AFKI Commodities Report: Ample Supply, Weak Demand Pressures Crude

AFKI Commodities Report: Ample Supply, Weak Demand Pressures Crude

Brent crude languished around nine-month lows while U.S. oil  prices dipped to a six-month low. Gold moved back above $1,300 on Russian-Ukraine tensions. Among softs, Brazilian crop concerns fuelled choppy trading in arabica coffee futures, while raw sugar prices slipped to 5½-month lows

U.S. crude futures this week fell to their lowest close in six months, while Brent languished around nine-month lows. Concern about weak demand and ample global supplies more than offset market nervousness about continued violent conflicts and escalating tensions in a number of key oil-producing countries.

The benchmark West Texas Intermediate (WTI) for September delivery  fell 46 cents on Aug. 6 to settle at $96.92 a barrel on the New York Mercantile Exchange (Nymex). This was the contract’s weakest settlement since  Feb. 3.  Meanwhile, Brent crude for delivery in the same month on London’s ICE Europe Futures exchange lost two cents to settle at $104.59 a barrel, its lowest finish since early November. September WTI and Brent ended last week at $97.38 and $104.61 a barrel respectively.

The U.S. benchmark in particular found some short-lived support following the release on Aug. 6 of the latest Energy Information Administration (EIA) data, which showed a sharp fall in the country’s gasoline stocks last week. Gasoline inventories fell by 4.4 million barrels in the week to Aug. 1, suggesting  strong U.S. demand for the product. Also supportive, was last week’s 1.8 million barrel decline in the country’s crude stocks to 365.6 million, according to the energy department’s data.

However, the EIA reported an 83,000-barrel climb to 18 million in crude stocks at the key Cushing, Oklahoma storage hub, reversing the drawdown of recent weeks and putting pressure on prices.

Commerzbank is among the analysts that believe the oil market is under-estimating the supply-side risks, pointing to the deteriorating situation in both Iraq and Libya.

In Iraq, the Islamic State (formerly known as Islamic State in Iraq and Syria, or ISIS) is continuing to expand the territories under its control. Last weekend, it seized two small oil fields and three predominantly Kurdish towns in the north west of the country as well as Iraq’s biggest hydro-electric dam, the Mosul Dam. The seizures were the Islamic State’s militia’s first major defeat on Kurdish forces since they began their move across northern Iraq in June. The Ain Zala and Batma oil fields, which together have an output of 30,000 barrels per day, are under full control of IS, according to a statement by the state-run Northern Oil Co.

So far, the Islamic State fighting is not near the major northern oilfields of Kirkuk, which remain in the hands of Kurdish peshmerga. The  country’s southern oilfields, which account for more than 70 percent of Iraq’s oil production,  and from where all of Iraq’s crude currently is exported. (The Kurdish Regional Government until recently has been exporting crude from northern oilfields under its control via a pipeline to the Turkish port of Ceyhan.)

Iraq’s oil exports from its southern ports increased in July,  averaging 2.44 million barrels per day, up from 2.423 million barrels a day in June. But shipments were lower than May’s  2.582 million barrels per day, the highest volume since 2003, according to the Oil Ministry.

Meanwhile, Libya  is seeing some of the worst militia fighting since Muammar Gaddafi was overthrown in 2011. However according to the country’s state-run National Oil Company (NOC), the country’s oilfields remain secure despite the prolonged clashes between rival militias around the capital Tripoli. But, according to Reuters,  Libyan  oil output has fallen to around 450,000 barrels per day from 500,000 barrels last week.

Tensions over Russia also have intensified in recent days. Reports of a Russian troop build-up on the border with Ukraine are fuelling fears of a Russian incursion into the country. Russia this week also is reported to have retaliated for the recently imposed fresh package of sanctions by the U.S. and EU, imposing its own restrictions on food and agricultural imports from the countries involved.  But for the time being, in oil markets concerns over global oil supply seem to be trumping geopolitical tensions.

Gold back above $1,300 on safe-haven buying

Gold was pushed higher by midweek after tumbling to a six-week low on July 31. Safe-haven buying once again helped take the precious metal back above the key psychological level of $1,300 an ounce on Aug. 6 amid the escalating Russia and Ukraine tensions  and U.S. equity markets.

On the Comex division of Nymex, gold futures for December delivery rose 1.8 percent to settle at $1,308.20 an ounce on Aug. 6. Earlier in the day, gold had touched $1,311. the strongest since July 29.  December gold had hit a low of $1,281.70 an ounce late on July 31, its weakest since June 19.

Gold prices have been under recent pressure amid positive U.S. economic data and concern that the Federal Reserve would raise interest rates on the back of an improving economy.  But safe-haven buying amid the various geopolitical tensions in the Middle East and over Russia and Ukraine has been  a strong support for the precious metal.

In contrast to gold, platinum and palladium continued to weaken, despite the heightened worries over Russia. Platinum futures for October delivery touched $1,451.10 an ounce on Nymex on Aug. 5, its weakest since June 19,  before settling at $1,455.90. The following day saw the precious metal regain a further $9.3 to close at $1,465.20 an ounce. Palladium futures for September delivery finished at $848.90 on Aug. 6, some $51 below the 13½-high reached on July 29.

Raw sugar dips to 5½-month low

Among softs, weak demand continued to stalk sugar markets, pressuring prices. Raw sugar futures on New York’s  ICE Futures U.S.  touched  a five-and-a-half month low on Aug. 5 amid a sell-off of holdings in the sweetener. Benchmark ICE October raw sugar  hit a session low of 16.10 cents a pound, its weakest since mid-February, before settling at 16.14 cents.

The previous day, October  raw sugar had surged briefly t0 17.26 cents a pound following news of a fire at a Brazilian Port of Santos warehouse owned by sugar producer Cosan.  The fire was reported to be quickly contained but not before some 15,000 tonnes of sugar were damaged.

At midweek, the benchmark ICE raw sugar contract was up a little on the day at 16.20 cents a pound, down 0.11 cents on last week’s finish.

“A combination of ongoing harvest pressures in Brazil’s Center-South, widening physical discounts, record-large global sugar stocks and moderating weather risks all combined to push ICE # 11 futures down through July to February lows of sub 16.7 cents a pound,” Rabobank noted in its latest Agri Commodities Monthly report, released, Aug.1.

The bank has lowered its third quarter 2014 price forecast by 1 cent a pound to 17.2 cents from its month-earlier projection, with nearby sugar futures expected to trade in a 16.5 cents to 17.5 cents per pound range during much of the remainder of the quarter.

However, Rabobank sees continued support for 2015 sugar futures contracts amid concerns over the impact on Brazil’s Center-South cane crop after dry harvest conditions and a tightening supply/demand balance in the 2014-2015 (Oct. 1-Sept. 30) season. Brazil is the world’s biggest producer and exporter of the sweetener, and the Center-South is the country’s top sugar-growing region.

White or refined sugar on London’s NYSE Liffe exchange finished slightly higher at midweek, with the October contract settling at $436.85 a tonne, up $5.25 on the day and $0.90 up on last week’s close at $435.95 a tonne.