AFKI Commodities Report: Will The Oil Price Plunge End soon?

Written by Lynda Davies

Oil prices finished more than 4 percent down after a volatile few days. Market fundamentals remain profoundly bearish amid a heavily oversupplied global market, but the Paris-based International Energy Agency (IEA) late this week provided a glimmer of optimism. The agency, in its monthly market report published on Jan. 16, said there already were signs lower prices were beginning to curb output in some areas, including North America.

The view echoes OPEC’s apparent belief that the production of unconventional crude will decline during the course of 2015 due to lower drilling activity in response to weak oil prices.

February Brent North Sea crude settled at $47.67 a barrel on Jan. 15, $1.02 down on the day, after earlier rising above $50 a barrel for the first time this week. Front month Brent on the London-based ICE Futures Europe exchange had finished at $50.11 a barrel on Jan. 9. The February contract expired on Jan. 15.

It was a similar pattern with the U.S. crude benchmark, the West Texas Intermediate (WTI). February WTI closed $2.23 a barrel down at $46.25 on Jan. 15 on the New York Mercantile Exchange (Nymex) after earlier hitting a high of $51.25 a barrel. It closed last week at $48.36. Following the IEA report, Brent and WTI had reached highs of $50.23 and $48.36 a barrel respectively as at 16.00 hours GMT.

Analysts put the recent volatility in the oil markets down to uncertainty. The market’s bearish fundamentals were underlined by the Organization of the Petroleum Exporting Countries (OPEC) lowering its estimate again for this year’s call on its crude by 140,000 barrels a day to 28.78 million barrels a day. In its latest monthly report, released Jan. 15, the producer group, citing secondary sources, said it produced 30.2-million barrels per day in December. This was slightly above OPEC’s output target of 30-million barrels per day, which was left unchanged at its last official production meeting held Nov. 27. OPEC producers account for about one third of global output.

However, the production group said it expects the rate of growth in non-OPEC oil supply to be slower than previously expected this year, forecasting non-OPEC supply to grow by 1.28 million barrels per day in 2015 to average 57.49 million barrels per day. This marks a downward revision of 80,000 barrels per day from the previous report. The producer group cited lower oil price expectations, the declining number of active rigs in North America and the decrease in drilling permits in the U.S., as well as the reduction in international oil companies’ 2015 spending plans as the main factors.

At midweek, the U.S. Energy Information Administration (EIA) reported the country’s crude stocks were continuing to rise. U.S. commercial crude inventories increased by 5.4 million barrels to 387 million barrels in the week ending Jan. 9 from the previous week, the highest ever level in 80 years for this time of year, the energy department said.

Bank of America Merrill Lynch is among the many analysts to further revise their crude oil forecasts. The bank this week said Brent could go as low as $31 a barrel by the end of first quarter 2015.

“Stocks all over the world are building at a very fast rate,” the bank said in a note to clients, indicating very high inventories would make any sharp recovery in prices much less likely.

Oil prices are now around 56 percent to 58 percent below their June 2014 peaks.

But, as noted above, providing a note of optimism as the week drew to a close, the IEA, while acknowledging oil prices could fall further before they recovered, said there already were signs lower prices were beginning to curb output in some areas, including North America.

In its latest monthly report published Jan. 16, the energy agency said “a price recovery – barring any major disruption – may not be imminent, but signs are mounting that the tide will turn.”

Gold climbs to four-month high

Gold, meanwhile, hit its highest level in four months on Jan. 15, boosted by prospects of a delayed U.S. interest rate hike and rising safe-haven investor demand.

The spot precious metal was fixed at $1259.00 a troy ounce in the afternoon fix in London on Jan. 15. On the Comex division of Nymex, gold for February delivery soared $30.30 to finish at $1,264.80 an ounce. The settlement price was the highest since the precious metal ended at $1,267.30 an ounce on Sept. 5. Gold is now around 6 percent up from where it started the year.

The prospect of a near-term U.S. rate rise now appears less likely on account of worries about wages in the latest U.S. jobs report and concerns about world economic growth.

The World Bank has revised downward its estimate for growth in 2015. In its latest Global Economic Prospects report, issued early this week, the bank cut its forecast for global growth this year to 3 percent, having forecast an increase of 3.4 in last June.

The growth rate of 2.6 percent for 2014 was also well below the forecast of 3.4 percent as a result of what the World Bank called a “string of disappointing” results in the euro area, Japan, parts of emerging Europe, in particular Russia, and Latin America.

Among other precious metals, platinum also added gains, brushing off concerns about global economic slowdown. The April metal on Comex finished at $1,262.9 an ounce on Jan. 15, up $23.8 on the day and $32.7 on the week so far. In contrast, sister metal palladium for March delivery on Comex fell to a more than two-month low, settling $14.30 down on the day at $766.35 an ounce on Jan. 15. March palladium had closed last week at just above $800 an ounce.

In industry news, Northam Platinum on Jan. 16 temporarily suspended operations at its strike-bound Zondereinde mine in South Africa, the world’s deepest for platinum group metals (PGMs), for “safety and security” reasons amid “incidents of intimidation.” Some 5,000 members of the National Union of Mineworkers (NUM) embarked on an unprotected strike on Jan. 13.

The Zondereinde mine produces around 65 percent of Northam’s annual production. Production losses amount to 1,000 ounces of PGMs a day, equating to revenue losses of 11.5 million rand ($1 million) per day, according to a company media statement announcing the suspension.  The Zondereinde smelter is continuing to operate.

Palladium, however, fell sharply amid the concerns about a global economic slowdown. Palladium futures for March delivery on Comex dropped to settle at $780.65 an ounce on Jan 14.

Weak grind hits cocoa, sugar

Among soft commodities, cocoa futures moved higher early in the week on continued worries about the impact on some of West Africa’s cocoa trees of the dry, dusty Harmattan wind blowing across parts of the region from the Sahara. However, worse-than-expected fourth quarter grindings data for Europe and a lower North American grind result somewhat reversed some of the early week gains.

New York March cocoa touched a two-and-a-half-month high of $3,015 a tonne on Jan. 13 before settling $3 down on the day at $2,991 a tonne. This represented a $23 gain on last week’s close at $2,968 a tonne. On the London-based ICE Futures Europe exchange, cocoa for May delivery had settled at £2,020 a tonne the previous day, up £17 on the Jan. 9 finish at £2,003.

However, weak fourth quarter European and North American cocoa grind data, seen as a measure of demand, further underlined worries about the impact of the financial crisis on the industry in Europe. While in North America, the weaker grindings are seen as reflecting reduced consumer appetite for chocolate in the face of higher prices.

Europe’s fourth-quarter cocoa grind fell 7.4 percent from the same period in 2013 to 323,061 tonnes, the Brussels-based European Cocoa Association said on Jan. 15. North American cocoa grindings for the fourth quarter of 2014 were 1.95 percent lower year-on-year at 122,886 tonnes, the National Confectioners Association in Washington, DC, reported.

Both New York and London cocoa finished lower after the release of the grindings data, with ICE March cocoa finishing $15 down on the day at $2,977 a tonne and May cocoa in London down £4 at £2,015 a tonne.

The market now is focusing on Asian fourth-quarter grindings data which are expected to be released next week.

Raw sugar prices moved higher again this week, supported by a stronger Brazilian real against the U.S. dollar in top producer Brazil, which makes export sales less attractive as returns to producers and exporters are lower. Ongoing dry-weather worries in the country’s main cane-growing region, the center-south, is also boosting prices. The next cane harvest is expected to start in April so the cane now is at a critical growing phase.

ICE raw sugar futures for March settled 0.42 cents up on the day at 15.38 cents a pound on Jan. 15, the highest for the front-month contract in five weeks. March raw sugar had finished last week at 14.91 cents.

March white, or refined, sugar on London’s ICE Europe closed $6.40 up at $399.8 a tonne, having ended last week at $392.60.

But arabica coffee futures headed lower this week as the market shrugged off concerns about dry weather in Brazil’s top coffee-growing areas. Front-month March arabica on ICE Futures U.S. ended 3.2 cents down on the day to settle at $1.7665 a pound on Jan. 15. March Arabica finished last week at $1.8005.

ICE cotton, meanwhile, fell to a seven-and-a-half-week low at midweek, as gloomy global economic data led investors to move out of their holdings of the fiber. The most active contract — March — on ICE Futures U.S. shed 1.17 cents to settle at 58.98 cents a pound on Jan. 14, after touching a low of 58.66 cents. March cotton trimmed losses to end the following day’s trade 0.51 cents up at 59.49, but still was 1.27 cents down on last week’s close.

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.