May 21, 2018 – Commodity Weekly: Commodity markets in bullish mode despite strenghtening dollar
Commodities had a pretty strong few days as the Brent driven oil rally helped to lift prices in most of the sectors. The strengthening dollar hit precious metals the most, but the selloff wasn’t particularly heavy. Extreme speculative positioning however represents significant threat of possible volatile corrections for many commodities.
The oil market was primarily driven by the withdrawal of the US from the Iran nuclear deal which combined with the rising middle east tension due to relocation of US embassy to Jerusalem, elections in Iraq and the Venezuelan crisis represents the biggest threat to oil supply for the last few years amid rising global demand.
Record prices prompted profit taking causing decline in speculative net long. As there is still strong backwardation especially in WTI, the buffer to slow eventual selloff is likely very small. Until the geopolitical situation will not stabilize or OPEC and Russia will not abandon the production cut deal (the most likely consequence of current rally), there can hardly trigger anything else a significant correction as WTI seems well stabilized above $70 for now.
The fears from delayed planting seems to be false this year again after the last crop progress report showed planning in the most important states is more or less in-line with 5 year average. Also 50% of planted corn emerged (last year 51%) which is a little above the 47% average.
According to the last Wasde report, while there is expected a small decline in corn crop and ending stocks for this marketing season, the report also draw attention to lower demand expected by the USDA. However the report was rather bullish helping to hold prices above 4 dollars per bushel.
On the other hand if we look at the COT report, commercials are heavily positioned on the short side compared to previous years, hedging their production, while hedge funds are holding significant net long around 200,000 lots. This gives the feeling that there might be something wrong with the rally .
As weather conditions are improving, the last hope for the bulls are the US-China trade negotiations where agriculture is among the highest priorities of the US negotiators.
Sugar mills in India are in difficult situation as regulated high sugar cane price makes it impossible to start operations in the next marketing year starting in October. The sugar mills association warned that fixed fair remunerative pricing (FRP) linked cane costs reached 90-100% of sugar sales revenues.
Due to elevated cane prices, farmers are increasing production of sugar cane that if processed could cause an overproduction of around 6mil tonnes of sugar in India. Now however the problems faced by sugar mills can cause an unexpected hurdle and much lower sugar production as initially estimated.
Markets bought into the trouble of the sugar mills but the question is if it will lead to short squeez or just preparing the space to reload for anothe bear run. In our view the coming elections will likely help Indian sugar producers to convince the government to find a quick solution. They will either introduce export subventions, or change the FRP mechanism or they will come with the combination of both and therefore we expect the prices will drop again and reach multi year lows unless the weather conditions worsen in the coming months.
I hope this helped. Good Luck and remember to watch your risk and be consistent
Mr. Tech Man
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