AFKI Commodities Report: Light At The End Of The Oil Prices Tumble

Avatar
Written by Lynda Davies

Crude oil prices find late week support while gold demand is expected to revive this year after falling to its lowest level in five years in 2014. Among soft commodities, ICE cotton hit a three-month high on support from strong U.S. exports and the prospect of a significant reduction in U.S. cotton acreage. Cocoa prices continue to tick up but arabica coffee remains under pressure

Crude oil prices moved up late this week with the key Brent International and U.S. West Texas Intermediate (WTI) benchmarks on Feb. 12 settling at respectively $57.05 and $51.21 a barrel respectively, basis the March contracts.

The previous day had seen March Brent on the London-based ICE Futures Europe exchange finish at just $54.06 after opening the week at $57.93 a barrel. March WTI, meanwhile, closed at $48.84 a barrel on Feb. 11 on the New York Mercantile Exchange (Nymex) after starting the week’s trade at $52.49.

As in last week’s price rally, it is widely believed the latest rise in prices likely is being fuelled by expectations that oil supply will grow less robustly in the coming months, especially in the U.S.  As reported here last week, this expectation is being driven by the record drop in the number of oil drilling rigs in the U.S. and the sweeping  investment expenditure cuts announced by oil majors.

Giving further credence to the belief that the Organization of Petroleum Exporting Countries’  (OPEC) strategy not to cut its output target in order to force production cuts elsewhere and let the market find its own level is starting to starting to pay off,  are the latest forecasts by OPEC and the Paris-based International Energy Agency (IEA). Both organisations this week indicated they now see higher demand this year for OPEC crude oil.

On Feb. 9, OPEC forecast demand for its oil in 2015 would average 29.21 million barrels per day, up 430,000 barrels per day from its forecast last month.  The IEA on Feb. 10 raised its forecast for the call on OPEC by 200,00 barrels per day to 29.4 million barrels.

Gold ticks up from one-month low

Gold  picked up to finish slightly higher late this week despite the news of a ceasefire in Ukraine that aims to end nearly 12 months of fighting between Russian-backed rebels and Ukraine forces.  The chance of peace softens the appeal of the precious metal as a safe-haven investment.

Earlier on Feb. 12, gold for April delivery had climbed as high as $1,232.8 a troy ounce on the Comex division of Nymex. The precious metal had found support on a softening U.S. dollar against a basket of other major currencies before settling  at $1,220.7 a troy ounce. Gold traded in U.S.  dollars becomes less expensive for foreign buyers when the U.S. dollar eases against their own currency.

A strengthening of the U.S. dollar had contributed to Comex gold futures’ fall to their lowest close in around a month on Feb. 11. The precious metal for April delivery touched a low of $1,219 a troy ounce, where it finished the day, some $12.6 down. This marked  a settlement level not seen for the most active Comex contract since Jan. 8.  As recently as Jan. 20, Comex gold was trading at a five-month high of near $1,300 a troy ounce.

While uncertainly over the resolution of Greece’s debt obligations has provided some support for the precious metal in recent days, investment funds over the past two-to-three weeks have been moving out of their holdings of metal in favour of equities.

Global gold demand is at its lowest level in five years.  World demand for the precious metal fell by 4 percent year-on-year to 3,923.7 tonnes, its third consecutive annual decline and the lowest volume in five years, the World Gold Council (WGC) reported on Feb. 12. Jewellery demand for gold fell by 10 percent to 2,153 tonnes last year while industrial demand reached an 11-year low.

Demand by the top two consumers of gold, China and India, dropped 38 percent to 814 tonnes and 14 percent to 843 tonnes respectively in 2014 compared with the prior year, according to the WGC.   The sharp decline in China’s demand reflected exceptionally strong demand in 2013, however.

However, the WGC said that gold demand ended 2014 on a strong note with total demand for the fourth quarter increasing to 987.5 tonnes, a rise of 6 percent compared to the same quarter in the previous year. The council is upbeat about prospects for this year, forecasting demand to  revive to 4,100-4,200 tonnes again, with jewellery demand leading the increase.

Cotton finds support on strong U.S. exports, lower plantings

Cotton finished lower as this week drew to an end, after hitting a three-month high on Feb. 10.  The most-active contract on New York’s ICE Futures exchange – currently May – traded as high as 63.45 cents a pound on Feb. 10 before easing back to settle at 62.81 cents a pound on Feb. 12. This still is well above the 5½-year low of 57 cents per pound recorded  three weeks ago.

The fiber has found support over the past fortnight from strong U.S. exports and the prospect of a significant reduction in cotton acreage in that country this crop year. According to the U.S. Department of Agriculture’s (USDA) latest World Agricultural Supply and Demand Estimates (Wasde) report, U.S. export sales of cotton in January were the strongest in over a decade, at 1.66 million 480-pound bales.

However, while the USDA in its February Wasde report raised slightly its estimate of imports in 2014-2015 by China, historically the world’s top cotton consumer and importer,  the country is expected to import approximately half the volume of cotton as it did in 2013-2014. The U.S. government department currently sees China importing an estimated 7.3 million bales this crop year (Aug. 1, 2014-July 31, 2015) compared with an estimated 14.12 million bales in the previous year.

Beijing in early 2014 announced its intention to scrap its cotton stockpiling program in favour of direct subsidies to the country’s farmers.  The  stockpiling scheme made it cheaper for Chinese companies to import the fiber rather than buy home-grown product and over the three years it was in place provided significant support for world cotton markets and prices.

Sharply lower global consumption, mainly in China but also in the U.S., combined with slightly higher world production, is raising projected world ending stocks. The USDA now sees global ending stocks reaching  a record 109.84 million bales for 2014-2015. This marks a 1.2 million bales increase on its January projection and is 8.18 million bales higher than estimated ending stocks for 2013-2014. The agricultural department noted the data continues to indicate a sluggish world consumption response to lower cotton prices, saying this is mainly on account of prices of man-made fibers having  also fallen.

While many market watchers considered the latest USDA Wasde report as bearish, Rabobank said there were a number of bullish cues. The bank consequently is maintaining “a constructive view” on cotton prices through 2015 “as plantings contract and high quality fibres remain in tight supply, driving demand for U.S. cotton”, although it noted the persistent growth in world stocks is a persistent headwind.

According to its latest Agri Commodity Markets Research  report – ‘USDA reports – Will the 2014/15 surplus persist next year? ‘, Rabobank  expects the ICE #2 contract to edge higher through the remainder of the first quarter to an average 62.5 cents per pound and 65 cents through the second quarter. The bank cited price support from the arrival of smaller Brazilian and Australian crops, down a combined 23 percent year-on-year, which will support demand for U.S. cotton.