AFKI Commodities Report: Oil Price Rise Ends As U.S. Supply Increases

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Written by Lynda Davies

Crude oil prices went down again at mid-week after a sharp rebound that began Jan. 29. The rally saw a 19-percent price gain to a one-month high, but prices declined again sharply amid further increases in U.S. supplies.

Despite the oil price gains, few market watchers were prepared to see the rally as a sign the market finally was starting to bottom out. The oil price plunge began in July 2014 amid a global supply glut and weakening demand.

After four days of price gains, Brent for delivery in March climbed as high as $59 a barrel Feb. 3 on the London-based ICE Futures Europe exchange. Last week, front-month Brent touched a near six-year low of $47.57. But the international benchmark went into retreat again at midweek, dipping as low as $53.07 a barrel on Feb. 5 before trimming losses to finish $2.41 up on the day at $56.57 a barrel.

The U.S. benchmark, West Texas Intermediated (WTI), on New York’s Mercantile Exchange (Nymex) followed a similar path, rising to $54.24 a barrel on Feb. 3, after last week’s drop to an almost six-year low of $43.57 a barrel. The following day, however, front-month WTI dropped to $47.93 before settling $4.60 down at $48.45 a barrel. By close on Feb. 5, March WTI had trimmed losses to settle just above $50 a barrel at $50.48.

Data that showed a record drop in the number of oil drilling rigs operating in the U.S. for the week ending Jan. 30 provided some of the early-week price support. U.S. oil rig count dropped to its lowest level since January 2012, according to Houston-based oilfield services company Baker Hughes Inc.

Analysts said the reduced rig numbers were a sign that OPEC’s strategy is working. That strategy involves OPEC not cutting its output target in order to force production cuts elsewhere.

Analysts also believe the sweeping  cuts in investment spending by oil majors are also helping prices. BP is the latest oil company to announce it was slashing its capital spending this year. On Feb. 3 BP said it plans to cut organic capital expenditure in 2015 by $4 billion-to-$6 billion compared with its original plans for the year. The U.K.’s BG Group also announced this week that it is was cutting capital spending by up to 30 percent in 2015 compared with last year. Both companies, like many other oil firms, have been hit hard by the steep fall in oil prices since June.

However, it was another hefty build-up in crude oil inventories in the U.S. that brought the four-day price rally to an abrupt end. U.S. crude stocks jumped by 6.3 million barrels last week to 413.1 million, according to data from the U.S. Energy Information Administration (EIA). This represented the highest U.S. commercial crude stock level since records began in 1982, and a 30-million barrel build since the start of 2015.

The government department also reported another big increase in crude stocks at the key Cushing, Oklahoma, storage hub, which is the delivery point for NYMEX crude. Stocks at Cushing rose by another 2.5 million barrels last week to 41.4 million barrels. Crude inventories at the hub are now 1.1 million barrels up on year-ago levels of 40.3 million.

While there are signs of some shutdowns in North American shale oil production, many analysts believe it will be some time before excess supply in the market is alleviated and consequently any chance of a sustained rebound in global oil prices.

Meanwhile, gold prices were in state of flux this week, as demand for the precious metal as a safe-haven asset waned, and then revived on jitters over Greece’s economy. Gold futures for February settlement on the Comex division of Nymex finished $1.8 up at $1,262 a troy ounce on Feb. 5 after dipping as low as $1,255.3 an ounce on Feb. 3. February gold had finished last week at $1,278.5 a troy ounce.

Cocoa steadies, arabica ticks up from 6⅟2-month low

Among soft commodities, cocoa ticked up after sinking to a fresh one-year low on Feb. 2. The dry, dusty Harmattan wind that has been blowing across parts of West Africa from the Sahara in recent weeks is now receding. However, the impact of this seasonal wind is yet to be determined on the upcoming midcrops in top growers Côte d’Ivoire and Ghana. A large 2014-2015 main cocoa crop is expected in Côte d’Ivoire, where harvesting began in October, but the outlook is less certain for the April-to-September midcrop, analysts said.

The development of Ghana’s midcrop also is showing some adverse signs, with one unofficial report cited by news media suggesting the total harvest this season may be down 9 percent from the previous season.

However, it is weakening global demand for the key chocolate-making ingredient that is driving market direction, analysts say. Recent weaker-than-expected grindings data, which are seen as a measure of demand for cocoa beans for Europe, Asia and North America have underscored market worries about faltering demand. Ample nearby supplies are also capping any potential for price gains.

Cocoa for March settlement on New York’s ICE Futures U.S. exchange finished at $2,743 a tonne on Feb. 5, $19 up on the day. At the start of the week, the front-month contract slumped to its lowest level since January 2014, dropping to $2,669 before trimming losses to close at $2,694 a tonne. Benchmark May cocoa on the London-based ICE Futures Europe exchange also finished higher on Feb. 5, settling £15 up at £1,908 a tonne after dipping to a low of £1,891 on Feb. 2.

Arabica coffee recovered late in the week on technical dealings after falling to the lowest level since July 2014. Forecasts for rain across top producer Brazil’s main coffee-growing regions continue to ease concerns about this season’s crop.

March arabica for March delivery on ICE Futures U.S. settled 4.15 cents-a-pound up at $1.6490 on Feb 4. after dipping to a six-and-a-half-month low of $1.5840 a pound on Feb. 3. March arabica eased back to settle at $1.6475 a pound on Feb. 5, down 0.15 cents on the day.

Robusta coffee for March settlement in London finished lower at $1,922 a tonne on Feb. 5, down $9 on the day and $3 lower on the week so far.

Sugar, ethanol and gasoline

Raw sugar, meanwhile, traded near a one-month low, recorded early in the week. March ICE raw sugar  settled at $14.41 a pound on Feb. 5, after dropping to a one-month low of 14.10 cents a pound on Feb. 2.

High global stocks of the sweetener and talk that India could soon launch raw sugar export incentives weighed on the market. Price support was short lived following top producer and exporter Brazil’s decision to increase the national blend of ethanol in gasoline from 25 percent to 27 percent, effective Feb. 15. The move should provide further increases in the proportion of the country’s sugarcane being processed into ethanol, diverting more cane from sugar production.

White, or refined, sugar also ended lower, with the front-month March contract on ICE Futures Europe finishing at $371.80 a tonne on Feb 5, after closing last week  at $383.40 a tonne.

Analysts said the prospect of India’s expected approval of raw sugar export incentives is limiting any potential for price gains.

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.