AFKI Commodities Report: Brent Oil Hits 2015 High Before Dipping

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Written by Lynda Davies

Brent crude reached its highest level since mid-December before a huge  U.S. inventory build weighed on prices. Among precious metals, platinum dipped to its lowest level in 5½ years. Cocoa rebounded as the market fretted over lower output prospects in West Africa. Arabica coffee traded at one-year lows as robusta hit a 2½-month high.

Oil prices were continuing to find support this week until a huge build in U.S. crude inventories weighed in on prices. Brent North Sea oil traded as high as $63 a barrel at  midweek, a price not seen since mid-December, before taking a bit of a tumble.

The performance of U.S. West Texas Intermediate (WTI) crude was more muted, but the front-month price – currently March, nevertheless, climbed to $54.15 a barrel on Feb 17, marking a good 8 percent increase on where it started February, before ending at $52.14 a barrel on Feb 18.

After hitting $63 a barrel on Feb. 17, Brent for April delivery on the London-based ICE Futures Europe exchange dropped to a low of $59.25 a barrel the following day after the U.S. oil industry group, the American Petroleum Institute (API),  late on Feb 17 reported a massive 14.3 million barrels rise in the country’s crude stocks for the week to Feb. 13.

Analysts had been expecting an increase of just over 3 million barrels. April Brent subsequently pared losses to finish Feb. 18 at $60.53 a barrel, down $2 on the day.

U.S. Energy Information Administration (EIA) data,  released late on Feb. 19, showed the country’s commercial crude oil inventories rose 7.7 million barrels to 425.6 million last week, the highest weekly build on record and the sixth straight week of increases.

The EIA also showed a steep increase in crude stocks at the key storage hub in Cushing, Oklahoma, where inventories last week increased by 3.7 million barrels to 46.3 million.

There was relief, nevertheless, that the government body’s stock build data came in significantly below that of the API.

The front-month WTI on New York’s Mercantile Exchange (Nymex) settled at $52.14 a barrel on Feb 18, some $1.39 down on the day after dipping to a low of $50.34.

The previous day March WTI, as noted above, had traded as high as $54.15 a barrel before finishing at $53.53 a barrel. U.S. exchanges were closed on Feb. 16 due to the Presidents’ Day holiday.

There remains some continued support for oil prices, though,  from the expectation of an eventual slowdown in U.S. oil production growth.

This view is being supported by a decline on oil drilling activity in that country, with data from Houston-based oilfield services company Baker Hughes Inc. showing the number of oil rigs in the U.S. declining by a further 84 to 1,056 in the week to Feb. 13. This marks the lowest number since August 2011.

Despite the declining rig numbers,  U.S. crude production rose to 9.28 million barrels per day in the week to Feb. 13, the highest level since 1973, and up from 8.15 million barrels a year ago and 7.12 million two years ago, according to EIA data.

Brent crude prices in particular now are also benefiting from the emergence of supply risk with Libyan oil exports effectively having dried up over the past week or so. According to Reuters,  not one crude oil tanker has left Libya in the past week as escalating violence has shut down the country’s major oil ports.

The news service said only some 70,000 to 80,000 barrels per day of oil were being exported from two offshore platforms, which, according to the state-run National Oil Corp., were operating normally.

Libya has been torn by conflict since the 2011 civil war which led to the deposing and killing of leader Muammar Gaddafi , with two rival governments now operating their own armed forces under separate parliaments. Since the removal of Gaddafi, a number of Islamist groups have exploited the power vacuum, including more recently ISIS.

This week, the Paris-based International Energy Agency’s (IEA) chief economist and incoming executive director, Dr Fatih Birol, warmed that the security problems caused by ISIS and others are creating a major challenge for the new investments in the Middle East.

He said “the appetite for investments in the Middle East is close to zero, mainly as a result of the unpredictability of the region,” and warned if those investments are not made today, then the badly needed production growth around the 2020s will not happen.

Birol, whose appointment as the IEA’s next executive director was confirmed on Feb. 12, was speaking to Japan’s gas industry association early this week. He takes up the new appointment at the end of August, replacing Maria van der Hoeven in the position.

Platinum sinks to 5½ year low

Among other precious metals, platinum dipped to its lowest level in 5½ years at midweek while palladium was also down.  South African production of platinum group metals (pgms) has been ramping up since the five-month mine strike in the country’s platinum belt ended in June last year, while Russian output has also increased.

A surge in auto sales has only partly offset the higher production. Both metals are used in auto-catalyst manufacture. Outflows of platinum from EFTs since the beginning of 2015 has also weighed on the market.

Spot platinum on the London Platinum and Palladium Market fell below $1,200 an ounce on Feb. 17 and had fallen to $1,170 an ounce by the pm fix on Feb. 19. This marked the spot metal’s weakest level in  5½ years. Spot palladium fared a little better this week, reaching $787 an ounce in the pm fix in London on Feb. 16, before dipping to $776 in the am fix on Feb. 19.

Statistics South Africa on Feb. 12 reported a 2.7 percent increase quarter-on-quarter for  the country’s production of pgms in the three months to Dec. 31, 2014.

But year-on-year production was 14.9 percent down in December, based on preliminary figures. Nevertheless, output has improved sharply since the end  of the five-month strike, which halted operations at the wholly-owned South African pgm mines of Anglo American Platinum, Lonmin and Impala Platinum.

Russia’s Norilsk Nickel, the world’s biggest palladium and nickel producer, reported a 3.0 percent year-on-year  increase in its output of palladium at its Russian operations for 2014 while its platinum production in Russia was unchanged on the prior year.

The company has also indicated it is targeting  its full year 2015 platinum and palladium output  to  remain almost unchanged on last year.

Gold bounced off a six-week low hit at midweek, as the market reacted to a more dovish stance from the U.S. Federal Reserve. Minutes of the Fed’s latest policy meeting, released on Feb. 18, revealed that many policymakers were in favour of holding interest rates at current levels for longer and that raising rates too soon could weigh on the economic recovery.

Gold for April delivery on the Comex division of Nymex moved to trade as high as $1,207.50 a troy ounce as at 17.00 hrs EST on Feb. 19. The previous day April gold had dropped as low as $1,197.20, its weakest level since early January, before settling at $1,200.20, down $8.40 on the day.

Robusta hits 2½-month high, arabica trades at 1-year low

Among the soft commodities, robusta coffee futures touched a 2½-month high early this week before turning lower.

The market has been buoyed by a lack of producer selling particularly from top grower Vietnam, which this week is celebrating the Tet Lunar New Year holiday. This year the Tet holiday runs from Feb. 15 to the 23th.

Recent dry weather in Brazil’s top conilon beans (a robusta coffee variety) growing state, Espirito Santo, is eroding output prospects there, and thus providing some support to the market.