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AfkInsider Commodities Report: Supply Concerns Support Oil And Cocoa

AfkInsider Commodities Report: Supply Concerns Support Oil And Cocoa

While most other commodities headed downwards this week, oil and cocoa prices largely bucked the trend, with concern about supply continuing to provide support for both.

Tensions surrounding a potential military strike on Syria by the U.S. drove up Brent North crude futures to a six-month high of $117.23 a barrel based on the October contract on London’s ICE Futures Europe last week. October West Texas Intermediate (WTI), the U.S. benchmark light, sweet crude contract, hit $111.75 a barrel, an intraday high not seen since May 2011. Syria itself is not a big oil producer but there are concerns the conflict could spill over into the wider Middle East and disrupt supplies.

After a weak start this week when Brent crude slipped to $114 a barrel, (fears over supply disruptions in the Middle East initially eased after the U.K. said it will not join any military action against Syria) Brent has since recouped some of the losses. October Brent was at $115.14 a barrel in late trade on Sept. 5. In addition to the tensions around Syria, a prolonged outage at several Libyan oilfields has also underpinned prices.

The most recent better-than-expected manufacturing data from the U.S. and China early this week have also boosted hopes that oil demand could pick up sharply in the remaining months of this year.

U.S. crude prices found some support after the U.S. Energy Information Administration (EIA) in its weekly crude oil report said the country’s commercial crude oil inventories declined by 1.8 million barrels to 360.2 million barrels in the week ending Aug. 30.  According to the government department, U.S. commercial stocks are near the upper limit of the five-year average range for this time of year. WTI crude for October delivery moved up to $107.90 a barrel shortly after the report was released on Sept. 5 and at midday was trading at $108.12 a barrel, up from $107 before the EIA released the report.


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Cocoa futures rose to their highest in almost a year in London on Sept. 5 amid signs that the world’s two biggest growers would see their output of beans fall in 2013-2014. Futures prices have moved up sharply over the past month or more on concerns that dry weather across parts of West Africa in recent weeks hurt the quantity and quality of the beans to be harvested in upcoming main crops. More than 70 percent of the world’s cocoa output is produced by four West African countries: Côte d’Ivoire, Ghana, Nigeria and Cameroon.  News group Bloomberg cited Sydney-based Macquarie Group as now estimating Côte d’Ivoire’s production will fall for a third year in 2013-2014, to 1.42 million tonnes from 1.455 million tonnes this year. Lomé,Togo-headquartered Ecobank Transnational Inc. now expects Ghana’s output to fall to 800,000 tonnes in 2013-2014 from about 900,000 tonnes in 2012-2013.

Cocoa futures for December delivery on London’s NYSE Liffe climbed to £1,706 a tonne on Sept. 5, the highest for a most-active contract since mid-September 2012, before settling at £1,704. In New York, December cocoa moved up to $2,563 a tonne, a $64.50 gain on the day.

Gold, meanwhile, also found some support on the ongoing concerns surrounding the Syrian conflict and for much of the early part of this week was trading above the psychologically-important $1,400-an-ounce level based on the most actively traded contract, December, on the Comex division of New York’s Mercantile Exchange (Nymex). However, a firmer U.S. dollar started to weigh on the price and by midday trade on Sept. 5, December gold had fallen to $1,371.90 an ounce. The price fall came despite the start of a workers’ strike on Tuesday at South Africa’s gold mines which hit production at a number of the mining sites. Analysts said tensions surrounding the strike so far have been potentially eased on account of a major union representing the striking workers softening its wage demands.

Platinum and palladium prices came under heavy pressure this week on concern that an improving U.S. economy would prompt the U.S. Federal Reserve to slow its bond-buying program in the near future. Platinum for October delivery on Nymex fell to $1,482.50 an ounce by midday on Sept. 5, a level not seen in more than three weeks. Sister metal palladium hit a two-month low of $687.50 an ounce. Investors were also cautious after data released earlier this week showed western European new car registrations, an indicator of new car sales in the region, continued to fall in August. Both platinum and palladium are important components in car catalytic converters. A close eye is also being kept on South Africa for signs of labor unrest in the mining sector spreading to the PGMs.  The country is the leading platinum-mining nation and the second biggest palladium producer.

Copper and other base metals also came under pressure by midweek despite the most recent positive economic data, particularly from China, but also from the U.S. and the Eurozone.

The final reading of HSBC’s China Manufacturing Purchasing Managers’ Index (PMI) for August  – released on Sept. 2 – recovered to 50.1, from an 11-month low of 47.7 in July. HSBC’s chief economist, China & co-head of Asian Economic Research, Hongbin Qu, said the reading “implies that growth in China’s manufacturing sector has started to stabilize on the back of a modest rebound of new orders and output.” The bank expects “some upside surprises to China’s growth in the coming months.” China accounts for around 40 percent of global demand for the red metal.

Final Eurozone Manufacturing PMI data, released the same day by Markit Economics, which also compiles the HSBC China PMIs, were also good, with the Manufacturing PMI for August at a 26-month high of 51.4, up from 50.3 in July.

 

Better-than-anticipated data from the U.S.’ Institute for Supply Management’s (ISM) earlier this week indicated the U.S. manufacturing sector grew last month at its fastest pace in more than two years, with the ISM index of national factory activity rising to 55.7 in August from 55.4 in July.  Best expectations had been for 54. A reading above 50 indicates expansion in the sector.

 

Three-month copper on the London Metal Exchange (LME) closed at $7,125 a tonne on Sept. 4, down $191 on seven days earlier. In mid-August, the three-month metal had hit a 10-week high of $7,420 a tonne. Analysts believed the main reason for this week’s price fall was on account of the generally higher risk aversion among market players.

 

Cotton futures prices fell again this week amid a generally plentiful global supply position.  By midday on Sept. 5, the most-actively traded contract – December – on ICE Futures U.S. was trading at 82.18 cents a pound, a level not seen since early June. ICE cotton futures had powered up to a five-month high of over 93 cents a pound in mid-August on increasing concern about the condition of the U.S. crop.

The Washington, DC-based International Cotton Advisory Committee  (ICAC) earlier this week reported global stocks would climb to 19.22 million tons by July 2014, a more than 10% increase on the estimated 17.40 million tons ending inventories for 2012/13. The forecast global inventory build comes despite an anticipated 3.5% drop in world cotton production in 2013/14 to a forecast 25.6 million tons, according to ICAC. Most of the production fall is expected to be on account of the U.S., where the lack of rainfall in Texas, the country’s biggest cotton-growing state, is having an impact on cotton plants.  The U.S. Department of Agriculture (USDA), in its latest Crop Progress report on Sept. 3, reduced the proportion of plants in “good” or “excellent” condition for the week ending Sept. 1 by 2 percentage points to 45 percent from the prior week for the 15 states representing 99 percent of the country’s 2012 planted cotton acreage. In Texas, only 34 percent of the cotton plants were in “good” or “excellent” condition last week, according to the US agency.

 

Raw sugar futures prices were little changed this week, with the ICE Futures U.S. front-month  -October  – contract settling at 16.36 cents a pound on Sept. 4.  At midday the next day, raw sugar was trading marginally higher at $16.52. A huge global surplus is keeping raw sugar futures trading at near three-year lows. ICE front-month raw sugar futures touched 15.93 cents a pound on July 16.

 

As with the raw sugar market, market fundamentals for coffee remain bearish in the near term due to the pressures from ample global supplies. Arabica coffee futures settled at $1.1678 a pound on Sept. 4, and just  above a four-year low of $1.1610 a pound hit on Aug. 30.

 

While care has been taken to ensure that the information contained in this report is accurate, it is supplied without guarantee. The author, Lynda Davies, can accept no responsibility for any errors or any consequence arising from the information provided.