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History of Gasoline and Diesel

Edward Drake was the first man to discover oil in Pennsylvania in 1859 and transformed it into kerosene for lighting. He then found many other products by distilling the oil and notably gasoline. However, at first gasoline was completely useless and valueless as there was no product that needed gasoline to work. It is only when automobiles were first introduced to the public that gasoline started to be valuable. Nowadays, gasoline can be used for cars, motorcycles, light trucks, boats, small aircraft, equipment and tools used in construction, farming, forestry and landscaping, and also for electricity supply. Gasoline comes to the end consumers in different types from standard to premium (based on its octane rating). The higher the rating is the higher are the anti-knocking properties.

Diesel was invented by Rudolf Diesel (hence the name) in 1893. After that Mr Diesel disappeared mysteriously, Mercedes-Benz launched the first diesel passenger car in 1936. Diesel cars were then developed essentially by European manufacturers. It is now used for trucks, buses, trains, boats, barges, farm and construction engines, military use and electricity generators.

Production & Consumption

For personal and environmental safety reasons, it is preferable to not transport gasoline and diesel in big quantities therefore they usually come in form of crude oil and then are refined in the country where they will be used. In 2015, the US had the largest refinery capacities with 18’315 thousand barrels1 per day and throughput with 16’207 thousand barrels per day. They were followed by China with refinery capacities of 14’262 thousand barrels per day and throughput of 10’661 thousand barrels per day. The largest refinery in the world is however in Jamnagar, India with a production capacity of 1.24 million barrels per day. In 2015, gasoline accounted for about 42% and diesel for about 27% to 29% of the total petroleum products refined in the US. If we compare by continent, Asia Pacific had actually the largest refinery capacities in 2015 with 32’554 thousand barrels per day and throughput with 26’802 thousand barrels per day. North America followed with refinery capacities of 21’883 thousand barrels per day and throughput of 18’976 thousand barrels per day.

1. 1 barrel = 42 US gallons = about 159L

The US is also the biggest consumer of gasoline in the world with 385 million gallons of gasoline used per day in 2015. The US is the largest consumer of light distillates1 as well with 9’395 thousand barrels consumed per day in 2015. The US consumption of light distillates in 2015 was higher than the light distillates consumption of South & Central America, Europe & Eurasia, Middle East and Africa combined, which accounted for 9’385 thousand barrels per day.

In term of Middle Distillates2, the US is also the country with the highest consumption with 5’627 thousand barrels per day. On the other hand, all the other continents consume more Middle Distillates that Light Distillates products. Asia Pacific is the largest continent consuming Middle Distillates with 11’338 thousand barrels per day. Europe & Eurasia follow with 9’098 thousand barrels per day. In general, until 2012 the world consumption road gasoline was still higher than road diesel but since 2000 the ratio road Gasoline/road diesel was decreasing. The US represented about 38% of the world road gasoline consumption and about 16% of the world diesel consumption in 2012. OECD Europe countries accounted for about 9% of the world road gasoline consumption and about 25% of the world diesel consumption in 2012.

1. Light Distillates: Aviation and motor gasoline and light distillate feedstock

2. Middle Distillates: jet and heating kerosene and gas and diesel oils

It is also interesting to see that in 2014 there was more demand than supply in the refined products market. Only Russia had a positive balance at that time. This reason is probably because the market uses surplus to compensate the imbalance, considering that none of the country fully uses the capacity of its refineries. Our theory is confirmed by looking at the US ending stocks of Motor Gasoline and Distillate fuel oil from 2011 to 2016 (Obviously it is only one country among the others but as the major player in the market it remains a good reference). 

Sources:

-https://www.fuelseurope.eu/uploads/Modules/Resources/fuelseurope-statistical-report-2015.pdf

- https://www.eia.gov/energyexplained/index.cfm?page=gasoline_history

-https://www.eia.gov/energyexplained/index.cfm?page=gasoline_use

-https://www.eia.gov/energyexplained/index.cfm?page=gasoline_home

-http://www.telegraph.co.uk/sponsored/motoring/diesel-performance/11956048/diesel-fuel-history.html

-https://www.eia.gov/energyexplained/index.cfm?page=diesel_use

-http://www.miningoilgasjobs.com.au/oil-gas-energy/hydrocarbons-and-energy/hydrocarbons/oil-and-gas/downstream/gasoline.aspx

-https://www.bp.com/content/dam/bp/pdf/energy-economics/statistical-review-2016/bp-statistical-review-of-world-energy-2016-full-report.pdf

- https://www.eia.gov/energyexplained/index.cfm?page=diesel_home#tab2

- http://www.hydrocarbons-technology.com/features/feature-top-ten-largest-oil-refineries-world/

-https://www.eia.gov/energyexplained/index.cfm?page=gasoline_use

-https://www.bp.com/content/dam/bp/pdf/energy-economics/statistical-review-2016/bp-statistical-review-of-world-energy-2016-full-report.pdf

-https://www.fuelseurope.eu/uploads/Modules/Resources/fuelseurope-statistical-report-2015.pdf

-https://www.eia.gov/dnav/pet/pet_stoc_wstk_dcu_nus_a.htm

Trade Flows:

Europe refineries are more configured for gasoline. Since early 2000’s climate awareness push Europeans to consume more diesel where the flow of gasoline to the US due to excess of production. The VW diesel scandal made a perceivable change.

Price & stock

Some quick facts:

  • We use mostly US stats from EIA because we did not find more rich and complete source of information.

  • According to EIA statistics, gasoline inventory in the US reached a record high of 259.1 million bbl on February 10 but goes down to 246.3 March 10.

  • Gasoline consumption in the US is characterized by seasonality. Diesel is more linear.

  • Since 1990 there is a mandatory mixed 10 to 15% of ethanol into the diesel so it is interesting to look at the correlation between ethanol and diesel prices

Future

Sources

https://www.eia.gov/todayinenergy/index.php?tg=gasoline

https://www.bloomberg.com/search?query=diesel&endTime=2017-03-22T19:34:06.996Z&page=3

https://www.wsj.com/articles/plenty-of-cash-lies-buried-on-canadas-oil-sands-1490021777

https://www.wsj.com/news/business/energy-oil-gas

http://www.zerohedge.com/news/2017-02-07/goldman-stunned-collapse-gasoline-demand-would-require-us-recession

http://www.cnbc.com/2017/03/17/russia-cutting-output-by-300000-barrels-per-day-by-end-of-april.html

http://www.cnbc.com/oil-gas/

http://www.globalization101.org/the-evolving-concept-of-energy-security/

https://dtntradingblog.com

Factors that move the prices

  • The crude oil effect
    Prices of Gasoline is heavily influenced by the crude oil market. And more precisely by the global market not only a specific crude oil market price. So the price of gasoline move in the same circumstances as the price of crude oil (WTI, Brent), they are all strongly correlated.
  • The ethanol market
    The price of Ethanol count for approximately 10% of the total volume of gasoline sold at the pump. So the price of Ethanol influenced a lot the price of Gasoline, even when the price of crude oil is stable.

  • The production environment
    The refiners activities also influenced the price of gasoline. Especially for the events below:
    • OPEC production
    • Non-OPEC production
    • Domestic production

The OPEC influenced a lot the price of crude oil and by some extent the price of gasoline. The surplus production drops reflects on the crude oil price, will also be visible on the gasoline price.

  • Economic and foreign exchange factors
    Gasoline is an important component of the economy. The gasoline price has been heavily impacted by the global crisis of 2008. Further on, the economic improvement of the situation in 2010, contributed to increase the crude oil and gasoline prices.

Gasoline News

  • Oil prices turn lower as focus returns to oversupply
  • The Oil Price Rally Is Stumbling at the Worst Possible Time
  • Oil prices edge higher amid Decline in US Gasoline Stocks

Sources:

https://www.futuresknowledge.com/news-and-analysis/energy/top-factors-that-move-the-price-of-gasoline/

http://www.4-traders.com/WTI-2355639/news/Oil-Prices-Edge-Higher-Amid-Decline-in-U-S-Gasoline-Stocks-24090920/

http://www.marketwatch.com/story/oil-prices-lifted-by-drop-in-us-gasoline-stocks-2017-03-23

https://www.bloomberg.com/news/articles/2017-03-22/oil-s-bad-timing-puts-pressure-on-drillers-as-banks-review-loans

Market overview – Renewable Energies

General presentation of the commodity

What is renewable energy? Renewable energy is collected from renewable resources such as wind, sunlight, water and so on. This is resources that are theoretically imperishable and can be replenished.

Compared to other energies, renewable are spread to wide areas and through all the world countries. Renewable energy is a up-to-date subject as it is one of the solutions to fight pollution caused by fossil fuels. Climate change and global warming concerns rising made these energies in front of the stage.

Mainstream Technologies

Wind power

Two types of wind turbines exist. Offshore and onshore turbines. When wind speed increases, turbine power output increases accordingly. The most efficient places are offshore or high altitude places with constant and strong wind.

Wind speed in offshore area are about 90% greater than on land area. In the future it is believed that wind energy could produce 40 times the current electricity demand (2015). Wind power account for 4% of worldwide electricity in 2015.

Hydropower

Hydropower is the most developed renewable energy. In 2015, it accounted for 16 % of worldwide electricity and about 70% of renewable electricity

Solar Energy

Solar energy account for a bit less than 1% of worldwide electricity. It turned in the recent years into a multi-billion industry. The cost are decreasing rapidly. It is believed to be the renewable energy with the most potential. It enables countries to increase their independency towards energy, reduce pollution and improve sustainability.

Market trends

Renewable energies capacity are growing quickly since 2004 – 10–60% annually depending of the energies (although it started from almost nothing). Investments are also rising slowly but surely. Solar accounts for 56% new investment and wind for 38%

Solar Energy

United States is the most developed country in terms of solar power. It was the first country to use solar power in California. Spain is also investing massively in solar energy. Solar energy is the fastest-growing energy and also the energy with the most potential in the near future.

Wind Energy

China, United States and Germany accounted in 2015 for half of the worldwide capacity. 80 countries use wind turbines and some of them have a high percentage of wind power such as Denmark 21% of electricity, Portugal 18% and Spain 16%.

Hydropower

Only a quarter of worldwide hydropower has been developed. However, there are many barriers such as heavy investment and lack of savoir-faire in undeveloped areas.

News about Renewable Energies

“ Trump’s coal revival plan won’t work; clean energy tech is already cheaper”
http://www.computerworld.com/article/3141331/sustainable-it/trumps-coal-revival-plan-wont-work-clean-energy-tech-is-already-cheaper.html#tk.drr_mlt

“Greensync launches world-first exchange to trade stored household solar power”

http://reneweconomy.com.au/greensync-launches-world-first-exchange-trade-stored-household-solar-power-49889/

How are Renewables traded?

Electricity, and therefore electricity coming from renewable energies are traded on specific markets such as the European Energy Exchange, which is located in Leipzig (DE) as well as on traditional commodity exchange like the New York Mercantile Exchange (NYMEX).

As a commodity, electricity (and renewables by extend) has a few unique characteristics: It is easily transportable along the grid and it is hardly storable.

Linked to the renewable energies, we can also find on the market what are called “Renewable Energy Certificates” (RECs). These are papers that are sold by renewable energy producers to companies that want to use electricity coming from ecological-friendly source.

Prices

The price depends on numerous factors such as the facility’s location, the current supply and demand, the type of power created(solar, wind, hydro) and the year the RECs were originally create. The pricing is regulated by a special department in each country responsible for the energy certification process. Therefore certificate are issued, traded and cancelled through state agency (generally one per country). Market participant are asked to open an account in the state agency

Energy Certificate Markets

There are two types of certificates buyers, the Quota ones and the Tracking ones:

The Quota ones are entity obliged by state policy to buy a certain quota of their electricity from renewable certified sources such as solar electricity. Whereas tracking are the ones who buys certificates in order to express environmental values or in order to add a green image (labeling, adding value to product, environmental standards, carbon emission, etc.).

The European EECS-GO Market (European Energy Certificate System for Guarantee of Origin) is a Dutch foundation which aim to standardize the European electricity tracking system.

History

Coal is a combustible carbon-based sedimentary rock and belongs to fossil fuel familiy and has probably the longest history. It is located primarily in the Northern Hemisphere and since the cave man, coal has been used for heating. In the 17th century, the English discovered that coal could produce a fuel that burned cleaner and hotter than wood charcoal. The constant need for energy to run the new technologies invented during the industrial revolution that provided the real opportunity for coal to be the first worldwide supplier of energy.

During the second half of the 1800s, others uses for coal have been found. Electricity is generated from the burning of coal. It is also use to make steel. The coal is a factor of economic development especially in developing countries, mines are present in over 50 countries and the industry employs directy around 7 million people worldwide.

Nowadays, coal is still the most important fuel for electricity generation and it will not change in the near future. On the opposite, due to the economic rise of China, India and other emerging economies whose power generation is principally based on coal, the majority of experts expect a revival of coal and a strong growth in its consumption and trade.

Production & Classification of Coal

Coal is mainly described by three characteristics :

Grade of coal : It is a measure of quality which is defined by the amount of minerals and sulfur present in the coal.

Coal Type : Macerals is the microscopic constituents of the coal, it is divided in three groups characterized by their chemical composition, appearance and optical properties :

1.         Vitrinite

2.         Exinite

3.         Internite

Rank of coal : A measure of « the extent of metamorphism the coal has undergone », sorted in four categories, here below from the lowliest to the highest ranking :

1.         Lignite

2.         Sub-bituminous

3.         Bituminous

4.         Anthracite

The table above shows the uses carbon content and world reserves % by categories. The highest rank has the lowest reserve. One of the reasons is that due to its low sulfur content, Anthracite coal produces virtually no smoke or particulate emissions and then it is the most demanded coal even though the main use of coal is the production of electricity.

Coal process

There are two mains types of coal, the coking coal and the steam coal. The coking coal is defined as a hard coal with a quality that allows the production of metallurgical coke. The steam coal is primarily used for energy production.

Coal mining

There are two methods, surface – opencast- and underground mining. The choice of the method that will be used is determinate by the geology of the place. Underground mining is used for about 60% of global coal production, although surface mining is more common in some major coal producing countries like in Australia where around 80% of the production is opencast.

Coal preparation

The treatment depends on the properties of the coal and its intended use. It may require only simple crushing or it may need to go through a complex treatment process to reduce impurities.

Coal transportation

The way of transportation depends on the distance between the place coal is prepared and used. For short distances coal is generally transported by truck. Train and barges are used for longer distances. For international transportation, ships are commonly used.

Here is the production cost of the different coal’s producers :

Taxes & Royalties : The term mineral royalty has traditionally been applied in mining legislation when referring to specific, ad valorem and, in some cases, mining taxes based on an accounting profit base. In effect, all of the forms set out above are alternative ways for governments to appropriate economic rents unique to mining and are applied in addition to the general corporate income tax and other forms of taxation that cover all sectors of an economy.

Producers/consumers

In 2015, the world production declined by 4% and the consumption by 1.8%. China is the largest producer of the world despite its output decreased by 2%.

This map shows the principal flows of exports and imports of coal.

Those routes are the main ones used to trade coal in 2008 and the figures are in metric tons. In Geneva, companies such as Vitol, Cargill, Trafigura or Mercuria trade coal principally since the financial crisis when the price started to raise.

In 2015, the world proved reserves of coal were totaling 114 years of global consumption making this commodity by far the largest reserve-to-production ratio for any fossil fuel. Europe, Eurasia and North America have the largest reserves and the largest R/P ratio which is about 276 years. Asia has the second largest reserves but due to its high rate of production, their R/P ratio is only up to 53 years.

Price

One of the reason why the price increased in 2007 is due to the fact that the oil price rose a lot making the delivery of coal much more expensive. Moreover, the global growing demand is as well a reason for the price increase of 2007. In 2010, the consumption of coking coal increased by 38% in the US and the coal consumption for generating power increased by 4.5% mainly due to bad weather conditions.

Futures

Futures are available for trading in the Intercontinental Exchange and on the New York Mercantile Exchange. This topic will be seen in details during the 1st bulletin.

Environment

Coal is known as the dirtiest fuel used to produce energy. The huge problem is that burning coal in order to make energy provides twice as much CO2 as burning natural gas and it is the major source used for generating electricity worldwide. According to Greepeace « Mining is the first step in the dirty life cycle of coal. When coal mines move in, whole communities are forced off their land by expanding mines, coal fires, subsidence, and overused and contaminated water supplies. Mines are quick to dig up and destroy forests and soils. But once the coal is gone, the problems they leave behind, like acid mine drainage, can persist for decades. »

Several envirnomental and health problems are the direct consequences of the extraction and burning of coal. In recent years, the industry has increasingly been targeted by movements for ecological justice.

In the coal industry, modern coal mines have rigorous safety procedures, health and safety standards which have led to significant improvements in coal mining. But there are still problems in this industry. The majority of accidents occur in China, mostly in small scale mines, where the techniques and equipment are very basic. In Beijing, the pollution due to the coal is so important that the government decided to close this month to the last electricity central powered by coal to completely switch to natural gas as the main source of power.

Sources

http://www.tdg.ch/economie/entreprises/Le-charbon-fera-toujours-partie-de-la-famille-royale/story/30067552

http://www.tradingeconomics.com/commodity/coal

https://www.eia.gov/coal/review/

http://www.businessdictionary.com/definition/tonne-of-oil-equivalent-TOE.html

Autors

Hedi, Ricardo & Nicolas

Price :

http://www.nasdaq.com/markets/corn.aspx

The price has not really change if we do an average of the three previous month (still around $3.6/ bushel)

Sugar price :

As mentioned during the first bulletin, sugar price is correlated to the Brazilian real.

http://www.tradingeconomics.com/commodity/sugar

Ethanol price :

Here we have superposed the graph of ethanol with the one of petrol to demonstrate that there is indeed a correlation between the two. There is also an upward trend for both of them as you can see on the graph.

http://www.tradingeconomics.com/commodity/ethanol

In this chart we find that the higher the price of sugar goes and the lower price of ethanol goes.

Our interpretation is that, if sugar is higher in term of price, the more producers will produce sugar instead of ethanol and vice versa.

http://www.tradingeconomics.com/commodity/ethanol

Here is a quick overview of the percentage of sugar vs ethanol produced until 2014.

https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart-detail/?chartId=79060

Forward curve :

Until July 2017, the forward curve is quite stable due to the fact that is the harvesting period so the supply and demand are almost equal. Between July 2017 and March 2018 (the next harvesting period) the curve is carry because it is preferable to store the sugar to be able to supply the market during the period between 2 harvests. Then, after March 2018, the curve turns into inverse because the demand will be high, inventories low and we don’t know if the future harvest will be good or not so we can’t guess the future supply. If we focus on March 2018/2019 we can see that it looks like steps due to the harvesting time.

http://www.marketqview.com/forwardcurvechart.php?ID=77&TYPE=Price

Forecast :

This graph shows that the ethanol and generally the biofuels market will take a more and more importance in the market, according to new regulations, the higher production of ethanol. The global market value of biofuels will also increase, which implies a higher demand for ethanol, and a higher price. The sugar cane plants will more and more be used for the production of ethanol, and that will impact the production of sugar. According to the Brazilian real value against the dollar that we saw last week, we will face a decrease of the sugar price in the next years.

http://finance.yahoo.com/news/top-3-trends-global-automotive-172300898.html


Sources :

https://www.theice.com/products/23/Sugar-No-11-Futures

https://www.theice.com/products/37089080/White-Sugar-Futures

https://apps.fas.usda.gov/psdonline/circulars/Sugar.pdf

http://www.agrimoney.com/news/brazil-cane-harvest-to-fall-in-2017-18—but-sugar-output-to-rise–10191.html

https://www.usda.gov/oce/weather/pubs/Other/MWCACP/Graphs/Brazil/BrzSugarcaneProd_0509.pdf

http://materials-risk.com/sugar-prices/?utm_content=buffer36423&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

Adrian, Bess and David

Forward Curves:

Prices:

Chinese policy:

As we have seen, China is the major player in terms of Cotton. The price peak in 2010/11 and the reduction of China’s cotton acreage, due to incentivization of grains plantations forced the government to take measures to keep farmers growing cotton.

China did not want to rely on foreign production and wanted to protect the Chinese textile industry. Therefore, government took control on the supply by:

  1. buying most domestic crop ( build reserve )
  2. impose tariffs and quotas on imports

Government bought since 2011 most of domestic crop to build reserve and supply Chinese cotton mills.

  • 42% of domestic production in reserves in 11/12
  • 86% of domestic production in reserves in 12/13
  • 89% of domestic production in reserves in 13/14

This enables them to hold the supply and sell at a higher price. The inventory strategy adopted in 2011 also impact the A-index, as Chinese governments imports were considerable.

The second option for mills is to import cotton, but Chinese government imposed quotas and tariffs on import making foreign market less interesting.

Finally, as we know that China is a huge importer of Cotton, change and uncertainty in their policy highly affects world price.

Strict quotas/tariffs = less imports = A index decreases

Soft policy = lot of imports= A index will increase

Change in policy

Indexes:

Different type of index cover the worldwide cotton market

NEW YORK NEARBY: this is the U.S origin cotton only. This index has five delivery period (March, May, July, October, and December) and can only be traded on future. As it has only five delivery period the term “nearby” is used, meaning that for a contract in January, the nearest price would be used, in this case the price of March contract.

A INDEX: This is an average of 16 varieties of medium grade cotton from all around the world. The A index is often higher than the New york Nearby index for two reasons:

  1. Better quality of cotton
  2. Include shipping cost to far east

CHINA COTTON (CC) INDEX: This index represents the average of Chinese price offered by merchant of cotton for a specific quality (328) within China. There are different index for chinese cotton representing different varieties or qualities but the CC index is the most commonly used.

INDIAN & PAKISTANI SPOT MARKETS: This is a spot market for Cotton, one of the most active in the world is in India. In opposition to the CC index or the A index, the price does not include delivery to Far East and Asia.

If we compare A index to CC index, we can notice a difference of approximately 20 cents/pound that is constant over months. This can be explained by the Chinese policy on cotton that was designed to provide slightly higher incomes to chinese cotton growers. This difference can vary depending on the aggressivity of chinese policy.

As we can see the price of the CC index follows the same shape as the A index which is the most commonly used. On the other hand the A index can be affected by 2 factors

  1. Chinese policy ( how many bales will China import ? )

  2. Meteorological conditions in US

On the graph of the CC index, the spread between the Cents/lb and RMB/ton is explained by change in currency USD/CNY.

Inventories:

Small increase to the forecast for the 2016/17 world cotton crop  of 300’000 bales, going from 105.4 million to 105.7 million according to the USDA. It was primarily caused by a larger projected U.S harvest, going from 17 to 17.2 million.

World mill-use decreased by 90’000 bales to reach 112.4 million bales. Notable changes concerned an addition of 200’000 bales to the Vietnamese estimates, increasing to 5.4 million and indonesia increasing by 150’000 bales to 3.1 million. On the other hand lies Turkey with a decrease of 350’000 to reach 6.3 million. Other smaller producers compounded to reach the balance of 90’000 bales.

As a consequence, estimates for ending stocks increased from 89.9 to 90.5 million bales since february.

Since February, China ending stocks estimates went upward by 100’000 bales. This was due to a reevaluation of the demand, which decrease by 100’000 bales.

Sources:

http://www.cottoninc.com/corporate/Market-Data/MonthlyEconomicLetter/pdfs/monthlyEconomicLetter-English.pdf

https://apps.fas.usda.gov/psdonline/circulars/cotton.pdf

http://www.agrimoney.com/11/cotton/

https://www.cotlook.com/information/the-cotlook-indices-an-explanation/

http://www.cottoninc.com/corporate/Market-Data/MonthlyEconomicLetter/CottonPriceDefinitions/Price%20Definitions.pdf

http://www.cottoninc.com/corporate/Market-Data/Cotton-Market-Podcasts/Chinese-Cotton-Policy/

Over the last two months, coffee prices have not changed significantly and rather exhibits a neutral or slightly downward trend for Arabica beans. A potential decrease in the Robusta-Arabica differential was discussed and can be reflected in February-March price movements. On February 15, 2017, the differential was about USD 0.39 and then reached USD 0.32 on March 15, 2017. This is explained by the previously mentioned drought in Vietnam which is so severe that analysts anticipate a possible 20% drop in volume compared to last year.

In our last bulletin we talked about the shortage of Robusta in the market and hence the increase in price for Robusta coffee and the decrease in the differential. Now this week, we found the terminal market inventories of Robusta to be on increasing tendency. The certified stocks on the New York (Arabica) and London (Robusta) futures markets have increased to 1.49 million bags and 2.80 million bags respectively. The fact that stocks of Robusta in London increased more than stocks in New York, is in line with the decreasing trend in Robusta shortage. Another reason could be the decision taken by Brazil on February 22 not to allow a quota for Robusta import, to support the soluble industry which is suffering from poor Brazilian Robusta yield and substitutes Robusta with lower grades of Arabica. The decision has been suspended for further investigation and has caused the local Robusta price to increase. Meanwhile, Vietnam, the major Robusta producing country, is estimated to have exported 11.9% more coffee in the first four months of coffee year 2016/17 compared to the previous year.

As we learned in previous bulletins, each sort of coffee has its own kind of contract. Market specifications and codes vary much.

The forward curve of Robusta is shifting from carry to inverse in November 2017. There is not much profit to be made through storage, as the steepness of the slope shows.

On ICE’s website, it is mentioned that ten delivery months should be available for trading. However, only 16 contracts have been traded for January 2018, and not one for later months. We believe that the unclarity in the market could be a reason for it. As much as this could also be a reason, we would recommend waiting for Brazil to share its quotas, as it might present an opportunity for arbitrage.

For Arabica, again, we haven’t seen much changes for the past weeks, as the curve is staying in carry and the slope is not gaining much in steepness. Contract prices are slightly up, which would support our last week recommendation to go long now, and hope for a continuous shift towards higher Arabica consumption that would optimize our position.

Tabea, Patrice and Nicole

Sources:

THE ICE  [online]. 15.03.2017. [cited the 15.03.2017]. Available from: https://www.theice.com/products/37089079/Robusta-Coffee-Futures

THE ICE  [online]. 15.03.2017. [cited the 15.03.2017]. Available from: https://www.theice.com/products/15/Coffee-C-Futures

INTERNATIONAL COFFEE ORGANISATION. 2017. Coffee Market Report. 14.03.2017

INTERNATIONAL COFFEE ORGANISATION. 2011. Relationship between coffee prices in physical and future markets. 107th session, London United Kingdom, 05.08.11

ECONOMIC CALENDAR. [online]. 13.03.2017. [cited the 15.03.2017].  Available from: http://www.economiccalendar.com/2017/03/13/coffee-prices-slip-arabica-sees-continued-technical-selling/

ECONOMIC CALENDAR. [online]. 28.02.2017. [cited the 15.03.2017].  Available from: http://www.economiccalendar.com/2017/02/28/coffee-prices-rebound-after-mondays-losses/

According to the International Cocoa Organization quarterly bulletin of cocoa statistics updated on February 2017, the world production of Coca will increase by 14.8%.

Price in USD/Mt

The spot price of cocoa beans has been falling since last year below $2000/t whereas last year (early 2016) it was above $3000/t. In early 2016, Biggest suppliers of Cocoa took measures to reduce the deficit of production that lead to high price. Excellent crop condition and strong willingness form farmers to produce an unexpected surplus of about 264.000 tons.

Price in USD/Mt

As we can see in the forward curve the agreed price today for a short time delivery (until may 2017) is lower than the spot price as the production and stocks till exceeds the demand.

Nevertheless, as prices go down, demand might increase which explains a contango in the forward curve.

Volume in MT

weather is still very good in general in the biggest producing countries such as Ivory Coast and Brazil, the production is expected to increase until may 2017 along with the decrease in the today’s agreed price for this period. The shift in curve between may 2017 and December 2018 explains the objective for producers to reduce its surplus in stock, helped by the low price and an expected boost in demand.

Sources:

http://www.marketqview.com/forwardcurvechart.php?ID=14&TYPE=Price

https://www.icco.org/faq/58-cocoa-harvesting/131-what-time-of-year-is-cocoa-harvested.html

http://www.foodbusinessnews.net/articles/news_home/Purchasing_News/2017/03/Analyst_says_global_cocoa_bean.aspx?ID=%7BD095F4BC-F523-4994-A297-690CF985BE31%7D&cck=1

http://www.reuters.com/article/us-cocoa-ivorycoast-weather-idUSKBN16D1G6

History

Copper is a metal that has been known all around the world since ancient times and considered to be one of the first metals to be used by humans. From West Africa to China to Europe to Central and South America, copper has been worked continuously from as far back as 9’000 BC. As one of the few independently occurring metals, copper has been used in several forms, from prehistoric to modern-day and it is the third most widely used metal in the world.

Production

Copper is found in a variety of minerals in the earth crust and it is then extracted from the ground. Mined rocks usually contain less than 1% copper. For it to become a final market product, it needs various chemical steps.  Once the ore is removed from the mine, the large rocks are then cut into small pieces using different processing methods in order to obtain a more usable form.

The next step is smelting which consists of extracting different elements that will not be used obtaining Matte copper. From the smelter, copper is then mixed with other chemicals that will react will the copper transforming it to Blister copper bringing it to the fire refining which consists of blowing air and natural gas to extract any sulphur and oxygen that remained leaving refined copper behind in order for it to be processed into copper cathode.

Refined copper is then placed in electrolytic cells in order to obtain 99% pure copper cathode.

The copper cathodes are pure but are not considered as being the final form of usage. Known to be strong and durable, it is also a very corrosion-resistant and that is why it makes this metal perfect for use on ships.

Copper cathode can be further transformed in different forms as shown above in products used for automobiles, appliances, electronics and a lot more.

The biggest producer of copper is Chile with more than 5.500 thousand metric tons produced in 2016. It is around 25-30% of the total production, which is around 19.000 thousand metric tons. Then Peru is second with more than two times less than Chile, with 2.300 thousand metric tons produced. And third is China, they produced around 1.700 thousand metric tons and they are a bigger producer than USA.

The biggest copper-producing company is Codelco, which operates in Chile and it is a state-owned company. The second one is the American company Freeport-McMoRan that mainly operates mines in USA, more precisely in the states of Arizona, New Mexico and Colorado. And third one is the Australian company, BHP Billiton which has operation in Australia, but also in Peru, Chile, Colombia and USA.

Ranking number 4 in this list, we find the Swiss based company, Glencore. Glencore operates mines in CR Congo and Zambia, as there is no big copper mine in Switzerland. It is interesting to see that a company without mines in its based country can produced more than 1 million tonnes of copper in 2016.

Here is the list of trading companies that trade copper:

- Louis Dreyfus

- Glencore

- Mercuria

- Trafigura

- Noble

Trade Flows

Exporters

Chile, which is the biggest producer of copper, is also the number one exporter of copper ores and concentrates. Followed by the Peru that is the second producer of copper in the world. The interesting point about the exporters is that we did not find China in the top 10 exporters. The reason is that China, which is the third largest producer of copper, consumes all its production.

Importers

China is the number one importer of copper ores and concentrates, followed by Japan and India. The reason why they import copper is that, they both have factories, which refined the copper in order to have a semi-finished or finished product.

Exporters

Chile is the major exporter of refined copper as the major exporter of copper ores and concentrates and also the largest producer of copper. But the second exporter of refined copper is Russia. And at the third place we find Japan. This can be explained by the fact that they are the second largest exporter of copper ores and concentrates.

Importers

On the importers side, we still have China as the major importers of refined copper, this is due to the large amount they need for their own consumption. Germany is ranked second in the list, because they use a lot of refined copper for their industry (for example: car manufactures). USA is at the third place of the importers of refined copper.

Market structure

Industrialization have change copper market structure. Also, Gradually, have been added changes in investment risks (countries risk profile), in the development philosophies of developing countries (investment encouragement), in the diversification strategies of multinational corporations (investments), and in the way copper is bought and sold on world markets (exchange platforms) changed the market structure.

Demand side

The demand of copper comes mainly from the construction market. The United States and Russia are major refined copper production, whereas China is the leading consumers of copper (40%). As the developing world continues to industrialise market tend to thing demand will continue rising and this will affect the commodity prices positively.

Supply side (last five years)


Copper-mining supply doubled between 1994 and 2014. Firstly, because mining copper have be profitable over the past decade. From 2011 to 2014 the cost of producing copper was said to be 2$ per pound, when price had and average of 4$. Since 2015 price of copper is falling. Three reasons can explain this: first, the currencies of copper producing countries have fallen. Secondly Mining companies are cutting costs due to increasing demand of copper which lead to increase in the scale and reduction of unit cost of production. Thirdly, energy prices have collapsed (copper mining is energy intensive).

Copper pricing mechanisims

Copper prices can be confusing.

First, Copper is traded on the London Metal Exchange (LME) in priced per tonne. LME copper may refer to spot LME copper prices or prices for futures contracts on the London exchange. Here it is priced in tonne and copper is sold in lots of 25 tonnes. LME copper futures contracts may be set at up to three months with daily expiration dates. Pricing is based on an agreed-upon copper price for a future date

Secondly, it is also trade on COMEX division of the New York Mercantile Exchange (NYMEX) in the CME Group in price per pound.

Physical delivery happens through a network of LME approved warehouses around the world (terminal market) and on the CME Group approved facilities located in the united states.

LME provide reference prices, act as future trading exchange and act as physical market of last resort for producers and consumers. LME inventories can therefore be considered as one indicator of global supply and demand. COMEX copper also refer to spot price and copper contract traded. In the market Copper must conform to specific chemical and physical requirement in order to be trade (grade A for LME and Grade HG for COMEX).

Copper is also traded in Shanghai Metal Exchange which have an important influence as 40 percent of the world’s copper is consumed by China.

Historical prices

The copper price has been on the downtrend in recent years (20 percent from 2011-2015) but they’ve actually gained 162.77 percent since 2000.

This is due to the rise of modern technology since 1980, to larger-scale offering lower grade so more costly mining procedures and increase production cost, to rising demand (the great commodity boom in the 2000). They are also downturn; the production boom in the 1980’s led prices to fall on the back of resulting oversupply. The respond of the supply to increasing demand had decrease the prices.

The Price

Since November 2016 price are recovering. This is partly base on speculation. In USA the President-elect’s $500 billion infrastructure plans is expected to affect the demand for the metal. Also, Chinese export are responsible for 50% of the last months’ copper demand and is expected to continue and so support prices until mid 2017 (up to 6’200 $ per tonne according to Goldman Sachs analysts)

What affect copper prices

On the demand side, the factors are; urbanization and industrialization, the building industry, currency movement of the actors, china demand (important actor which use structure finance with the commodity as collateral – approximatively one-third of copper imported into china are through those finance deal)

On the supply side, they are factors such as Supply disruption (copper come for South America in major part where strikes and natural disasters occur from time to time), Use of substitute (aluminium), oil prices (energy intensive), World development and activities (copper concern many industries), mine supply (supply of ore, copper discovery, extraction cost), refining activities (miners are paid according to the copper price at the time that the refiner makes the sale so they bear the risks – physical – spot), stock level of the approved warehouses.

Romain Boissenot, Luljeta Musli, Cynthia Yougang

References

Copper.org. (2017). Copper Production. [online] Available at: https://www.copper.org/education/copper-production/ [Accessed 7 Mar. 2017].

Icsg.org. (2017). Downloads. [online] Available at: http://www.icsg.org/index.php/component/jdownloads/finish/170/2202 [Accessed 7 Mar. 2017].

Investopedia. (2017). Commodities: Copper | Investopedia. [online] Available at: http://www.investopedia.com/university/commodities/commodities3.asp [Accessed 7 Mar. 2017].

Network, I. (2017). Copper Refining: From Ore to Market | Investing News Network. [online] Investing News Network. Available at: http://investingnews.com/daily/resource-investing/base-metals-investing/copper-investing/copper-refining-from-ore-to-market/ [Accessed 6 Mar. 2017].

The Huffington Post. (2017). Has Copper Lost Its Predictive Power?. [online] Available at: http://www.huffingtonpost.com/peter-hall/copper-economy_b_2916667.html [Accessed 6 Mar. 2017].

Anon, (2017). [online] Available at: https://minerals.usgs.gov/minerals/pubs/commodity/copper/mcs-2016-coppe.pdf [Accessed 9 Mar. 2017].

Anon, (2017). [online] Available at: http://www.trafigura.com/media/1364/economics-commodity-trading-firms.pdf [Accessed 9 Mar. 2017].

Anon, (2017). [online] Available at: https://www.princeton.edu/~ota/disk2/1988/8808/880805.PDF [Accessed 9 Mar. 2017].

Barrera, P. (2017). LME Copper vs. COMEX Copper | Investing News Network. [online] Investing News Network. Available at: http://investingnews.com/daily/resource-investing/base-metals-investing/copper-investing/lme-copper-price-comex-copper-price/ [Accessed 9 Mar. 2017].

Cmegroup.com. (2017). Copper: Supply and Demand Dynamics – CME Group. [online] Available at: http://www.cmegroup.com/education/featured-reports/copper-supply-and-demand-dynamics.html [Accessed 9 Mar. 2017].

Cummans, J., Cross, D., Cross, D., Cross, D., Kranc, J. and Ciura, B. (2017). CommodityHQ.com. [online] CommodityHQ.com. Available at: http://commodityhq.com/education/four-little-known-factors-driving-the-price-of-copper/ [Accessed 9 Mar. 2017].

Icsg.org. (2017). Downloads. [online] Available at: http://www.icsg.org/index.php/component/jdownloads/finish/170/2202 [Accessed 9 Mar. 2017].

Jamasmie, C. (2017). Copper to be best performing commodity of 2017 — analysts | MINING.com. [online] MINING.com. Available at: http://www.mining.com/copper-best-performing-commodity-2017-analysts/ [Accessed 9 Mar. 2017].

Ldcom.com. (2017). Metals – Louis Dreyfus Company. [online] Available at: http://www.ldcom.com/global/en/our-business/our-platforms/metals [Accessed 9 Mar. 2017].

Network, I. (2017). Copper Refining: From Ore to Market | Investing News Network. [online] Investing News Network. Available at: http://investingnews.com/daily/resource-investing/base-metals-investing/copper-investing/copper-refining-from-ore-to-market/ [Accessed 9 Mar. 2017].

History

Oil gathered from the Ukhta river was delivered to Moscow for the first time in 1597. The first oil well in the world was drilled at Bibi-Aybat near Baku in 1846.

Commercial oil production only began in the second half of the nineteenth century. Shell Transport & Trading, which later became part of Royal Dutch/Shell, began transporting oil produced by the Rothschilds to Western Europe. The pre-Soviet era of oil production in russia was marked by welcoming foreign investment and decent oil production.

Oil production suffered as a result of the Russian revolution in 1917, and the situation worsened with nationalization of the oil fields by the Communists in 1920. The Nobels, who played a major role in the development of oil industry in Russia, sold a significant part of their Russian holdings to Standard Oil of New Jersey, which later became Exxon. Companies including Vacuum and Standard Oil of New York, which later became Mobil, invested in Russia. The continued inflow of Western funds helped Russian oil production to recover, and by 1923 oil exports had climbed back to their pre-revolutionary levels.

In the post-Soviet era, Oil fields became entirely privately held, which led to an increase in foreign investment into new technologies and a significant increase in production. In the early 2000’s the trend was reversed however, with government seizing large oil companies (See the Rosneft case) and imposing restrictions on foreign investment. The price to pay to deny foreign capital from profiting from Russian oil, a decrease in productivity, currently seems to be a price the government is willing to pay.

Russian Crude oil grades and comparison

There are six different oil brands exported from Russia: Urals, Siberian Light, Sokol, Vityaz, REbco and ESPO

The benchmark for Russian crude oil is the Urals brand, a mix of heavy oils from Urals/Volga region and Siberian light defined as medium and sour, API approx. 32 and sulfur content at 1.35%.

For reference, here are the specifications of oil the other brands in Russia:

Brand API approx. Sulphur (w%)
Siberian Light 37.8 0.42
Sokol 35.5 0.28
Vityaz 34.6 0.16
REBCO 32 1.8
ESPO 34.8 0.48

Reference: Exxonmobile, oilru.com, catoil.com

Roughly, Urals crude is slightly heavier than Brent and much more sour, which marks them much more often than not at a discount to Brent (brent/urals spread discussed further.

Due to sheer volume, Urals and ESPO are the major brands with a bright futur. With an API of 34.8 and sulphur content of 0.48%, ESPO is a fairly sweet, medium-light blend Russian crude oil brand. As it’s not getting blended with heavy crude, it’s better than Urals.

%Shares of World exports of crude oil,

2014 Data, click to enlarge

Russia was formerly the world’s second largest exporter and producer of crude oil, recently toppling Saudi Arabia after both countries cut oil production following the OPEC agreement Although Russia isn’t a member of the club, they have pledged to follow the trend of decreased production. There is little certainty that the Oil giant will follow through fully with its promised decrease however.

Supply and demand


Russian crude oil reached an all time high of 11’202 MMbpd in October 2016 and a record low of 5’707 MMbpd in May 1998. Regarding Russia’s crude oil output cut, it dropped in February to 11’100 MMbpd from 11’200 MMbpd. This cut of 100’000 bpd represents only a compliance of one third with the OPEC agreement. In January Russia cut another 117’000 bpd according to the country’s energy minister A.Novak.

As we can see on the graph above Russia produces more than it consumes. Over the years the consumption stays stable whereas the production increase.

Exports


Russia is the world’s largest producer of crude oil (including natural gaz condensate). Hydrocarbons play a large role in the Russian economy, as revenue from oil and natural gas production and exports accounts for 21% of Russia’s federal budget revenue.

However, recent international sanctions on Russia, coupled with low oil prices, have put pressure on the Russian economy. (source : eia)


In 2016, Russia exported1.05 MMbpd to China, overtaking Saudi Arabia as their biggest supplier

Key Companies

Russia’s oil production by company in 2014


Source: US EIA

Among 10 main companies, only first 2 are responsible for more than half of the production.

Brent/Russian crude spread

The major Russian oil brand Urals, which is used for pricing bulk of the Russian oil going to the global markets. It’s usually traded at a discount to Brent. According to data below, a barrel of Urals has been traded with no more than a $4 discount off Brent’s price over the period from 2012 until now. It’s sold only outside exchange for direct long-term delivery contracts, hence only counterparties know prices. Urals brand oil is supplied through the Baku-Novorossiysk pipeline and the Druzhba pipeline system. Urals Crude futures are traded on the Saint Petersburg International Mercantile Exchange (SPIMEX) in U.S. dollars. ESPO is exported through the recently constructed ESPO Pipeline to China as well as through Russia’s Pacific coast port of Kozmino to other Asian countries. First batch was sold (in December 2009) with a $0.5 discount to Dubai. In 2011 it was traded with a premium of $2.2 to Dubai.

Comparing with Brent, we can notice premium peaks in beginning 2012 and in mid 2013 where Urals was at 73 cents a barrel more than Dated Brent. First biggest discount was noted in mid 2014 because of international sanctions following Ukrainian crisis. Russia’s oil has been falling harder end of 2015. In December 2015, Russia gave a “Christmas gift” to the global oil market when its exports grew by 26% vs. December 2014.

Russia is actively working to increase its market share in Asia, putting pressure on Saudi Arabia which has been the main oil supplier in this region. Russia reached to 5 MMT from 1 MMT in last 10 years.

A perfect correlation b/w Russia’s oil production and Brent Crude. Beginning 2008, lowest production near 9.8 MMbpd with highest Brent prices at 135$/bbl. Production more than 11 Mmbpd end of 2015, record lowest brent prices near 30$/bbl.

Prices recap


Perfect inverse correlation b/w USD and prices of URALS. More the $ is stronger, lower is the price of URALS

Sources:

http://www.oilru.com/or/53/1141/

https://www.eia.gov/beta/international/analysis_includes/countries_long/Russia/russia.pdf

http://oilprice.com/Energy/Crude-Oil/Russia-Makes-A-Move-On-Asian-Oil-Markets-As-OPEC-Cuts.html

http://marketrealist.com/2017/02/russias-oil-production-impacts-crude-oil-market/

https://medium.com/the-transformation-games-in-english/oil-a-perfect-storm-continued-4184788f4b04#.vif22ea0c

http://www.focus-economics.com/countries/russia/news/exchange-rate/russian-ruble-stabilizes-on-the-heels-of-rally-in-oil-prices

http://www.tfex.co.th/en/education/download/paper/20120402_BrentFuturesInsights29March12.pdf

http://www.eia.gov/todayinenergy/detail.php?id=22392

https://data.oecd.org/energy/crude-oil-production.htm

http://corporate.exxonmobil.com/en/company/worldwide-operations/crude-oils/sokol

http://fortune.com/2017/02/21/saudi-arabia-russia-top-crude-oil-producer/

http://timesofindia.indiatimes.com/business/international-business/oil-prices-fall-on-doubts-over-russian-output-curbs/articleshow/57487675.cms

http://www.economist.com/blogs/graphicdetail/2016/01/red-and-black

http://www.sibneft.ru/pages.php?lang=1&page=2