

The price of cotton dropped further this week as weather concerns in the U.S. were offset by generally favourably global growing conditions which should help a rebound in global production from the depressed levels of the 2010/11 season.

An extreme drought in Texas which is responsible for one third of U.S. production, has caused farmers to abandon the crop and currently some 30 percent of  total U.S. planted acreage risks being dropped leaving the U.S. production some 8 percent below last year.

Production from China and India, two main producers, is expected to more than offset lost U.S. output with favourable weather lifting yields at a time where consumption from the two nations has been slowing as high prices have led to an increased use of synthetic fibres.

From the Wild Wild West to tranquility territory

Clearly most short-term speculative accounts have reduced positions dramatically, as also seen in ETF net-long positions, whilst long-term investors have stayed put, and are possibly first watching Wimbledon and now the Tour de France, with no intention to escalate positions.

Still, they may choose to stay alert like Annie and keep some powder dry for flash crashes, dips and stop related sell-offs as the secular trend for commodities remains intact.

Risk-off in June reduced investor net-length significantly, back below 2008/2009 and 2010 highs despite underlying demand being intact and weather disruption supportive factors.

Source: Morgan Stanley analysis

Oil prices floored
Oil prices found the floor after the International Energy Agency hiccup. Again, as shown in CFTC data, speculative accounts have reduced net longs in WTI and Brent and most major top five banks which were premature in hiking oil price outlooks have now revised outlooks down by $10, still eyeing WTI $110 and Brent $125.
The IEA 60 mln barrel release seems to be oversubscribed, already indicating firm underlying demand clockwise from Sapporo to Vladivostok, so the impact of the emergency stock release on the global balance is likely to be relatively short-lived and long-term bullish.
IEA inventory release showed yet another draw higher than expected and boosted by positive U.S. economic data releases, WTI finished this week at the highs of 98,60 from last Fridays 94,50 whilst underlying fundamentals remain bullish for oil as we are living with no spare capacity.

Source: Bloomberg

Natural Gas traders akin with US weather prophet
You really have to be a U.S. weather prophet to week trade natural gas to determine if air conditioning is on and off with no correlation with Dow Jones. U.S. natural gas futures slid more than four percent lthis week, pressured by weaker cash gas and improved nuclear generation despite some ongoing heat. Inventory data caused another day tumble to lows of $4.13 MMBtu. The IEA storage report showed 95 Bcf injection much higher than expected and with the deficit set to evaporate before summer ends, the outlook for gas is looking increasingly bearish.

Precious metals – Hype is behind us
When my Mum and cab driver do not mention silver and gold for three weeks, then I know the Q1 hype and price rally is behind us. Also ETP silver product flow shows the smallest net long positions in three months and with a clear indication that speculative accounts are not willing to take gold prices higher than1550 - with producer hedging obvious and break-even prices for cost of production putting a firm bottom under the market around 1200 ex profits - then around 1400 seems to be the absolute floor currently from a demand/supply perspective.
However good news from the global auto sales industry is keeping a floor under  platinum prices after the Japanese tsunami earthquake related soft patch trend. Gold wobbled back and forth this week on ratings issues and closed 3% up on the week.
With positions being fairly neutral, the next move will be fierce, so stay alert!

Agriculture – China steps in
Next week is busy again as USDA and WASDE report crop conditions, ending stocks and production and with U.S. weather changing by the minute all grain products are facing volatility going into next week.
This week however was recovery week followed by last week's dramatic limit down sell-offs in wheat and corn on the back of acreage and ending stocks data, with major news that China was stepping in buying corn for storage again.

Russian wheat sales continued to weigh on the market amid seasonal pressure from U.S. winter crop harvests and crop conditions for corn and beans are pretty good because the weather is helping the yields, so the market is currently capped on the upside too.
Corn prices rallied a good 4% after the wash out last week, boosted by sentiment, fresh Asian buying and higher oil and sugar prices, leading corn higher through ethanol demand

U.S. rice futures close solidly higher as India's agricultural minister switches course to say he will not push for grain exports. A continued ban on grain exports from India most likely means increased demand for rice from other countries and with India being the second-largest producer after China, but also consumer, it remains a key driver for rice prices when exports are regulated.

Source: Bloomberg 

No Cocoa please, but hot Coffee and plenty of Sugar

Coffee
Parts of Brazil's Minas Gerais coffee belt were mildly hit by frost this week and supported current prices. Frost can kill coffee trees' leaves and branches, reducing output in the following year's crop. Such freezes are rare but this is the worst since the last major freeze in 2000 occurred last week, but was mostly confined to minor producer Parana. Being the world's largest producer of Arabica coffee, Brazil remains the one and only coffee price factor with Vietnam producing Robusta  instead. All in all it’s all down to weather and frost in Brazil, so risk remains for higher Caffe Latte prices at your corner cafe.

Sweet Sugar up 10%
The queue of ships waiting to load sugar at Brazilian ports rose from 64 to 86 this week, as the world's largest sugarcane crop nears peak harvesting. Waiting times for ships to load were between 8 and 10 days, which would appear to be much shorter than a year ago when ships faced waits of a month or more at some congested ports when rain repeatedly interrupted loading.
UNICA revised down cane crush estimates and sugar took off to the moon and continued production fears in Brazil is keeping front prices firm and squeezed this week, whilst deferred contracts 2012 are still trading 20% lower than spot. Super low inventories, Brazilian harbour congestion and long speculative longs are keeping front prices sweet as well.

Cocoa, O’Boy
The cocoa surplus for the 2010-11 season is likely to affect the market in the third quarter as shipments resume from top producer Ivory Coast, which produces 1/3 of world output.
Rains in the Ivory Coast's key cocoa growing regions last week were ample for the development of the mid-crop until late August and the Ivory Coast is now the end of the 2010/11 season with a bumper crop well ahead of target largely due to good rains. 

Cocoa purchases in the world's number two grower Ghana reached 940,000 tonnes by mid-June, putting output over 50 percent ahead of last year and the bumper harvest had strained storage facilities and led to some congestion at some port and depot facilities. 
Market prices have peaked and market direction looks bumpy with negative bias.

 

Copper, force majeur decouples C from C
Production at Collahuasi copper mine, the second-largest in the world has reportedly fallen to 30-40% of capacity over the past week due to on-going adverse winter weather conditions.
Indeed, current weather conditions were described as a once in "every 50 to 65 years" also as supply-disruption in Chile has come from the separate threat of a 24-hour strike by workers at Codelco, the world's biggest mining company. The final concern on the supply-side has come from Grasberg mine in Indonesia being the third-largest mine globally. The seven day strike at the mine has reportedly reduced the mine site to operating at close to 10% of capacity. So copper rallied for others reason than the Chinese rate hike which would otherwise put pressure on prices. So, Copper has decoupled from China gaining yet another 4 percent this week on top of last week’s rally. The trend is your friend, so be it.

 Source: Bloomberg

By Kjeld Lynggaard, Senior Manager, Trading Advisory on behalf of Ole Hansen.

Commodity review: Annie get your gun

By Kjeld Lynggaard, Trading Advisory

It has been a Wild Wild West lately and a difficult few weeks for commodity players, hedgers and producers, with macroeconomic uncertainty prevailing over stock markets, with risk on and risk off on an intra-day basis and speculative positions being stopped out, washed out, re-entering, rebuilding, but not panicking. But most of the erratic moves have been caused by external events such as IEA release, USD volatility and not by rock firm underlying fundamentals supporting commodity prices long-term.

A reduction of speculative longs as observed in recent weeks is structurally positive for commodity assets, which still are run by weather developments, geo-political events and the good old supply and demand fundamentals. Also Chinese speculative volumes reduced as Commodity futures trading in China, the largest buyer of copper and soybeans, tumbled 30 percent in the first half as regulators clamped down on speculation and as the central bank mopped up liquidity to ease rising inflation.

Around $7bn was withdrawn from core commodity investments in May, a level of outflow not seen since the financial crisis. Total commodity AUM experienced a massive decline of $26bn to $425bn , the first decline since August 2010 and the largest since the $55bn fall in October 2008

Stay alert Annie and keep some powder dry for continued volatility ahead.

Oil news is bullish
Indian oil demand was at its second highest level ever in May, with diesel demand at a record high buoyed by greater usage in power generation.
Japanese demand already shows signs of improvement, with May demand down by just 90 thousand b/d y/y.

Latest weekly DOE data show a fall in US oil inventories led by crude inventories, while June demand softens on the back of poor distillate demand.  The surplus of US oil inventories relative to their five-year average has fallen by 4.1 million barrels in the latest data release and now stands at just 27.1 million barrels.

IEA - OPEC 1-1, IEA scores own goal
Oil prices recovered strongly this week as advocated by TAT in our Next Week and Trades on the radar for Saxo Bank Trading Advisory clients and now stand above levels at which the SPR was released. August Brent gained $3.6 to $111.65/bbl while the equivalent WTI contract added $1.8 to $94.56/bbl. Indeed, after the initial knee-jerk reaction lower, it does seem to us that the market is finally viewing the IEA stock release with a fair degree of skepticism and even supporting bullish view, with worries about the possible signals it sends beyond the upfront price developments an focusing on the long-term impact. If in the long-term the oil goes back and the release is essentially borrowing oil from the future, it will have done little to alleviate market tightness for the future.

Moreover, if this is viewed as OPEC being unable to meet current demand through its capacity usage or even  worse if output is reduced as consumer governments take on the role of the marginal supplier, the negative impact on prices will be extremely short-lived and even positive….short term gain, long term pain!

Natural Gas: Watch the air-conditioners
US natural gas prices gained on the week as warmer temperatures approaching supported the market. August contract is trading virtually flat to July, expired and gained from 4.20 to 4.36 during the wobbly week. The approach of warmer temperatures has overcome what still appears to be bearish sentiment in the marketplace. Enthusiasm could be short-lived as EIA-914 and Natural Gas Monthly data released yesterday showed mixed news, tending to be bearish and market to stay in secular range 4.10-4.75 in Q3 2011.
EIA-914: The increase in supply roughly matched that predicted by more contemporaneous pipeline flow data, meaning the market was not necessarily caught off guard by the robust production increase reported. On a y/y basis, production is running well ahead of last year by 4.6 Bcf/d, led by growth in Louisiana.  The success of shale gas, in particular from the Haynesville and Marcellus, in boosting these volumes is profound.

Carbon, bungee jumped
European Union carbon permits fell 20 percent in June, the most since January 2009 as regulators set rules that will prompt more supply and potentially trim demand. The EU plans to sell at least 300 million tons of allowances starting this year and running through 2012, boosting supply. They will be the first sales for the phase than begins in 2013 and ends in 2020. Trading in allowances jumped to a record this month on ICE as prices plunged to their lowest in more than two years. This week, Carbon regained some strength and trading low 2010 levels which seems low considering the global industrial pick-up.

 Precious metals maybe not so precious
Silver spec’s are out, but investors remain long:

Silver
Silver ETP holdings continue to dwindle, with June set to mark the third consecutive month of outflows also emphasized by recent reduced CFTC data showing only minor longs left in Silver futures.

Gold
Gold buckled under the weight of growing investor appetite for risk on Thursday after Greece looked increasingly likely to push through austerity measures, which offset the potentially bullish impact of a weaker dollar. 
The price of gold is on course for an eleventh consecutive quarterly gain during the second three months of 2011, so Gold is losing steam as safe haven status and inflation hedge excuses are evaporating. The battle for 1500 continues.

PGM
Platinum and Palladium however received supporting news over the cause of the week with risk of political impact from nationalization of South African mines, whilst global car sales data is showing signs of life with Japan picking up again after March disaster, all in all very supportive for PGM.

Agriculture – Cliffhanger
Corn extended its biggest monthly loss since October 2008 and wheat tumbled to the lowest level in almost a year after the U.S. reported acreage and inventories that topped analyst’s estimates.
The USDA surprised the market yesterday and caught investors completely off guard with limit down on corn and wheat contracts on fund selling and stop losses. However, questions remain as to exactly how much of the recent Midwest flooding was captured in the acreage survey, which was conducted in early June.
But all in all higher acreage and higher stocks than expected caused 7% sell-off in both grains whilst soybeans enjoyed “safe haven” status after figures met expectations. The massive flooding will likely cause huge revisions of just released data which will be price supportive and recent sell-off is finally taking the heat of food prices and inflation, whilst underlying demand fundamentals are improving rapidly. Inventories were also reported higher than expected but stocks to use ratios remains almost all time low, so reaction seems overdone. Corn stocks to use ratio is currently below 5%, whilst wheat stocks around 21% of global annual consumption. Corn cannot afford one single weather event and Apollo 13 will take off again.
Rice, our top pick, however raced limit up the daily 50c to 15.05 as USDA slashed its plantings estimate and the impact from Mississippi River flooding has submerged fields whilst the weather has either been too hot or too dry.
Don’t keep your powder dry, start shooting as grain prices are back to Q2 2010 levels pre global weather hiccup.

Wheat prices:

Cotton down, Benetton up!
 U.S. farmers seeded 9.2 percent more cotton than forecast in March, exceeding estimates by analysts, after prices surged to a record this year according to USDA data. Cotton fell to a seven-month as more orders were canceled from the U.S., the world’s top exporters, and a report showed planting topped estimates

Sugar, lifted by rain
The strongest gainer was sugar, with the front month peaking 8% higher and closing only just 1% higher on the week. Sugar prices have gained on logistical delays at Thai ports and a weak start to Brazil’s harvest. Indeed, also Unica released latest sugarcane production statistics from Brazil's centre-south which highlighted the wide lag in current crushing compared to year-ago levels.
Global Sugar Organisation Unica said rains in southeastern Brazil slowed harvesting in the first half of June. Rainfall also watered down the cane that was collected, contributing to a 2% decline in recoverable sugar content per ton and a 3.3% decline in ethanol yield..
The global sugar balance remains extremely tight, hence front month old crop will remains extremely volatile for the reminder of the year 2011, with risk clearly to the upside for front contracts whilst deferred remains under pressure.

Weekly Commodity Update: OPEC spooks oil markets

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.

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.

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.

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.

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.

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.

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.