May 21, 2017 – Weekly Commodity – Oil traders waiting for Opec, rain challenging US crops , sugar rejected ethanol parity
Last week the US and Brazilian politics were making the main headlines. Continuous weakening of US dollar supported commodities while the depreciation of Real had a negative effect on sugar, coffee and soybeans. The weak Brazilian real caused a liquidation of 5mil. tone of soybean stocks in only one day. Raw sugar got extra support on Friday from the rains forecasted for the cane crushing regions of Brazil. Crude oil prices supported by oil minister statements (Saudi Arabia and Russia) regarding OPEC production cut extension. The US farmers keep fighting their battle with cold weather and high moisture, corn sowing still below average.
The oil market is now focusing on the upcoming OPEC meeting (25th May) where countries producing oil and Russia are expected to agree on an extension of the production cut by 6-9 months. The expected positive outcome of a production cut extension and the increasing demand are the 2 main factors that can help to recover the oil prices. The production cut up to now however didn’t decrease supplies as OPEC members were emptying their oil reserves which are much lower now. This means the extension would bring a real drop in oil supply this time and in combination with the expected increase in demand for 2H this could cause a signficant rise in oil prices. I will publish a deeper, fact digging article later this week ahead of the OPEC meeting.
Technically WTI closed the week above psychological $50 level and if you are not log yet, probably you could still think about going long or start to build a long positions as in case extension the price can easily break out from the flag and reach new highs in the $60/b area. The tricky part here is the impact of US shale producers hedging activity usually pushing prices down. Even this will effect mostly the longer expiries (1+ year from now) I would probably take some profits around January highs ($55/b) if the closest contracts reach it.
The grain market is focusing on the North American weather still as current moisture is hitting two crops the same time. While the wheat harvest is just starting, the rain and cold weather may cause potentially yield and quality problems as well as spreading crop disease. However it’s hard to assess the damage at this phase. Corn sowing is slowed down by moisture and as I mentioned earlier there are fears if the rains will not stop the farmers will eventually switch from corn to soybean which could be planted a little later. This could result in jump in corn prices and further drop in soybean. Also don’t forget a huge corn net short in hedge fund positioning, which could result in a short coverage and jump in prices.
Technically we saw a false break to the downside from the triangle on Corn chart. There is a higher short squeeze potential in the corn makret (MM increase their already huge net short positions more than expected) that could be triggered by further sowing delay and farmers shifting potentially to soybeans. This may also trigger a bear run in Soybeans breaking down through the October lows.
The last week in the Sugar market was more about Government crisis in Brazil than the fundamentals. Due to the weakening of Brazilian real the Sugar prices slid down toward 15 cents levels. However at the end of the week prices recovered above 16 cents again due to further rain forecasted in the cane growing regions of Brazil. The other supporting case for sugar is that the market reached the 15 cent ethanol parity zone in Brazil below which it’s more economic for mills to produce ethanol instead of sugar.This could eventually result in less sugar production as expected.
Technically there is some upside potential short term to retest the H&S neckline and the last low before the sell-off at 18 cents. There is a high probability of range trading for several weeks between 15-17 cents until the market start to sell again. The Brazilian ethanol parity will provide strong support at 15 cents until the cane crush season is over.
Good Luck and remember to watch your risk and be consistent
Mr. Tech Man