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Freight rates increase while the WAF crude price has continued to tumble (WAC #2)

Price movement recap

 

Since October, BRENT and WAF crude oil prices continue to decrease significantly and we can see on the graph above that they are still correlated.

The reason behind this great decrease is an oversupply of crude oil in the market, in general. There are several causes for this decrease:

  • The market reaction in regards to the US sanctions taken by M. Trump against Iran.
  • Then, the US issued sanction waivers for eight countries importing Iranian crude

In order to react to this situation, OPEC countries decided to cut/reduce oil supply for next year. As a result, oil prices will rise and stabilize over time.

If we compare the previous Forward curve to the new one from this week, we can notice that the price decreased from around 8$/per barrel but we can see that future prices are in containgo resulting from the OPEC annoucement.

So it is better to store the crude since carrying costs are supported by a higher price. However afterwards, the future price decreases a little bit (from July 19) so it is better to sell (small backwardation).

Supply and demand

Freight rates for tankers have increased sharply since the beginning of October for Nigeria and Angola. Therefore the offer for WAF crude stays quite pricey for buyers and the high freight rates weigh somehow on Asian demand. The general buying interest, especially to Asia, had slowed due to rising freight rates, even though some spot cargoes were traded at the end of October. The daily cost of shipping Angolan crude to China has jumped to above $50,000, from closer to $42,000 on about a few days. Finally refiners have appropriated vessels in the Middle East to secure alternatives to their usual deliveries of Iranian crude which fall under US sanctions from 4th of November.

“Freight is ridiculously expensive. It’s become a $1 a barrel more expensive going east, which puts the breaks on things,” one trader said.” (Reuters)

Total exports from main WAF crude oil producers will reach 3.86 million barrels per day (bpd) in December, according to 3.88 million bpd in November, led by declines in Angolan output. Nevertheless China’s crude oil imports increased to an all-time high of  9.61 million bpd in October. (32 percent increase on the same month last year)

 

Sources:

https://www.reuters.com/article/westafrica-oil/w-africa-crude-high-freight-rates-weigh-on-asian-demand-idUSL8N1XA82U

https://www.reuters.com/article/westafrica-oil/w-africa-crude-offers-for-nigerian-crude-stay-too-pricey-for-buyers-idUSL8N1XB7VL

https://www.erce.energy/graph/brent-futures-curve

https://www.reuters.com/article/westafrica-oil/w-africa-crude-surplus-cargoes-drag-on-spot-trade-and-diffs-idUSL8N1XI7BF

https://www.reuters.com/article/westafrica-oil/w-africa-crude-sellers-face-off-against-high-freight-and-excess-oil-idUSL8N1XJ6IP

https://www.theweek.co.uk/oil-price/95286/what-is-the-price-of-oil-and-which-way-will-it-go

https://www.theguardian.com/business/2018/nov/12/oil-prices-saudi-arabia-production-opec-khalid-al-falih

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Soybean Bulletin N°2

Thanks to this graphic that resume the fluctuation of the price of Soybean for last month, we can observe that since the last bulletin, the price has sharply increased from 30th October to the 1st of November from 847.00 USD per hundred bushels to 887.75 USD per hundred Bushel. (Red circle)  It can be explained by a simple reason.

It would be that soybeans start to be planted in Brazil. It means that the resources are scarce in the inventories. Indeed, if we take the seasonality of soybean, we can observe that the harvest for Brazil is done in March. Hence, they are actually selling today their old crop, which should be priced higher than their new crop because the supply is lower.

(High price for scarce resources/ Low price for abundant resources)

From the 1st November to today, the price has actually stabilized. The reason would be that we are actually starting the harvest in the USA. The new crop should be sold at a lower price, which is why the price has actually stabilized since then. The market of soybean is mainly driven by the supply of those two countries and by the huge demand of China.

Finally, the blue circle represents the increased in volume sold from one day to another.

As we can see, the forward curve does not change much within two weeks so we can assume that we need more time to see an evolution in the curve. We can see a carry from November to August and then it slows down from August to September and then we can see another carry until July 2020. The forward curve of soybeans tends to follow a seasonal pattern where we have the notion of old crop and new crop. The new crop period for soybean is in November so that is why we see an upward trend in the forward curve at this time of the year.

Moreover, we have a lot of supply so the price should drop but due to the fact that Brazil is becoming short on soybeans the U.S has a lot of demand coming from China so this could be the reason why the forward price keep following this upward trend.

Watch Video: https://institute.cmegroup.com/courses/introduction-to-grains-and-oilseeds/modules/understanding-seasonality-in-grains

US farmers refuse to sell their soybeans

Instead of selling their soybean crops right away, American farmers have decided to store their entire production in silos and containers. The reasoning behind this is the hope that the price of the commodity will rise in the coming weeks when government leaders hopefully have reached an agreement and lifted the tariffs barriers. For some farmers, It is not a choice since their only alternative would be to let their crops to rot. By the end of the crop year, the country’s total inventory of soybean would amount to 955 million bushels.

http://marketqview.com/forwardcurvechart.php?ID=74&TYPE=Pricehttps://www.farmfutures.com/soybean/us-farmers-storing-

soybeanshttps://www.thebalance.com/soybean-planting-and-harvest-seasons-809258

https://www.bloomberg.com/opinion/articles/2018-11-13/xi-jinping-not-trump-is-the-true-cold-warrior

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North American Crude Bulletin#1

Price movement recap

In the past four week we have seen a significant of USD 10 drop in oil prices with WTI crude around USD 63 per barrel in early November.

Prices reached a peak in October due to global shortage supply after announcement of US sanctions over Iran, who started on the 4th November.

Early October Saudi Arabia and Russia stated they will raise their production to compensate the shortfall in supply. U.S. Treasury yield increase also impact also impact oil price as it has added volatility across all markets including currencies and commodities.

Future prices: Prices agreed today for delivering a specified quantity of crude oil (light) at a specified time and place in the future.

before theUS midterms election in United States 02.11.2018

We can see that there is not a huge difference on the curve pace after the US midterms election. As we are still in a contango, we recommend to go on long term. Even if there is a little slight on the forward price, it is still profitable to store and sell in the future.

WTI spot and London Brent oil curve:

The exchange of crude knows a lot of variation. The variation can be influence by a lot of thing like a tweet from Donald Trump explaining that some commercial sanction will be proceed against a country from the OPEC.

This graph shows the price variation of the Brent crude and West Texas intermediate spot. We can see that the two curves are correlate and move in the same way. Even if the variation trend is clearly turned to a price decrease, the London Brent oil price remains higher than the WTI crude oil spot.

Crude oil price :

Oil prices are still dropping this week while the U.S crude oil production is increasing. A lot of crude oil actors due to the US production intensification are wondering about a global oversupply return. It is why some of the OPEC member are thinking that a production curbs may become necessary once again in order to prevent a glut.

References:

https://www.zonebourse.com/LONDON-BRENT-OIL-4948/graphiques-comparatif/

http://marketqview.com/forwardcurvechart.php?ID=23&TYPE=Price

https://www.eia.gov/dnav/pet/PET_PRI_SPT_S1_D.htm

http://www.theweek.co.uk/oil-price/95286/what-is-the-price-of-oil-and-which-way-will-it-go

https://oilprice.com/Energy/Crude-Oil/The-Real-Reason-For-The-Big-Sell-Off-In-Oil.html

 

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Copper Weekly Bulletin – N°1

Chinese economic slowdown and the trade war keep copper price low:

The 3-month copper price dropped on Monday November 5 after experiencing a two-week high last Friday following some comments made by the US president Donald Trump, on a probable approaching trade deal with China.

The copper price was trading at USD 6,315 a ton on Friday, its highest since October 22 but slipped down 1.5 percent to USD 6,191.50 a ton on Monday as investor took profits.

Since late September the price of the copper varied between a USD 5,950 and USD 6,400 range as the worries of trade war minimizes the effect of the shortage of the metal.

The LME also introduced a premium of USD 31.00 per tonne as concerns of a shortage rises which contrasts greatly with the discount of USD 47.00 at the end of October.

Indeed, the price of copper is a victim of negative sentiment. FocusEconomics noted at the beginning of the month that the price of the commodity is stable but is not going anywhere soon for two reasons: firstly, the chinese economy is slowing then because of the tariffs.

The price of the red metal was supported last month by the drop in inventories to the lowest in 10 years (see graph 1; on a 5 year-range only). Therefore, the drop helped to outweigh the chinese slowdown as well as the worries of a trade war.

Despite the negative sentiment, analysts forecast that the price of copper should rise in Q4 as new technologies such as renewables and electric cars will drive the demand of the commodity.

Graph 1: Warehouse Stocks Level

  

Inventory Level:

Graph 2: Inventory level and price

On 31st October, the LME copper inventory level was at his lowest in a decade. The day after, it increased from 57’650 (open tonnage) to 102’600 tonnes and directly stabilized around 100’000 tonnes.

We observe here (31.10.2018 – 01.10.2018) a common phenomenon between the price and the inventory level as the stocks suddenly increased when the price was relatively low.

At the same time and on a larger scale (2 weeks), we would expect the price to grow when the inventory fall. Usually, an inventory fall means that there is a shortage or an increased demand in the market. Therefore, such an increase in the inventory illustrates the actual uncertainty around copper supply and demand due to political factors.

Backwardation or Contango?:

Backwardation: In October, the trend in the 3-month future price shows that there is shortage on the supply side as the spot price is higher than the future price. It means that buyers need copper now, in that condition, a trader  should be “short” or sell his positions to not take carriage cost.

Sources:

https://www.voanews.com/a/china-xi-trump-phone-call-extremely-positive/4639713.html

https://www.reuters.com/article/global-metals/metals-copper-slips-on-profit-taking-idUSL4N1XG3CH

https://uk.reuters.com/article/global-metals/metals-london-copper-slips-from-two-week-top-idUKL4N1XG1RM

https://www.bloomberg.com/quote/LMCADS03:COM

https://uk.reuters.com/article/global-metals/metals-copper-rises-as-democrat-victories-in-us-weaken-the-dollar-idUKL8N1XI4OH

https://investingnews.com/daily/resource-investing/base-metals-investing/copper-investing/focuseconomics-chinese-growth-rhetoric-keeping-copper-down/

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LNG – The seasonal and growing commodity (Weekly Bulletin # 1)

Supply and demand factors

LNG is a product directly impacted by the Natural Gas supply and demand: LNG is NG that is liquefied. We then have to look at the supply side which is the amount of natural gas production, the amount of gas in storage and the volumes of imports/exports. The price variations will also affect the supply side: a decrease in the price will reduce production and sales of stored gas, while an increase in price will tend to show the opposite trend.
On the demand side, we can observe factors such as the weather (winter/summer), the petrol prices (substitute) and the economic growth and policies in a country.

If we look at this graph again, which shows the American consumption of gas over the years, we can definitively observe a seasonality due to the weather: cold weather increases demand for heating while summer increases demand for cooling, meaning a higher electricity consumption (since many electric power plants are fuelled by NG, it directly affects the demand). This example could be used to explain NG consumption in other countries such as Japan or South Korea since NG is used for the same purpose.

Price

The two biggest LNG importers are Japan and Korea (accounting for 34% and 15% respectively in world LNG imports), since they have no access to pipelines. Prices of NG there is different and higher than other NG markets (US: Henry Hub; Europe: NBP) since it includes cost of freights and gasification/regasification costs (see graph here).

Inventory levels of LNG

The demand of LNG increases during the winter when people need natural gas to produce the heat. During the winter, the inventory level of LNG is low because of the peak demand of the market. The opposite occurs during the summer when the climate is pleasant. In this period, the inventory level of LNG tends to increase.
The seasons are also linked to the spot and future price of LNG. During the winter, the spot price of LNG is higher than the forward price, and during the summer it is the opposite.

The present price of LNG

As shown in the Asian LNG prices’ graph, the spot price of LNG is equal to $12 per mbtu. The spot price of NG (Henry Hub) is equal to $3.53. The differential between these two commodities is equal to $8.47.

As we can see on the natural gas’ forward price curve, the forward price is currently equal to $3.84. In order to know the liquefied natural gas’ forward price, the differential of $8.47 shall be added to the natural gas’ forward price and gives $12.31.

By comparing the LNG’s spot price and LNG’s future price, we determine that the forward price ($12.31) is equal to the spot price ($12). The demand of LNG will probably raise in the next months. We will see if the spot price will be higher.

 

 

Long-term recommendation – US/China trade war

The winter period in China might be seen as a factor which makes the Chinese market as a bullish market for US LNG suppliers. However, the trade war between China and USA has led to a tariff of 10% on US LNG imports. Because of this tariff of 10%, China had to find some alternatives to avoid this impact on the LNG demand of the country. Indeed, China tied deeper its trade with Russia and is developing a pipeline project for transporting gas from Siberia. Moreover, China shows a high interest to join the pipeline “TAPIA”, which is a pipeline project that involves importing natural gas from Turkmenistan through Afghanistan, Pakistan and India. These projects will help China to prepare for a future increase in demand, since the country is seeing to become the world’s biggest market of natural gas. The consequence for the US would be to loss its market share in China, simply because China will probably not invest in US LNG anymore. In order to avoid a huge deficit for the US, Trump had to convince EU countries and Japan to increase their imports of US LNG.

LNG market shows some opportunities and possible growth in the supply and demand side. However, since the US/China trade war, LNG is becoming more a diplomatic concern. We recommend to pay attention to LNG market which might show a positive or negative fluctuation on the price.

References

TAKESHI, Kumon, 2018. “US-China trade war weaponizes liquefied natural gas.” Nikkei (online). October 9, 2018. (Consulted on November 7, 2018). Available to the following URL:
https://asia.nikkei.com/Spotlight/Asia-Insight/US-China-trade-war-weaponizes-liquefied-natural-gas

BP, Natural Gas Prices. (Consulted on November 8, 2018). Available to the following link :
https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy/natural-gas/natural-gas-prices.html

ITC, Trade Statistics For International Business Development. (Consulted on November 8, 2018). Available to the following link :
https://www.trademap.org/(S(ki1e5knkr0ide3lrwd52fdsq))/Country_SelProduct_Map.aspx?nvpm=1%7C%7C%7C%7C%7C271111%7C%7C%7C6%7C1%7C1%7C1%7C1%7C1%7C2%7C1%7C1. Consulted November 2018

EIA, 2017. « Factors Affecting Natural Gas Prices ». EIA (online). August 23, 2017. (Consulted on November 8, 2018). Available to the following link :
https://www.eia.gov/energyexplained/index.php?page=natural_gas_factors_affecting_prices. Consulted November 2018

EIA, 2018. “Short-term energy outlook”. EIA (online). November 6, 2018. (Consulted on November 8, 2018). Available on the following link:
https://www.eia.gov/outlooks/steo/marketreview/natgas.php

YCHARTS, 2019. “Henry Hub Natural Gas Spot Price”. Ycharts (online). November 5th, 2018. (Consulted on November 12th, 2018). Available to the following URL:
https://ycharts.com/indicators/natural_gas_spot_price

TERAZONO, Emiko, 2018. “LNG prices leap on strong Chinese demand.” Financial Times (online). October 2nd, 2018. (Consulted on November 7th, 2018). Available to the following URL:
https://www.ft.com/content/e54e6392-c332-11e8-8d55-54197280d3f7

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BRAZILIAN CURRENCY & POLITICAL STABILITY AFFECTING COFFEE MARKET (coffee#1)

The main drivers for a change in price in this period:

1. Macroeconomic factor:

Presidential election in Brazil has slumped the Brazilian currency “real”. This resulted in making profitable to ship the Robusta coffee beans “for delivery on the exchange” in Europe. Plus, the Brazilian coffee producers have been hammered by the currency depreciation as it has raised the cost of inputs of production (such as: fertilizer, pesticides)

However, as we can see the real appreciated back in October that is why the Shipments to Europe have now started to slow down. The cause of this decrease is because the market favors Jair Bolsonaro and is forecasted to be the Brazilian’s new President. However, the latter, as Trump, has some plans such rising the economy in brazil which was in recession with some new financial measures favouring enterprises to invest as well as attract foreign directt investors within the country. Some of the new regulation would increase the use of Amazonian forest resources which would mean more supply provided by the farmers would be available.

2. Currency

The UDSBLR is the relation between the US dollar and the Brazilian Real- shows the value of a us dollar in Brazilian real- so decrease in the graph means the real is getting stronger (to buy 1 dollar you need less real) and increase means the real weakens.

The coffee composite indicator is an index for the price of all kinds of beans aggregated together.

We can also explain this as the Brazilian currency depreciates versus the US Dollar, there is more demand as you can buy the same quantity for less price in USD and therefore the price increases which explains the negative correlation between the USDBL and the coffee composite indicator.

We can see in both graphs during the period of the presidential election in Brazil the price of coffee bean is volatile due to the decrease in political stability of the country.

Arabica Coffee Bean Price:

Robusta Coffee Bean Price:

As we can see in both of these graphs, which represent the price of Arabica and Robusta beans over the past 2 years, the market was bearish for a long time while now. Around the end of September, the price started to increase.

As price of coffee decreased, the demand obviously increased, as importers wanted to buy it while the price is still attractive. However, this level of low prices negatively impacted productivity due to low farmers salaries (which don’t incentive farmers to produce). This results in a high demand and a low supply which pushes the prices up as we are seeing now in the futures market.

Our Recommendation:

As we are currently in a carry market, we think it would better to buy and store the coffee.

 

References:

https://www.bbc.com/news/world-latin-america-46039996?intlink_from_url=https://www.bbc.com/news/topics/c4wq0zk0wq2t/brazil-general-elections-2018&link_location=live-reporting-story

https://seekingalpha.com/article/4211740-4-reasons-coffees-price-moving-higher?page=2?article_roadblock

https://tradingeconomics.com/brazil/currency

https://www.theice.com/products/15/Coffee-C-Futures/data?marketId=5305276&span=3

https://www.bloomberg.com/opinion/articles/2018-10-29/coffee-s-brazil-election-buzz-might-not-last-if-real-weakens

https://www.cnbc.com/2018/10/01/reuters-america-coffee-industry-could-act-to-raise-prices-brazil-association-abic.html

https://www.investing.com/analysis/tropical-trump-bolsonaro-looms-large-over-sugar-coffee-rally-200347582

https://www.climatecouncil.org.au/2016/09/12/trouble-is-brewing/

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West African Crude Bulletin#1

October is not really a good month for crude oil prices. Oil prices got their biggest monthly drop in more than two years. For example, the WTI (West Texas Intermediate crude) dropped by 10.8 % in October. The West African grades prices for Qua Iboe and Nemba are also getting down.
Trafigura and Mercuria traders are assuming that Brent crude oil could rise to
$90 per barrel by the end of December and even pass $100 at the beginning of 2019, as markets tighten once U.S. sanctions against Iran are fully implemented in November.
OPEC as well as Russia are planning to raise their output to counter falling supply from Iran, although no decision was publically made yet. Some sources are saying that OPEC and other producers are willing to raise their output by 500,000 bpd when the worldwide production in June 2018 was around 92,6mbpd.
The oil prices are dropping down Following Trump’s tweets (see below) and intervention in the media, the price of crude oil has decreased significantly. Donald Trump was complaining that the oil prices are too high; moreover, he accused OPEC of pushing oil prices higher, and said that they should lower their prices. He actually expressed his discontent on twitter, after which, the oil prices dropped down and are still going down. He even threaten Middle East to withdraw US military resources if they do not want to cooperate. We assume that Trump’s pressure on OPEC is an attempt to make US crude oil more attractive. For instance, in July 2018 the US production was around 11mbpd and exportation around 1.8mbpd in the half of 2018. In 2018, the US has boosted their exports to Asia, Oceania such as China, South Korea and India by 80% compared to 2017.

To conclude, we think that the West African crude is not the only one which is suffering from Trump’s actions but the crude oil industry as a whole.

The forward curve below represents BRENT CRUDE OIL for year 2019. We chose the BRENT CRUDE as it is a benchmark for West African Crude oil. We can see that the price slightly decreases over time and hence tells us that this forward curve is in backwardation.

As we are in backwardation, we recommend to go short. There is no incentive to store because the price decrease over time. Storing crude would lead to carrying costs, which would not be economically viable.

Sources
Prices falling: https://mobile.reuters.com/article/amp/idUSKCN1N427C
Trump’s Tweets: https://twitter.com/?lang=fr
US export: https://www.hydrocarbonengineering.com/gasprocessing/24092018/eia-crude-oil-was-the-largest-us-petroleum-export-inthe-first-half-of-2018/
World production: https://www.forbes.com/sites/rrapier/2018/06/14/world-setsnew-oil-production-record/#4d589dcd752d
Trump’s pressure on OPEC : https://www.cnbc.com/2018/09/20/trump-wantsopec-to-keep-crude-low-it-cant-do-that-oil-expert-says.html
Brent backwardation: https://www.spglobal.com/platts/en/marketinsights/latest-news/oil/091218-brent-cfd-curve-moves-into-backwardationamid-bullish-crude-oil-outlook
Brent Futrue contract: https://www.theice.com/products/219/Brent-CrudeFutures/data?marketId=222467

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China and the structural change on the iron ore market (Iron ore – Bulletin 1)

 Price movement recap

In May, the transaction activity for imported iron ore slowed down in China due to an general economic slowdown because China remains under threat from punitive US tariffs on Chinese imports. Then in June, the prices of iron ore fluctuated and in July, steel production restrictions due to China’s anti-pollution measures impacted China’s imports of iron ore : the demand of iron ore increased because China has to reduce its steel production. From August to October, prices of iron ore are gradually inscreasing.

 Dynamic of supply and demand

Due to the new anti-pollution rules registered in the Three-Year Plan Action by the China government, the Chinese steelmaker imports more iron ore.

However, they are looking for a higher quality of iron ore in order to pollute less. This 2020 action plan to air quality is leading to steel producers to offer a rich iron ore on the market as reducing costs as well.

To illustrate this structural change, International mining and Resources Conference, on this Monday 29th of October until today, the 1st of November in Melbourne, the CEO of Rio Tinto Group, Jean-Sebastien Jacques suggests new ways of mining because the issues of the protecting air, water and land are more important more than ever. He considers that the mining has seen as an “old industry” that it is necessary to modernise by using automation and artificial intelligence (AI).

In that sense, as the CEO of FMG, Elizabeth Gaines is introducing autonomous trucks automatizing their ways to production to propose a best quality to the China demand because China demand still very strong.

Finally, this structural change concerns all of iron ore companies. For example, the emerging iron ore company Finders Mines Limites (FMS) rating in the Australian Securities Exchange which is focusing on the exploitation of the mines in the Pilbara region (western Australia ) operates with discount rates for lower-grade and high-impurity iron ore in order to improve the quality of their iron ore.

 Recommandations

Since iron ore prices per metric tonne are constantly rising due to Chinese factors, we believe that it would be better to sell iron ore to earn a margin.

Sources

MB, F. (2018). ‘Structural change’ in iron ore market leads Flinders Mines to review options | Metal Bulletin.com. [online] Metalbulletin.com. Available at: https://www.metalbulletin.com/Article/3841133/Search-results/Structural-change-in-iron-ore-market-leads-Flinders-Mines-to-review-options.html [Accessed 1 Nov. 2018].

GmbH, f. (2018). Iron Ore PRICE Today | Iron Ore Spot Price Chart | Live Price of Iron Ore per Ounce | Markets Insider. [online] markets.businessinsider.com. Available at: https://markets.businessinsider.com/commodities/iron-ore-price [Accessed 1 Nov. 2018].

Creagh, B. (2018). Rio Tinto CEO targets a reinvention of mining – Australian Mining. [online] Australian Mining. Available at: https://www.australianmining.com.au/features/rio-tinto-ceo-targets-reinvention-mining/ [Accessed 1 Nov. 2018].

Eco-Business. (2018). China releases 2020 action plan for air pollution. [online] Available at: https://www.eco-business.com/news/china-releases-2020-action-plan-for-air-pollution/ [Accessed 1 Nov. 2018].

Mining-journal.com. (2018). “… no one at Fortescue is displaced as a result of automation”. [online] Available at: https://www.mining-journal.com/leadership/news/1341574/-…-no-one-at-fortescue-is-displaced-as-result-of-automation [Accessed 1 Nov. 2018].

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Russian Crude Oil Bulletin#1

Price movement 

Prices on the low despite US sanctions

 

Oil prices spiked at the beginning of October to a four-year peak, with Brent Crude at around US$85 per barrel on worries over stretched global supplies due to US sanctions on Iran.

However, following this spike, prices came close to post their biggest monthly percentage decline since July of 2016 as rising production and the potential slowdown in energy demand outweighed expectations.

An important fact has been whether other producers will compensate the diminished supply. OPEC, led by Saudi Arabia, and other leading producers, Russia, agreed in early summer to rise crude production after over a year of reduction. Comments in recent weeks by the Saudis regarding their potential maximum production—reaching up to 11 million barrels a day—have further weighed on prices of late.

Examples to illustrate the supply and demand dynamic of the commodity.

The main change we have seen recently is about the market sentiment, partially due to increasing concerns about demand as a result of the trade conflict between the U.S. and China. However, “real demand data remained robust in September,” Commerzbank said[1]. On the supply side, producing countries have also played an important role, with crude oil inventories in the U.S. having risen significantly for several weeks. Saudi Arabia, Russia and Libya boosted up their oil production in a noticeable manner in October. The result of these actions is positive as oil producers seems to be successful in offsetting the supply outages coming from Iran and Venezuela.

 

The OPEC nations are struggling to fully deliver on the oil production increase of 1 million bpd promised in June, Reuters reported, quoting an internal OPEC document.

In comparison to May, Saudi Arabia ramped up its production by 524,000 bpd but in the meantime Iranian, Venezuelan and Angolan production fell nevertheless, the non-OPEC partners in the deal have significantly increased their combined production. Last September, Russian oil production reached 11.36 million bpd. As a whole, the country’s production has increased by 450,000 bpd since May, but part of that increase was counterbalance by a decrease in Kazakhstan, Mexico, and Malaysia.

Recommendations to be short (sell) or long (buy) for the next 3 or 6 months.

“There’s a sense that the global economy goes into a bit of a slowdown and demand in 2019 isn’t quite as robust as it has been over the past couple years,” said Brian Kessens, energy asset manager at Tortoise in Leawood, Kansas. “We are still in more of a risk-off sentiment.”[2]
In addition to demand side concerns, all eyes are on the impact of Iran’s sanctions, which are expected to come into effect on Nov. 4, with many believing that Saudi Arabia and OPEC will do what is necessary to fill any shortage supply.

Following every bit of information stated previously, we recommend to be short on the commodity as we fully trust in OPEC and other producers capacity to fill the gaps and prevent shortage.

Sources

Beals, Myra P. Saefong, Rachel Koning. « Oil on Track for Biggest Monthly Loss in More than 2 Years ». MarketWatch. Consulté le 1 novembre 2018. https://www.marketwatch.com/story/crude-oil-tips-higher-but-is-about-to-log-a-9-october-retreat-2018-10-31.

« Brent Crude Futures | ICE ». Consulté le 1 novembre 2018. https://www.theice.com/products/219/Brent-Crude-Futures/data?marketId=222467.

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[1]https://www.marketwatch.com/story/crude-oil-tips-higher-but-is-about-to-log-a-9-october-retreat-2018-10-31

[2]https://www.bloomberg.com/news/articles/2018-10-31/oil-set-for-biggest-monthly-decline-since-2016-on-growth-fears

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To bean or not to bean – Weekly bulletin N°1

Price

As we can see the price of soybean for the last six months has dropped dramatically between the end of may until July, the reason for that is definitely the impact of the trade war on the price, it first appears in July 2018 when China imposed a 25 percent on imports of soybean coming from the U.S. as a response from the tariffs imposed by the U.S on Chinese export.


American soybeans are really important to feed the growing middle class in China, where soy-fed pork has become an important part of the diet. The demand will be even more important this fall when soybeans from Brazil will be rare because of the end of their season. The typical period during which the U.S used to ship almost half of his production to China is in October and November so that could explain the rise of the price even though the trade war is still there, China still needs soybeans coming from the U.S.

Heavy rains devastate harvests

For the second year in a row, heavy rains had a negative impact in the soybean production. On one hand, the farmers have trouble meeting their quotas of soybean production. On the other hand, the rain forced shipments to pass down the Mississippi River instead of the usual west coast. This creates a bottleneck for the transport, which leads to delays, which then leads to an increase in the price of the soybean.

Iran might become the new first importer of USA

Even though Iran had big political issues with the USA, some reports on Financial Times and on other websites showed that the USA were filling the gap that China left, once they started to increase the taxes of importation from them, with Iran. Indeed, Iran became the first main importers of Soybean from the US in August 2018. The data from the U.S. Census Bureau explained that Soybean exports from the USA increased in August, to 123.7 MB in 2018 compared to last year. It also informed that Iran purchased 15.2 MB of U.S. soybeans which was much more than the past five years.

Recommendation

Recently we observed that the price of soybean is quite low. So with basic business knowledge, it will be clever to buy at the lowest price and based on this price forward curve we can see that there is an upward trend, hence the price is going to be higher. Therefore, buy at a low price and sell at the highest price. Moreover, we have to be informed of the upcoming events during the trade war.

Sources

Daniel Shane, C. (2018). China may soon regret slapping tariffs on US soybeans. [online] CNN. Available at: https://edition.cnn.com/2018/10/01/economy/china-soybeans-trade-war/index.html [Accessed 28 Oct. 2018].

Macrotrends.net. (2018). Soybean Prices – 45 Year Historical Chart. [online] Available at: https://www.macrotrends.net/2531/soybean-prices-historical-chart-data [Accessed 28 Oct. 2018].

1, B. (2018). Soybean Outlook – Stop guessing, start selling. [online] Farm Futures. Available at: https://www.farmfutures.com/story-weekly-soybean-review-0-30767 [Accessed 28 Oct. 2018].

Press, T. (2018). Rainy harvest devastates Louisiana soybeans for 2nd year. [online] The Seattle Times. Available at: https://www.seattletimes.com/business/rainy-harvest-devastates-louisiana-soybeans-for-2nd-year/?utm_source=RSS&utm_medium=Referral&utm_campaign=RSS_all [Accessed 28 Oct. 2018].

Shedlock, M. (2018). Iran Replaces China as Top Importer of US Soybeans. [online] FXStreet. Available at: https://www.fxstreet.com/analysis/iran-replaces-china-as-top-importer-of-us-soybeans-201810302207 [Accessed 28 Oct. 2018].

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