AfkInsider Commodities Report: Oil Futures Fall, U.S. Inventory Climbs

AfkInsider Commodities Report: Oil Futures Fall, U.S. Inventory Climbs

Nagging uncertainty over the U.S. Federal Reserve’s monetary stimulus policy returned to stalk markets this week.

Last week, many commodity prices rallied after the Fed, in a move that surprised many market watchers, said it would maintain its $85-billion monthly bond-buying program while it awaits “more evidence that progress (in the U.S. economy) will be sustained before adjusting the pace of its purchases.”

New York Federal Reserve Bank President William Dudley said on Sept. 23 that Fed Chairman Ben Bernanke’s June timeline for scaling back the central bank’s stimulus measures is “still very much intact.” The Fed’s economic stimulus program is seen by investors as a key driver in boosting the price of commodities as it tends to depress the value of the U.S. dollar against other major currencies.

Crude oil futures, which rallied within minutes of last week’s Fed announcement, resumed their downward trend this week on the lack of clarity over U.S. monetary policy and as fears over disruptions to Middle East supplies faded. However, it was the unexpected rise in U.S. crude stockpiles last week that put the biggest pressure on prices. This is the first increase in U.S. inventories after several weeks of decline and could be indicative of weaker-than-anticipated demand in the world’s largest oil-consuming country. Many analysts had been expecting a further fall in last week’s crude stocks.

U.S. crude oil futures dropped to their lowest level since early July after the U.S. Energy Information Administration (EIA) said on Sept. 25 that the country’s crude oil inventories last week increased by 2.6 million barrels to 358.3 million barrels in the week ending Sept. 20. The rise was attributed to lower refinery runs and higher imports.

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The U.S. crude benchmark, West Texas Intermediate, for November delivery settled at $102.66 a barrel on the New York Mercantile Exchange (Nymex) on Sept. 25. This marked the lowest settlement for the most-active contract since July 3. November Brent crude – the international benchmark for crude oil – slipped to $108.32 a barrel on ICE Futures Europe by close. Brent crude prices are also being pressured by reports that oil production in Libya is on the increase again after weeks of disruption hampered oil flows from the county.  November Brent had hit a six-month peak of $117.34 a barrel in late August when a U.S. military strike against Syria appeared imminent.

Gold had surged more than $75 an ounce to $1,375.10 basis the most actively traded contract – December – on the Comex division of Nymex after last week’s surprise move by the Fed to hold off tapering. December gold had been languishing at a six-week low of around $1,300 an ounce prior to the Fed’s announcement.

But the precious metal eased back to settle at $1,336.20 by Sept. 25. Analysts said gold’s losses so far this week were pared after the latest HSBC Purchasing Managers’ Index (PMI), released on Sept. 23, showed manufacturing activity in China at a six-month high in September. China traditionally has been the second-largest consumer of gold after India. The “flash” version of the China Manufacturing PMI, compiled by HSBC and Markit Economics, rose to 51.2 in September compared to 50.1 in August. An index reading above 50 denotes expansion. The estimate typically is based on approximately 85-90 percent of total PMI survey responses each month and is designed to provide an accurate indication of final PMI data.

In a statement accompanying the data, HSBC chief economist China and co-head of the bank’s Asian economic research, Hongbin Qu, said the preliminary reading “added further evidence to China’s ongoing growth rebound. The firmer footing was supported by simultaneous improvements of external and domestic demand conditions.” The bank expects a “more sustained recovery as the further filtering through of fine-tuning measures should lift domestic demand.”

The moderately positive data on China provided some support for copper prices this week although uncertainty over the U.S. Federal Reserve’s intentions weighed on sentiment. The red metal had rallied to a one-month high following last week’s Fed announcement, with the three-month price on the London Metal Exchange (LME) moving up to $7,368 a tonne on Sept. 20, before losing steam by close, to settle at $7,280 a tonne. By finish on Sept. 24, three-month copper had slipped to $7,173 but clawed back to $7,190 a tonne by close the following day.

U.S. crop worries underpin cotton

Among the soft commodities, cotton futures continue to be underpinned by concern about the condition of the U.S. crop even as uncertainty about U.S. stimulus policy keeps investors cautious. The most actively traded December contract on ICE Futures U.S. initially edged lower early this week, to settle at $84.38 a pound on Sept. 24, some $1.16 down on its week-ago price. However, by midday on Sept. 26, December cotton was trading up at $85.30 a pound.

Cotton crops in the top U.S. cotton-growing state, Texas, and some other key growing regions in the country’s Southeast, have been badly hit by a lack of rainfall. The U.S. is forecasting its lowest cotton output since since 2009-2010, estimated at 12.9 million 480-pound bales for the current season (Aug. 1, 2013-July 31, 2014).

Raw sugar climbed to a five-month high this week on concern that rains will reduce supplies from top producer and exporter, Brazil. Rain this week in São Paulo, the country’s main sugar-growing state, is reported to be hindering the current cane harvest and may reduce yields. Millers in the Center-South region processed 42.84 million tonnes of cane in the first half of September and produced 2.96 million tonnes of sugar, according to the latest data from Brazil’s sugar cane industry association, Unica. Of these totals, São Paulo millers processed 26.58 million tonnes of cane and made 2.085 million tonnes of sugar, the trade body indicated.

Raw sugar for March delivery settled at 18.20 cents a pound on ICE Futures U.S. in New York on Sept. 25, the highest for a most-active contract since mid-April.

Despite the recent hike, raw sugar’s gains are likely to be limited in the near term amid ongoing concerns over ample global supplies, analysts said. Supplies will outpace demand for a third year in the current season, which ends Sept. 30. The 2012-2013 season (Oct. 1-Sept. 30) is estimated to see a record statistical surplus of 10.261 million tonnes of sugar, according to International Sugar Organisation (ISO) estimates (ISO Quarterly Market Outlook report Aug. 22). Another smaller supply surplus is forecast for 2013-2014, with the ISO currently estimating this at 4.502 million tonnes.

Raw sugar futures are down almost 10 perent since the start of 2013 amid the global supply glut. White, or refined sugar futures prices are holding up rather better than for the raw sweetener. The December white sugar contract on NYSE Liffe settled at $491 a tonne on Sept. 25, up around $10 on its settlement a week earlier.

Short covering provided some support for arabica coffee prices this week, after last week’s slide to the lowest prices in more than four years. Rain is also threatening to hinder the harvest in leading grower Brazil. Arabica coffee for December delivery on ICE Futures U.S. settled at $1.1723 a pound on Sept. 25, a more-than 2.8-percent gain on the four-year low of $1.1407 recorded a week ago. Nevertheless, sentiment remains weak for arabica, with prices down 20 percent so far this year and heading for a third annual decline as a global supply glut weighs on the market.

Robusta coffee initially edged up from the near three-year lows seen last week, with the November contract on NYSE Liffe settling at $1,709 a tonne on Sept. 25. But the following day in late trade, November robusta had slipped to within $1 of last week’s near three-year low of $1,660 a tonne.

Cocoa prices were trading slightly lower this week but remain underpinned by continued concern about supplies in the next season which starts next month. The world’s two biggest cocoa producers, Côte d’Ivoire and Ghana, are expected to harvest smaller main crops on account of a lack of rainfall in recent weeks, which is feared to have hurt the quantity and quality of the beans. Futures prices have moved up sharply in recent weeks, with cocoa prices in both London and New York climbing to 12-month highs earlier this month.

December cocoa futures on NYSE Liffe closed at £1,676 a tonne at midweek, some £30 off the one-year high of £1,706 a tonne touched on Sept. 5. ICE December cocoa futures in New York settled at $2,563 on Sept. 25, just over $35 short of the 12-month high of $2,598 a tonne recorded on Sept. 11.

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.