AFKI Commodities Report: Oil Prices Dips On Higher OPEC Output

AFKI Commodities Report: Oil Prices Dips On Higher OPEC Output

Oil prices weakened this week on higher output from the Organization of the Petroleum Exporting Countries (OPEC) and slowing U.S. demand which more than offset worries about the potential impact of new sanctions against Russia and ongoing violence and unrest in the Middle East, Ukraine and Libya. The oil market also appeared to ignore positive economic data from the U.S. and China, the world’s biggest oil consumers.

Brent for September delivery on London’s ICE Futures Europe exchange touched a two-week low of $105.47 a barrel on July 31, before settling at $105.92. It had finished last week at $108.40.

The U.S. benchmark West Texas Intermediate (WTI), also for September, slipped below $100 a barrel on July 31 to hit $98, its weakest in four months. U.S. oil had ended the previous day’s session 70 cents down to settle at $100.27 a barrel.

OPEC’s oil production increased in July from the previous month, a Reuters survey indicated on July 30. The report cited a fragile recovery in Libyan output which outweighed lower production in Iraq and Angola.

Supply from OPEC countries averaged 30.06 million barrels a day in July against 29.92 million in June, the report, which draws on shipping data and information from oil companies OPEC and consultants, showed. The June and July output is close to OPEC’s nominal target of 30 million barrels per day.

Libya contributed the lion’s share of the increase for July, according to the survey, with supply increasing to 430,000 barrels per day from 210,000 barrels in June. A Libyan Oil Ministry official was quoted by news wires this week as indicating the country was producing around 500,000 barrels of crude oil a day. The official also said Libya’s oilfields were all secure.

But with the situation in the country continuing to deteriorate amid escalating violence between rival militias around the country’s capital Tripoli and in the eastern town of Benghazi, the extent and sustainability of a production recovery remains uncertain. Oil storage tanks owned by a subsidiary of the state’s National Oil Company near Tripoli airport went on fire after being hit in a rocket attack this week, for example.

The latest economic sanctions imposed on Russia by the U.S. and the EU on July 29 include bans on the export to Russia of exploration and production equipment for the country’s oil industry. But analysts believe Russia’s oil production is unlikely to be impacted in the short term.

Worries about slowing U.S. demand were reinforced amid rising gasoline stocks at a time when the country’s driving season is typically at its peak. The U.S. Energy Information Administration (EIA) in its Weekly Oil Status Report on July 30 showed gasoline inventories climbed 365,000 barrels to 218.2 million, their highest in four months, during the week to July 25.

But on a positive note, the government body reported a 3.7 million barrel decline in the country’s crude inventories last week while stocks at the key Cushing, Oklahoma hub, the delivery point for the WTI, fell 929,000 barrels to 17.9 million. This marked the lowest stocks level at the hub since October 2008.

A plentiful physical supply of crude is weighing on prices, analysts say, but they expect prices are likely to still find support from the ongoing conflicts in Iraq and Libya, among other oil producing countries.

Russian worries keep palladium strong

Palladium reached an intraday high of $899.90 an ounces, the highest level since February 2001, on July 29, before settling at $880 as investors fretted that Russia could retaliate against the fresh U.S. and EU sanctions by restricting its palladium exports.

Russia is the biggest producer of the precious metal and is expected to produce 39 percent of global supply this year.

The palladium market already is expected to see a record global supply deficit this calendar year. In its most recent supply forecast report, London group Johnson Matthey, for instance, projected a 1.6 million ounce global deficit for palladium.

Sister metal platinum was weaker at midweek, with October futures on Nymex settling at $1,481.90 an ounce. In early July, the precious metal had traded at a 10-month high of some $1,515 an ounce. But supply concerns and strong demand from the automotive sector continue to underpin the precious metal.

Meanwhile, gold continues to weaken.  The precious metal found some safe-haven support early in the week amid the escalating conflict in Gaza. December gold had pushed back above the key $1,300 an ounce level on July 28 to settle at $1,303.30 a troy ounce on the Comex division of the Nymex.

But this wasn’t to last, as positive economic data and a resulting firmer U.S. dollar took its toll on sentiment. In addition, the U.S. Federal Reserve, as expected, on July 30 cut its monthly bond purchases by a further $10 billion to $25 billion and left interest rates unchanged.

December gold on Comex slipped to a five-week low of $1,286 an ounce in early trading on Comex on July 31, having settled the previous day’s session at $1,296.90 an ounce.

Cotton futures dive, arabica at two-month high

Among soft commodities, cotton prices continue to fall, with the most active contract on New York’s ICE Futures U.S. exchange closing at a new contract low of 64 cents a pound on July 30 and only marginally above a five-year low.

December cotton had finished last week at 65.4 cents, some 12 per cent down on June, making the fiber one of the worst performers among agricultural commodities in recent months.

The prospect of a further supply surplus in 2014-2015 is weighing heavily on prices. The U.S., the world’s biggest exporter, is expected to produce a bumper crop in the 2014-2015 season that starts Aug. 1.

The U.S. Department of Agriculture (USDA) in its July World Agricultural Supply and Demand Estimates Report (Wasde) raised its expectation of the U.S.’ 2014-2015 crop from 15.0 million 480-pound bales in June to 16.5 million bales.

This will be the country’s biggest cotton crop since 2012-2013. Protracted drought has taken its toll on output particularly in the biggest growing state of Texas in the past couple of years.

At the same time, global demand is expected to be lower in 2014-2015, particularly with top importer China moving to end its cotton stockpiling program and replace it with direct subsidies to farmers. The USDA is now forecasting global cotton stocks to reach a record 105.7 million bales at the end of 2014-2015.

Arabica coffee continues to be supported by adverse crop news coming out of top exporting country Brazil. This week saw another industry forecast downgrading output in the current season. Worries are also increasing over the 2015 crop.

The benchmark September arabica contract on ICE Futures U.S. surged 2.3 percent to settle at a two-month high of $1.8660 a pound on July 30 before closing 1.8 cents up on the day at $1.8250 a pound. The benchmark arabica contract had hit a five-month low of  $1.5925 a pound on July 15, ironically amid easing worries over drought damage.

Over the past couple of weeks, however, several industry forecasts have re-ignited concern that crop losses could be at the top end of the initial forecasts circulating in April, which had pushed arabica to more than $2 a pound.

Brazilian coffee exporter Terra Forte on July 30 estimated the 2014-2015 crop at 45.8 million 60-kg bags, down 1.6 million bags from its February forecast, citing drought losses. The exporter also warned on next year’s crop, noting a continued risk of premature flowering.

Robusta coffee on London’s NYSE Liffe exchange at midweek was little changed on last week’s close with the September contract settling at $2,037 a tonne on July 30. It had finished at $2,032 on July 25.

Cocoa futures in London and New York, meanwhile, remain supported by expectations of forthcoming industry buying amid reducing industry stocks. The benchmark September contract on New York’s ICE Futures touched a session high of $3,214 a tonne on July 20 before settling at $3,205.

Late last week, ICE September cocoa had hit a three-year peak of $3,324 a tonne. On London’s NYSE Liffe, the second-month cocoa contract (December) climbed as high as £1,982 a tonne at midweek before settling at £1,978. The spot cocoa contract (September) on Liffe touched a high of £2,020 a tonne on July 31, after hitting £2,000  for the first time since July 2011 on July 24.

The strong price support comes despite a favorable near-term supply outlook. Increasingly, now more market players and analysts are forecasting a small surplus in world cocoa supply this season (Oct. 1, 2013-Sept. 30, 2014).

Previously a small global deficit had been widely expected in 2013-2014. The about-turn follows good rains in West Africa which have boosted output of the region’s mid-crop harvest which typically runs April through September.

ICE raw sugar futures, meanwhile, sank lower, with the benchmark September contract touching 16.42 cents a pound on July 31, its weakest since February.

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