AFKI Commodities Report: Crude Prices Tumble Further

Crude oil futures hit fresh lows amid rising supply from the Organization of the Petroleum Exporting Countries (OPEC) and the U.S. at a time when concerns about slackening global oil demand are deepening. Brent crude at midweek slid to a more than 2⅟4-year  low whilst the U.S. crude benchmark, the West Texas Intermediate (WTI), fell to its lowest in 17-months.

WTI futures for November dropped as low as $88.20 a barrel on the New York Mercantile Exchange on Oct. 2, the first time the front-month contract has fallen below $90 since April 2013. November WTI had settled at $90.73 on Oct. 1, down $0.43 on the day and $2.81 below last week’s close at $93.54 a barrel.

Driven by the country’s shale drilling boom, U.S. oil production in August rose to its highest level – an estimated 8.6 million barrels per day – since 1986, the U.S. Energy Information Administration (EIA) reported in its monthly Short-Term Energy Outlook released Sept. 9. The energy body expects the U.S.’  crude oil production to average 9.5 million barrels a day next year, which if achieved, would be the country’s highest annual average crude oil production since 1970.

While U.S. commercial crude oil stocks fell by 1.4 million barrels during the week ended Sept. 26, as reported by the EIA in its Weekly Petroleum Status report on Oct.1, crude inventories at the key Cushing, Oklahoma, crude storage hub and the delivery point for WTI contracts, increased by 315,000 barrels last week.  Some analysts believe that it was this latter development in particular that weighed on U.S. crude prices.

Brent for November delivery on London’s ICE Futures Europe exchange had tumbled as low as $91.60 cents a barrel on Oct. 2, the lowest since late June 2012. This level was as much as $2.56 down on the prior day’s close at $94.16 a barrel and more than$5 on last week’s finish at $97.

Earlier this week,  Reuters reported oil supply from OPEC jumped to its highest in almost two years in September, averaging 30.96 million barrels per day up from 30.15 million barrels per day in August.

The Reuters survey is based on shipping data and information from sources at oil companies, OPEC and consultants. The production increase came on the back of  further recovery in Libya and higher output from Saudi Arabia and other Gulf producers in the face of sub-$100 per barrel oil prices, Reuters reported. State-run Saudi Aramco said on Oct. 1, it sharply cut official oil prices for Asian customers in November.

Analysts said this is the clearest sign yet the world’s largest exporter is trying to compete for share in the crude market.

Gold slips to nine-month low

Gold fell to its lowest level since early January, pressured by a strong U.S. dollar and the closure of markets in top buyer China for the National Day Golden Week Holiday (Oct. 1-7). Spot gold dipped as low as $1,204 a troy ounce on Sept. 30, a near nine-month low, before trimming losses as a retreat in the dollar and global equities boosted demand for the precious metal as an alternative investment.

Gold was fixed at $1,211.75 a troy ounce in London’s pm fix on Oct. 2.  On New York’s Comex, gold futures for December delivery finished at $1,215.50 a troy ounce on Oct. 1, up $3.9 on the day.

Until the recent dip, the U.S. dollar has been trading at a four-year high against a basket of other major currencies and a stronger dollar makes dollar-denominated precious metals more expensive for holders of other currencies.  Concerns about a U.S. interest rate hike sooner than had been earlier expected also has weighed on gold in recent weeks.

Demand for the precious metal by China remains weak. Commerzbank in its daily commodities report on Sept. 26, said China’s net imports of gold through Hong Kong were 33 percent down  at 497 tons since the beginning of the year though to the end of August compared with the same period in 2013, according to data from the Census and Statistics Department of the Hong Kong government.

Officially, all gold exported to China moves through Hong Kong, although the country recently started taking direct imports via Beijing.

“The weak gold demand in China is one key reason for the slump in the gold price over recent months,” Commerzbank said. “So far, the price slide has not sparked any revival of physical demand. Evidently buyers in Asia are holding back in anticipation of even lower prices. Thus, the gold price remains more dependent on Western investment demand.”

Among other precious metals, platinum and palladium also continue to face strong headwinds. Like gold, the two pgms have been hit by the strong U.S. dollar as well as heavy speculative liquidation.

Concerns that slow growth in Europe and China could reduce demand for cars have also hit the two metals.  Platinum and palladium both are used in auto catalytic converters; with this end-use accounting for about 38 percent of platinum supply and around two-thirds of palladium supply.

Platinum tumbled to a five-year low with the spot metal fixed at $1,273 an ounce in the pm fix  on London’s Platinum and Palladium market on Oct. 2., its lowest since October 2009. Spot palladium, meanwhile,  dipped to its lowest in six months on Oct. 1, being fixed at $769 an ounce on the London market.

Arabica coffee climbs above $2, cotton hits 5-year low

Arabica coffee climbed above $2 a pound at midweek, continuing to be supported by worries over the size of top grower Brazil’s crop.  Arabica futures for  December touched $2.1368 a pound on New York’s ICE Futures U.S. exchange on Oct. 2, the highest since April. The previous day, December arabica had settled at $2.0020, more than three percent up on the previous day’s close of $1.9425.

CoffeeNetwork, part of the INTL FCStone group, is the latest  to indicate possibly a more bullish outlook for ICE arabica than when prices rose to a peak for the front month contract of $2.1570 a pound in April. ICE arabica futures prices are now at their highest since then.

CoffeeNetwork, in a report released Oct. 1, forecast Brazil’s coffee harvest as falling to 47 million 60-kg bags in 2015-2016 (April 1-March 31) as a result of the prolonged drought conditions that hit the south of the country early this year.

The forecast is above the 43 million bags forecast by soft commodities analyst F.O. Licht last week  as “its working estimate” for the country’s coffee output in 2015-2016, but still is well below the 60 million bags forecast for the current season before the drought hit Brazil’s main coffee-growing areas.

Robusta coffee futures on London’s NYSE Liffe exchange also gained, though more modestly than ICE arabica. November robusta on Liffe settled at $2,057 a tonne at on Oct.1, a $101 gain on last week’s finish at $1,956 a tonne.

Cotton futures on ICE rallied at midweek on the back of tight stocks in top exporter U.S. ahead of the harvest. Last week, prices had sunk to a five-year low after China, the world’s top cotton consumer and importer  said it would cut import quotas for the fiber to the minimum required by World Trade Organisation obligation i.e. 894,000 tonnes.

Beijing is in the process of scrapping its cotton stockpiling program that has been running for the past three years  in favour of direct farmer subsidies. Beijing’s shift in policy was announced in January and has been weighing on cotton markets since then. The stockpiling program provided significant support for world cotton markets and prices given that it drove significant import demand.

December cotton on the ICE Futures U.S. exchange dropped to 60.83 cents a pound on Sept. 24, the lowest for a most-active contract since early October 2009. Since then, ICE cotton futures have been trading just above the five-year low until Oct. 1, when the December contract closed 0.79 cents higher on the day at 62.16 cents a pound.  The most-active contract had finished last week at 61.89 cents.

However, reflecting the bearish fundamentals for the fiber, the International Cotton Advisory Committee (ICAC) on Oct. 1 said it expects the lower world cotton prices to persist in 2014-2015. Citing the changes in China’s cotton policy and the forecast 1.8 million tons of surplus cotton production, the intergovernmental group believes prices are unlikely to rise to the levels seen in the last two seasons.

ICAC cut its cotton price forecast for 2014-2015 to 75 cents a pound. This compares to  91 cents for the previous season and 88 cents for the one before that.  The estimate is based on the Cotlook A Index, which typically trades above futures: the CotLook Index A stood at 70.20 cents per pound on Oct. 2.

Cocoa prices pulled back at midweek from the 3½-year highs reached on ICE Futures U.S. on Sept. 25 on fears the Ebola virus could spread to key cocoa producing countries, Cộte d’Ivoire and Ghana, and reduce output in those nations.

Cộte d’Ivoire is the world’s biggest producer and exporter of the key-chocolate making ingredient, and Ghana is the second largest producer. The two countries produce around 60 percent of the world’s cocoa.

Two other West African countries, Nigeria and Cameroon, typically account for a further 10 percent of  supply.

Cocoa for delivery in December on ICE Futures U.S. finished at $3,176.50 a tonne on Oct. 1, down $118.5 or 3.4 percent on the day. This is reported to be the biggest one-day drop in almost two years. On Sept. 25, December ICE had hit $3,399 a tonne, the highest level for a most-active contract since April 2011.

Profit-taking by investors as well the Cộte d’Ivoire government raising  price supports and releasing data showing increases in cocoa port arrivals and exports had drive the price downturn, according to analysts.

Cocoa on London’s NYSE Liffe exchange, which had finished at £2,140 a tonne on Sept. 25, basis the December contract, was also lower by Oct. 1, settling at $2,057 a tonne and £78 down on the day.

Analysts said the worries about the Ebola virus reaching Cộte d’Ivoire and Ghana are continuing to support cocoa markets.  Cộte d’Ivoire borders Liberia and Sierra Leone. The two  countries, as well as Guinea, have been most badly hit by the disease.

Raw sugar futures for delivery in March on ICE Futures U.S. finished at 16.02 cents a pound on Oct. 1,  down 0.45 cents on the day. The March contract had closed last week at 15.50 cents a pound. The October raw sugar contract on ICE expired on Sept. 30.

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.