AFKI Commodities Report: Oil Price Plunge Continues

Written by Lynda Davies

Oil prices continue to nosedive, with Brent North Sea crude and U.S. light sweet crude now trading at their lowest levels in more than five years.

Brent crude for January delivery on London’s ICE Futures Europe exchange on Dec. 16 fell below $59 a barrel for the first time since May 2009. The West Texas Intermediate (WTI) for January on the New York Mercantile Exchange (Nymex) dropped below $54 a barrel, a level also not seen since May 2009.

Both benchmarks have since recovered slightly, with Brent settling at $59.27 a barrel and WTI at $54.11 a barrel on Dec. 18. These price levels, nevertheless, mark a more than 3-percent decline in the case of Brent, and a 4-percent drop for WTI since the start of the week.

All told, crude prices are now down nearly 50 percent on their June spike on the back of the ISIS insurgency in Iraq. Prices are almost 20 percent lower since the Organization of the Petroleum Exporting Countries (OPEC) decided Nov. 27 to leave its output target unchanged at 30-million barrels per day. Some stakeholders hoped the group would move to help support oil prices by cutting its production target.

Statements from OPEC delegates last weekend added to the negative market mood. The United Arab Emirates Energy Minister Suhail Al-Mazrouei told news media OPEC would refrain from reducing output even if prices fall as low as $40 a barrel.

The exporter group has been producing more than its official output target in recent months, with production averaging 30.25-million barrels in October and 30.48-million barrels in September.

Analysts say OPEC is letting the market find its own level, having abandoned its traditional role as swing producer, no doubt in a challenge to shale oil producers in the U.S. U.S. crude production is at its highest in three decades on the back of the shale revolution.

Meanwhile, gold is back below $1,200 a troy ounce this week after the Federal Reserve at its two-day Open Market Committee meeting appeared to have abandoned its position to keep interest rates close to zero for a “considerable time.” In its policy statement, the Fed included language indicating the central bank is prepared to hike rates as early as the middle of 2015, but will be “patient” as it progresses toward monetary tightening.

U.S. gold futures for February on the Comex division of Nymex settled at $1,194.5 a troy ounce Dec. 17 after dipping to a low of $1,182. It had closed last week at $1,222.5 a troy ounce.

Cocoa firms on market consolidation

Cocoa turned higher again, supported by short-covering. Cocoa for March delivery on New York’s ICE Futures U.S. exchange settled $50 up on the day at $2,965 a tonne Dec. 18, a near-$108 gain on last week’s close at $2,857 a tonne. London March cocoa ended $30 up at £1,969 Dec. 18 on the ICE Futures Europe exchange, and $81 higher than it finished last week.

Also lifting prices is Olam International’s $1.3-billion agreement, announced Dec. 16, to buy rival firm Archer Daniels Midland’s cocoa-processing business. The proposed acquisition will result in Olam Cocoa becoming the world’s third-largest cocoa processor.

The market is concerned the expansion of Olam’s operations may reduce liquidity in cocoa bean trade. The transaction remains subject to the necessary regulatory approvals and clearances but is expected to close between April and June 2015.

Sugar, coffee slip lower

Sugar futures slumped to their lowest in almost three months after Brazil’s sugarcane industry association, Unica, said it expects the country’s 2014-2015 key center-south cane crop to reach 567 million tonnes, a near 4-percent increase on its previous forecast in August. Brazil is the world’s biggest sugar exporter.

Sugar continues to be pressured by plummeting oil prices. Weak crude oil prices erode the competitiveness of cane-derived ethanol, thus reducing the incentive to divert cane to ethanol in countries like Brazil.

Raw sugar for March delivery on ICE Futures U.S. fell to 14.62 cents a pound Dec. 17 , the weakest since late September, before trimming losses to settle at 14.72 cents a pound. Sugar futures recovered a tad the next day, settling 0.27 cents higher at 14.99 cents, and a marginal gain on last week’s close at 14.98 cents a pound.

White, or refined, sugar for March delivery on ICE Futures Europe touched a contract low of $383.0 a tonne Dec. 17 before settling $1 up on the day at $384.70.

Arabica coffee futures continued to retreat, touching a five-month low at midweek, amid rains in top grower Brazil’s main coffee-growing areas in the center and south of the country. Rain is seen as positive for the development of the upcoming crop after severe drought early this year damaged coffee trees and impacted this season’s output.

Arabica coffee for March delivery on ICE Futures U.S. hit $1.7115 a pound Dec. 17, the lowest for the second-position contract since July 23, before settling 5.85 cents down on the day at $1.7185 a pound. March arabica clawed back some of the losses in trade the next day, ending 2.5 cents up at $1.7435,  essentially flat on last week’s close.

Analysts say despite the current retreat in prices the market remains volatile given the uncertain outlook for Brazil’s 2015-2016 crop. Recent rains may not have arrived in time.

January robusta coffee on ICE Futures Europe ended at $1,912 a tonne, down $3 on the day Dec. 18, and $32 less than last week’s close at $1,944.

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.