Commodity Trading Major

PRICE MOVEMENT RECAP

The graph shows that the price continues to increase as expected. The worldwide supply is currently low since latin american producers are not in their harvest season and that the US is done with their harvest season. Moreover, the production of soybeans in Brazil and Argentina is uncertain because of the La Niña phenomenon. There have been extreme low rainfalls, altering the growth of soybeans. Now, the lands are extremely dry, which will postpone the planting season and thus alter the supply. Although Argentina seems to experience better weather, their contribution to the worldwide production is not significant enough to make up for other countries’ decreasing production. The consequences of this is that the supply is low but the demand is high, since China is continuing to buy a lot from the US. Thus, the price will continue to increase. 

What is interesting is that some chinese importers are willing to cancel the purchase of some of the agreed US cargoes for December and January, since they have not entered into a futures contract before, as they were not expecting such a rise in the price. Importing soybeans at the current price means that they would lose money. The potential consequences on the price remains unknown since the size of the cancelled cargoes has not been disclosed.

Additionally, Biden’s administration is expected to maintain the US’ trade tariffs policy on China, but will be more predictable to China compared to Trump’s administration, as said by Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce

Worth mentioning that the Biden administration is focused on multilateral approach.

China has committed to purchase US$36.3 billion worth of US agricultural products, including soybeans, in 2020 and US$43.3 billion in 2021 as agreed in the Phase 1 of their agreement on trade. 

However, China has been buying more soybeans from Brazil than usual, resulting in Brazil selling more than the US to China. 

Therefore, as Brazil had to sell more to China, both countries needed to buy soybeans from the US to meet their requirements. This results in a tight supply and demand, increasing soybean prices.

INVENTORY

When it comes to the world ending inventory of soybeans, they unsurprisingly declined over the past three years as shown below:

Source: CME Group

Even though much of it can be attributed to Brazil, the ending stocks of US soybeans have significantly dropped as well (-333 million of Bushels, which represent a decrease of 64% from year 19/20 to year 20/21) which is explained by a reduced production in most of the producing states, and an increasing demand mainly from China, but also from Brazil, which has been forced to import US soybeans since their local production was altered due to reduced rainfalls. In fact, the situation is such that 20/21 could record the lowest ending stocks of soybeans since five years, according to the Agriculture and Horticulture Development Board.

SUBSTITUTES

CORN

Corn is a substitute for soybean that China is using to feed livestock. This, coupled with the plunging Ukrainian production resulted in a 32% price increase between June 1st and November 30th

CRUDE PALM OIL

Soybean and palm oil are considered substitute goods because importers can easily switch between the two commodities. Most of the world’s palm oil production is located in Indonesia and Malaysia. There is a high volatility in the spread relationship between the two commodities because a drought in the United States could alter the soybean oil supply one year, while disease in Southeast Asia could alter the palm oil supply next year. 

The two markets tend to move together. In fact, with the increase of soybean prices, this increases the price of crude palm oil as well. 

In 2017, Malaysia exported 2.87 million tonnes of palm oil to China. However, the trade agreement between the US in China might in the long term affect the Malaysian exports of CPO. China might buy more soybean from the US than CPO from Malaysia.

RECOMMENDATION

As discussed, the production (supply) is uncertain for the following months due to weather issues in Latin America. Moreover, the demand is still high, showing an increase in the price. Since the production is uncertain coupled with COVID-19, the price will continue to increase and we can expect stocks at the beginning of the year to be lower compared to the previous years. We recommend going long over the next months as the supply will remain low. 

With the US-China trade agreement, we can assume that the export (from the US) of soybean will drastically increase. However, this remains uncertain as China may “washout” imports from the United States.

REFERENCES

China Says Its Grain Imports Not to Blame for Global Price Surge – BNN Bloomberg, [no date]. [online]. [Viewed 2 December 2020]. Available from: https://www.bnnbloomberg.ca/china-says-its-grain-imports-not-to-blame-for-global-price-surge-1.1529331

Chinese buyers look to cancel U.S. soybean orders as processing margins shrink | Reuters, [no date]. [online]. [Viewed 2 December 2020]. Available from: https://www.reuters.com/article/us-china-soybeans-cancellations/chinese-buyers-look-to-cancel-u-s-soybean-orders-as-processing-margins-shrink-idUSKBN28510H

Corn Prices – 59 Year Historical Chart, [no date]. [online]. [Viewed 2 December 2020]. Available from: https://www.macrotrends.net/2532/corn-prices-historical-chart-data

Cover Story: ‘Predictability’ is the word to describe Biden’s trade war approach, 2020. The Edge Markets[online]. [Viewed 2 December 2020]. Available from: http://www.theedgemarkets.com/article/cover-story-predictability-word-describe-bidens-trade-war-approach

FEEDNAVIGATOR.COM, [no date]. Bullish picture for maize and soybeans. feednavigator.com [online]. [Viewed 2 December 2020]. Available from: https://www.feednavigator.com/Article/2020/11/12/Bullish-picture-for-maize-and-soybeans

Geosys How is La Niña impacting Brazilian and Argentina crops?, 2020. UrtheCast [online]. [Viewed 2 December 2020]. Available from: https://www.urthecast.com/how-is-la-nina-impacting-brazilian-and-argentina-crops/

snd_cbt.pdf, [no date]. [online]. [Viewed 2 December 2020]. Available from: https://www.cmegroup.com/trading/agricultural/files/ht_charts/snd_cbt.pdf

spreading-cbot-soybean-oil-and-bmd-crude-palm-oil.pdf, [no date]. [online]. [Viewed 2 December 2020]. Available from: https://www.cmegroup.com/trading/agricultural/files/spreading-cbot-soybean-oil-and-bmd-crude-palm-oil.pdf
wasde1120.pdf, [no date]. [online]. [Viewed 2 December 2020]. Available from: https://www.usda.gov/oce/commodity/wasde/wasde1120.pdf

Group 3 – K
Maxime DOLLA, Mahona PENNA, Romane POUCHON

Price movement recap

WTI Spot price has remained more or less around USD40/barrel from September to November and now since November 19^th we can see an increase in price that reached 45.2 on the 30^th of November. This increase in price might be explained by the fact that the economy is slowly recovering and also because of many announcements of potential prospects for vaccines against covid-19 from 2021.

Forward curve 2.12.20

CME GROUP., [09.11.20]. NYMEX WTI Crude Oil Futures & Options. In : [online]. 

Available at : http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html. 

The forward curve shows that the market is in contango for the moment which means the spot price for delivery now is lower than today’s price for delivery in future. This means our market is relatively well supplied. Supply is greater than demand now, 

However, as we can see from May 2021, we cannot be sure that the market will remain in a contango situation or will go to backwardation. Indeed, OPEC recently met and agreed to delay their planned increase in production, so there are uncertainties about whether the market will be well supplied or in shortage. If the market underestimates the economic recovery and consequently is faced with a shortage, it would mean that demand is greater than supply. Hence the spot price for delivery now might be higher than the price for delivery in a future period. The demand would send a message to the market: Don’t store! Deliver now!

ANN KOH AND ALEX LONGLEY., [02.12.20]. Oil prices stabilize as OPEC focuses on diplomacy. In : [Online]. [Consulté le 3 décembre 2020]. Available at : https://www.worldoil.com/news/2020/12/2/oil-prices-stabilize-as-opec-focuses-on-diplomacy.

Differential WTI vs Brent: SHALE OIL !

WTI crude oil is shipped by pipeline to Cushing. Its storage site, situated at the far end of Oklahoma, makes it expensive to ship and export in terms of transportation, rendering it primarily processed in the national territory and intended for United states consumption. Pipeline market

Brent crude oil, due to the geographical position of its storage location, which has a deepwater port, large volumes are moved by tankers around the world, reinforcing its relevance as a global reference.Off-shore market.

The main cause of the differential in WTI relative to Brent are due to an excess of light crude oil (SHALE) on the US market and the inability of US refineries to refine it. Since 2015, Ban on exporting US crude is lifted, narrowing the differential. But still, US crude exports are challenging and expensive.

ANON., [10.10.18]. Oil: Why is Brent more expensive than WTI? | Hellenic Shipping News Worldwide. In : [Online]. [Consulté le 3 décembre 2020]. Available at : https://www.hellenicshippingnews.com/oil-why-is-brent-more-expensive-than-wti/. 

ANON., [03.12.20]. Brent WTI Spread. In : [Online]. [Consulté le 3 décembre 2020]. Available at : https://ycharts.com/indicators/brent_wti_spread.

Supply and demand dynamic – Inventory levels

During the week that ended the 20 of November, the American Petroleum Institute (API) has reported the oil production at 11 million barrels per day, it represents a build of 3.8 million barrels in oil inventories.

The following week, an increase in inventories of crude oil of 4.146 million barrels has been reported by the API. Both weeks are above what analysts expected.

According to analysts, OPEC+ is likely to extend its current production cuts until January, rather than easing them.

An acceleration in shale drilling would complicate OPEC+’s calculations, but the recovery in U.S. shale drilling “remains modest and aimed at stabilizing production instead, as confirmed by recent earnings comments and a commitment to return cash to shareholders,” Goldman analysts wrote in a note.U.S shale production is expected to decline by 140,000 bpd in December, month-on-month, according to the Energy Information Administration (EIA). The decline is spread between all major shale basins (Permian, Bakken, Eagle Ford, Niobrara, Anadarko)

ANON., [27.11.20]. U.S. Shale Production Continues Its Decline. In : OilPrice.com [online]. [Consulté le 3 décembre 2020]. Available at : https://oilprice.com/Energy/Energy-General/US-Shale-Production-Continues-Its-Decline.html. 

Recommendations:

December 1st, 2020.

General oil prices were trading down, while the WTI Crude stayed stuck around $40s dollars per barrel. Despite the Covid-19 situation optimism, OPEC ended its 30th November meeting without production plans for 2021. US shale oil output is expected to have a big drop in supply according to the US Energy Information Administration (EIA). Due to the reduction of spending in this production.

Josh Owens., [10.11.20]. Oil Optimism Returns On Fresh Vaccine News | OilPrice.com. In : [Online]. [Consulté le 3 décembre 2020]. Available at : https://oilprice.com/Energy/Energy-General/Oil-Optimism-Returns-On-Fresh-Vaccine-News.html. 

With the crash in prices due to the demand collapse in early March, the U.S. drillers reduced their spending/production in response to it. Which led to thousands of lost jobs in the sector. The U.S. shale has suffered from the pandemic this year, moreover with the incoming Administration of Joe Biden the shale will again be targeted. As Joe Biden’s promise to ban new oil and gas drilling on federal lands and waters.

Tsvetana Paraskova., [25.11.20]. U.S. Shale Bankruptcies Accelerate Despite Pandemic Protection. In : OilPrice.com [online]. [Consulté le 3 décembre 2020]. Available at : https://oilprice.com/Energy/Energy-General/US-Shale-Bankruptcies-Accelerate-Despite-Pandemic-Protection.html. 

Compared to our last bulletin where the price was at $42.59 and now raising to $44.70 per barrel (price today for delivery in december) the recommendation was to be long (buy) for the next 3-6 months and still the same as of today. The future consumption of oil is expected to rise continuously throughout the year, since the arrival of the pandemic’s protection. The market being well supplied will be contango. Therefore it will be better to be short (sell) in a future period sometimes next year.

ANON., [2.12.20]. WTI Crude Oil Price Charts. In : OilPrice.com [online]. [Consulté le 3 décembre 2020]. Available at : https://oilprice.com/oil-price-charts. 

Price evolution

The price of cotton recently almost retrieved its pre-pandemic level. Nevertheless, according to John Robinson, PHD, AgriLife Extension cotton economist this will not last.

Indeed, like most of markets during the pandemic the cotton price fell more than 20 cents, from 70 cents per pound to 49 cents per pound from February to April.

What has helped increase cotton’s price is the fact that the Chinese Government began to buy cotton bales to increase their reserves which has helped to obtain a steady upward price.

Moreover, the US climate was not ideal to produce cotton this year, Many US regions such as Texas and Georgia had droughts, multiple tropical storms followed by freezing temperature. This bad weather triggered price speculator buying cotton, which helped cotton to gain back its price of 70 cents as of November.

Pakistan might also be playing a role in the increase of Cotton’s price. Indeed, Pakistan had many of its agricultural crops in several areas destroyed due to heavy rains, pest attacks and locust invasions. The government is under pressure to bring down price of essential goods and support its textile sector (biggest employer) and is therefore planning to import huge volumes regardless of the rates. The fact that the supply is lower than usual due to the bad weather conditions in several producing country, and that the demand is increasing also explains why the price is moving upward.

Supply & Demand

Covid-19 has driven to a collapse in world’s price. According to Cotton Outlook, by the end of 2019/20 the cotton world consumption estimate has fallen from 27million tonnes to below 22 million in just two years. We can see it thanks to the green bars on the graph.

The speed of recovery in consumer demand remains uncertain. The recent apparel imports suffered from a postponed demand as consumers purchases were initially delayed. Furthermore, some lost demand, such as 2020 summer and vacation, clothing school uniforms for some countries, hotel cotton bed sheets and towels, etc, could maybe never be recovered. The remote work and school purchases remains unknown.

The production of cotton for 2019/20 was barely affected by the pandemic. Cotton was already picked in the Northern Hemisphere and was already planted in the South. Nevertheless, the volume of cotton unshipped, unconsumed, or unsold was of potentially catastrophic proportions still according to Cotton Outlook. The rise in world stock during 2019/20 was of around 3.9 million tonnes.

The global cotton production is forecasted at 18.6 million for a 480-pound bale. This means that it increases up by 1 percent from November but down by 11 percent from last year. The futures prices shos us that supply and demand should increase, mostly during spring when seeding will begin.

Forward Curve

The December future contract being at its end with 20 cents up, we can see that all cotton futures have slightly increased accordingly. We are still in a contango situation (Price on the 3rd of December 2020: 69.99) and it may still increase if the COVID-19 pandemic stabilizes.

Recommendations

Bad weather condition in several producing countries and the still ongoing COVID-19 pandemic is still affecting the forecast of cotton prices. And with the fact that the futures price is on the rises at least until July 2021 where it will be valued 73.510 we recommend to go long on cotton investment.

Sequeira Reny, Tiago Marques & Nicole Peytregnet

Bibliography

World Cotton Day – Cotton Outlook Feature, [no date]. [online]. [Viewed 1 December 2020]. Available from: https://www.cotlook.com/world-cotton-day-cotton-outlook-feature/

4.5.3-Cotton trading-The fundamentals of cotton supply and demand, [no date]. [online]. [Viewed 1 December 2020]. Available from: https://www.cottonguide.org/cotton-guide/cotton-trading-the-fundamentals-of-cotton-supply-and-demand/

cotton: Cotton exporters hope to resume trade with Pakistan – The Economic Times, [no date]. [online]. [Viewed 2 December 2020]. Available from: https://economictimes.indiatimes.com/markets/commodities/news/cotton-exporters-hope-to-resume-trade-with-pakistan/articleshow/72000396.cms

Cotton No. 2 Futures | ICE, [no date]. [online]. [Viewed 3 December 2020]. Available from: https://www.theice.com/products/254/Cotton-No-2-Futures/data?marketId=5739902

Cotton prices rebound, but supplies high, 2020. AgriLife Today [online]. [Viewed 2 December 2020]. Available from: https://agrilifetoday.tamu.edu/2020/11/10/cotton-prices-rebound-but-supplies-high/

cotton.pdf, [no date]. [online]. [Viewed 1 December 2020]. Available from: https://apps.fas.usda.gov/psdonline/circulars/cotton.pdf

CT1 Commodity Quote – Generic 1st “CT” Future – Bloomberg Markets, [no date]. [online]. [Viewed 1 December 2020]. Available from: https://www.bloomberg.com/quote/CT1:COM

DILAWAR ISMAIL, 2020. Pakistan Steps Up Imports of Farm Goods to Curb Soaring Prices. . 2 October 2020. [Viewed 2 December 2020]. Available from : https://www.bloomberg.com

Global cotton prices increase in October, 2020. [online]. [Viewed 3 December 2020]. Available from: https://www.just-style.com/news/global-cotton-prices-increase-in-october_id140137.aspx

World Cotton Day.pdf, COTLOOK LIMITED, [2020]. . [online]. [Viewed 1 December 2020].Available from : https://www.cotlook.com/world-cotton-day-cotton-outlook-feature/

Price movement, demand & supply analysis

We can observe on this graph the price evolution of natural gas spot price over the year 2020. We have to highlight the fact that due to this overall unstable economic situation established with the Covid-19 pandemy, NG and LNG prices drastically decreased and reached a lowest price record achieved. However, we can still observe the seasonality of this commodity through this graph. Indeed, the demand as we have seen increase during the winter time which is reflected on the price. That is to say, in December 2019, we can see that the price went above 2.40 USD/MMBtu and reached this level back in September in 2020 before hitting rock bottom record in the same month. After this, the price raised again according to expectations based on the demand seasonality.

Exportations:

The graph above represents the U.S LNG export from 2018 to 2020 Q2. We can observe that the U.S export of LNG over the year drastically increases in overall. Even though Japan is the world’s biggest importer of LNG accounting with 20% of the global consumption, we can see that South Korea is the main purchaser in the United states, South Korea were making massive effort of consuming cleaner energy (however they have long-planned nuclear and coal plants projects in the coming years-> consumption of LNG is expected to decrease over time). We can see that Korea is closely followed by Japan which uses LNG to generate nearly 40% of its power. In the U.S export the European countries are leading by country such as Spain, France and Netherland which become major importer due to drop in domestic production and coal to gas switching. Concerning the export to Mexico the Sur de Texas-Tuxpan pipeline which was complete in Q4 2019, the U.S. LNG exports to Mexico have been displaced by pipeline flow. Between Q1 and Q2 in 2020 we can see the massive drop for the U.S export globally due to the COVID-19 breakdown combined with a warmer winter affect the demand of LNG.

Forward Curve:

A therm (thm) equals 100’000 British thermal units (Btu).

There are many factors that can affect oil and gas prices. Some of these include the changing dynamics of supply and demand, the amount and cost of storage available, changes in interest rates, fluctuations in foreign exchange rates, the marginal cost of supply, assessment of geopolitical risk and supply shock and the market opinion and expectation and many more influences.

In this case, futures are highly dependent on seasonality of demand and result in a curve that is neither a contango or a backwardation curve but a mix of both depending on the period. We can see that the incentive in January 2021 will be to sell as much as possible whereas in August 2021, the market is telling producers to store. Furthermore, we can observe that prices are to remain stable for the next 7 years as of today. 

Market pressure points:

According to the NGSA, there are mainly 5 types of market pressure points that can influence the price of Natural Gas and thus LNG. Economy, Weather, Demand, Production, Storage are variables that have influence on market pressure. For this winter the forecast on average predict a upward market pressure in the U.S due to the following factors:

Economy: is a vital factor that influences the LNG market. For the current year, the GDP is expected to decline to -2.6 percent. Which will have a downward pressure.

Weather: The National Oceanic and Atmospheric Administration predicted an average winter 4 percent colder than last winter in the United states. This factor will affect consumption and put an upward pressure on the market.

Demand: Customer demand forecast an average 109.5 Bcf/day in 2020/2021 compared with 2019/2020 with an average of 110.6 Bcf/day . In global this will have a neutral pressure on the market.

Supply: NGSA, expected the production to decrease by substantial 9 percent. This will result in a higher price due to the fact that there is a lower supply with a constant demand.

Storage: The start of winter inventory is forecast to be 9 percent above the 5-year average with just over 4 Tcf of gas in storage, considerably more than last winter’s 3.7 Bcf levels. Higher capacity storage will result in a downward pressure on the market in the U.S. 

Recommendation:

Since this coming winter market is expected to go in contango with the analysis made by NGSA, we recommend to store now and sell later the commodity. Furthermore, as we are in the second wave of the COVID-19 LNG market is becoming uncertain as every commodity we can only plan for the coming month.

Bibliography:

National Oceanic and Atmospheric Administration, [no date]. [online]. [Viewed 03 December 2020]. Available from: https://www.noaa.gov/

CHUNG, Jane, 2019. South Korea’s LNG imports to fall on new nuclear, coal plants. Reuters [online]. 31 October 2019. [Viewed 03 December 2020]. Available from: https://www.reuters.com/article/us-southkorea-lng-power-analysis-idUSKBN1XA0LJ

NGSA, [no date]. [online]. [Viewed 03 December 2020]. Available from:

https://www.ngsa.org/wp-content/uploads/sites/3/2020/09/NGSA-PowerPoint-2020_2021-Winter-Outlook-for-Natural-Gas.pdf

Reduced LNG demand delays FIDs, 2020. LNG Industry [online]. [Viewed 03 December 2020]. Available from: https://www.lngindustry.com/liquid-natural-gas/09112020/reduced-lng-demand-delays-fids/

UK Natural Gas Futures Curve, [no date]. ERCE [online]. [Viewed 03 December 2020]. Available from: https://www.erce.energy/graph/uk-natural-gas-futures-curve/

Henry Hub Natural Gas Spot Price, [no date]. [online]. [Viewed 03 december 2020]. Available from: https://ycharts.com/indicators/henry_hub_natural_gas_spot_price

By Lyticia Wouguia, Christopher Delfin, Piratharsan Poologanathan

Chinese Market 

The chinese farmers expect the price to rise with the Covid-19. Thus, they prefer to stock the wheat instead of selling at the current price. As stated in the below chart, even though the current fixed price by the Chinese government is 2240 YUAN and the market price is above,consequently chinese farmers prefer to store the commodity. This may be explained by the fact that the australian wheat is about to be banned. In fact many other commodities are already banned and the wheat is expected to be banned at its turn. The uncertainty is quite high and may challenge de traders. As a matter of fact, at least for the other commodity, the embargo affected even for transaction already made. 

Australian future market

It is reported that these past few weeks, Australia is having good weather conditions which makes the production of wheat a lot easier. The table below is indicating that the situation of the wheat futures is normal. Compared to our 1st bulletin, the future market of wheat in Australia does not face the seasonality. In fact, it has a steady increase in the future’s price. This is due to expecting renewed relationships with traditional customers who have been buying wheat from other countries over the past few years because Australia has been facing poor seasons. It is expected that the traditional Asian consumers such as Vietnam, Philippines, Thailand will be actively seeking offers of Australian wheat on account of superior quality relative to other origins.

Australia and Argentina’s export situation

In 2020/2021 the wheat harvest is estimated at 27.9 million metric tons. This represents an increase of more than 84% over the previous season. Australian wheat exports are set at 17 MMT for the 2020/21 season, due to a larger exportable surplus created by favourable growing conditions in much of Australia this season. Western Australia’s wheat production for 2020/21 is about 8MMT, with APW (Australian premium white) and AH (Austarlin Hard Wheat). Argentina is in direct competition with Australian wheat exports and has gained market share in the Asian region over the past two years, not only for wheat but also for other feed grains such as maize.

The latest update from the Buenos Aires office of the US Department of Agriculture has reduced Argentina’s wheat production for 2020/21 to 17.4 MMT. This corresponds to a downward revision of wheat exports to 11.2 MMT, a 15 % drop from the previous year. The decrease in exports can be attributed to lower production due to dry weather (the La Nina phenomenon, which brings wetter than usual conditions in Australia, has the opposite effect in Argentina with drier than usual conditions) but also to increased competition from Australia.

Australian wheat is one of the cheapest in the world, which means that it is well placed to take advantage of strong international demand.

Recommendations

The potential ban from the Chinese government, might increase the price of the local production wheat. Therefore we recommend investing now. The global price of wheat is not likely to be touched by those measures. 

Sources

https://www.barchart.com/futures/quotes/F3*0/futures-prices

https://thediplomat.com/2020/11/chinas-trade-offensive-against-australia-continues-with-ban-on-wheat-imports/

https://gwcexports.com.au/biggest-top-australian-wheat-exporters/#:~:text=Australian%20wheat%20exports&text=Australia%20is%20one%20of%20the,or%20using%20container%20based%20transport.

https://www.world-grain.com/articles/14481-focus-on-australia

https://www.graincentral.com/markets/australian-wheat-priced-to-find-ample-export-demand/

https://www.farmweekly.com.au/story/7002078/australian-wheat-is-some-of-the-cheapest/

Price movement

Despite uncertainties about the second wave of covid-19, the fall in prices was limited due to disruptions in oil supply in several regions. Recent information about a possible vaccine and the demand for oil in China and India have supported the rising trend. Hedge funds and fund managers have slightly modified their positions in response to covid-19 uncertainties and global demand predictions, but this has not stopped the upward trend in prices. Nevertheless, the decrease in US oil stocks in coupled with the price war between Russia and Saudi Arabia is impacting the market.

Differentials

In Europe, the value of Urals (medium sour crude) is at a premium against Brent (light sweet) due to the strong demand from Mediterranean and Asian refiners. In addition, the value of Urals is supported by a lower loading in November than in October due to increased demand from Russian refineries. Furthermore, the difference between a high supply and a low demand for Brent crude coupled with an increase in American and Libyan exports add further pressure on the latter.

Forward Curve

The forward curve shows a sustained contango in October as oil supply and demand prospects deteriorated. The supply of cargoes remained modest, while floating storage in the North Sea was significant. The COVID-19 disruptions have affected trade. High stocks and the development of floating storage also had a negative impact.

Supply and Demand drivers, and stock levels

There are a few key factors that influenced the supply and demand, the first to consider is the ongoing deal of the OPEC+ members, concerning the planned reductions in oil productions. The members originally planned on cutting more of their production by 2 mbp .Though, the recent discussions, on November 17^th were not decisive and they planned on not cutting the supply before seeing how the situation is going to evolve and postponing a decision to January 2021. As a matter of fact, Russian oil producer recently met with the country’s Energy Minister, and let hear that they were not ready to accept deeper cuts, and that all they could do was keeping on going with the actual reduction, but not more than this.

Another very important point that influences the supply and demand of Russian crude oil is the ongoing “war” with Saudi Arabia, where both want to become the first supplier of China, as they are taking advantage of the very low oil price. Both Saudi Arabia and Russia are trying to cope with the high demand and win the Chinese market, boosting their export to China, whose demand is still going strong despite the Covid-19 pandemic and the global demand being low. For the past year, Russia was ahead in term of export, but the latest month their first place was taken by Saudi Arabia

Asia is a very important market for Russian crude, and it doesn’t only involves China, Asian country are entering a bidding war on the price to ensure that they will secure their supplies, an example being cargoes from Russia being bought at very high prices, such as Chinese and Japanese buying Russian ESPO (Eastern Siberia–Pacific Ocean oil pipeline) at a five-month high premium price. What could further influence the demand and supply is the fact that Asian refiner are lacking oil supply contract from OPEC members, and they will most probably turn to Russia, who is fully able to respond as they didn’t cut production as much as planned.

As for the demand, it could improve depending on the evolution of the Covid-19 pandemic as hope for a vaccine could improve it, but still, this remains to be seen. As of now, analysts say that the oil demand is usually low in the first quarter of the year, and the fragile oil market may not be able to absorb the additional supplies, that means that the OPEC+ deal cuts are very important and that the parties involved should respect the cuts in quantity they planned on.

Finally, a last factor could also influence the demand. Northeast Asian countries, such as Japan and South Korea, are expecting very cold winters, and it could benefit Russia. In fact, some producer from far East Russia are already planning on making short haul delivery to those country and boost their kerosene output to cope with the incoming demand. And, the time necessary for a delivery from far East Russia to Northeast Asia being only around a week, compared to the 10-15 necessary from South East Asia, the concerned country will most likely take advantage of Russia’s oil supply.

As for the stock levels, Russia’s energy sector being totally state controlled, and the country being the opposite of transparent, it is extremely hard to find up to date data. However, the inventory levels were of 13 billion metrics tons in the beginning of 2020, according to the US Energy Information Administration, while they were of 14,7 billion metrics in 2019.

Recommendations

The demand from Asia and the production cuts driven by members of OPEC+ have a positive impact on the market. Based on the information provided in this bulletin, we advise a long position and to be attentive to the information that will result from the next OPEC+ meeting.

Sources

“Opec committee reveals no 2021 oil cut guidance as ministers will wait to decide”. Consulté les 23 et 24 novembre
https://www.spglobal.com/platts/en/market-insights/latest-news/oil/111720-opec-committee-reveals-no-2021-oil-cut-guidance-as-ministers-will-wait-to-decide

“Oil from Russia to US snapped up on Asia’s growing appetite”. Consulté le 23 novembre.
https://www.bloomberg.com/news/articles/2020-11-17/oil-from-russia-to-u-s-snapped-up-on-asia-s-growing-appetite

“Oil climbs with Russia in talks on delaying OPEC output hike”. Consulté le 24 novembre
https://energynow.com/2020/11/oil-climbs-with-russia-in-talks-on-delaying-opec-output-hike/

“Russia: It’s Too Early To Talk About Tweaking OPEC+ Deal”. Consulté le 24 novembre
https://oilprice.com/Energy/Energy-General/Russia-Its-Too-Early-To-Talk-About-Tweaking-OPEC-Deal.html

“Commodity Tracker: 4 charts to watch this week”. Consulté le 24 novembre
https://www.spglobal.com/platts/en/market-insights/blogs/oil/ct-opec-meetings-russian-crude-palm-oil-france-nuclear

”Graphic: Saudi Arabia and Russia in tight race to become China’s top oil supplier in 2020”. Consulté le 24 novembre
https://in.reuters.com/article/china-oil-saudi-russia-graphic/graphic-saudi-arabia-and-russia-in-tight-race-to-become-chinas-top-oil-supplier-in-2020-idINKBN2800HE

“The Battle for Dominance In China’s Oil Market”. Consulté le 25 novembre
https://oilprice.com/Energy/Energy-General/The-Battle-For-Dominance-In-Chinas-Oil-Market.html

Monthly report. Consulté le 24 novembre
https://www.opec.org/opec_web/en/publications/338.htm

Chart. Consultés le 24 novembre
https://www.cmegroup.com/trading/energy/crude-oil/brent-crude-oil.html
https://oilprice.com/oil-price-charts/

Differential. Consulté le 25 novembre.
https://www.neste.com/investors/market-data/urals-brent-price-difference

“OPEC+ leaning towards oil cut extension, despite rally: sources”. Consulté le 25 novembre
https://www.reuters.com/article/us-oil-opec/opec-leaning-towards-oil-cut-extension-despite-rally-sources-idUSKBN285273

“Oil rally stalls on signs of more supply, demand doubts”. Consulté le 25 novembre
https://www.reuters.com/article/us-global-oil/oil-rally-boosted-by-surprise-fall-in-u-s-stocks-idUSKBN28603W

Price movement recap

While on the 30th October the price of aluminium was USD 1820.5, the latter kept increasing to reach on the 20th November 2020 its highest since the beginning of the year, meaning even before COVID-19.

This high price is mainly due to a destocking effect following the increasing demand of China. The Chinese government is willing to considerably develop its infrastructures as it is part of its “Made in China 2025” project and relies heavily on aluminium. China’s economy has rebounded from COVID-19, particularly due to government spending.

Forward curve

The market is showing a slight contango until November 2021 due to the decrease in inventory level. However, the market is not confident, any sudden change in supply or demand will make the market shift. We can see that the later the delivery date is the more fluctuations there are in the price. After going from some shift between contango and backwardation, the market is seen as being well-supplied from mid-2022.

Supply and demand dynamic

At the beginning of the month, the US market has been looking closely at the national elections as the outcome of the election is very likely to impact the recent Section 232 aluminium tariffs imposed by the Trump Administration. The election process and the refusal of Mr. Trump to recognize its defeat has been creating uncertainty and difficulty to plan. Nevertheless, the real impact on the US aluminium market will not be immediate. As a matter of fact, the Biden administration will not be able to completely remove the tariffs and smoothing the tariffs will take time.

In addition, the announcement of a possible vaccine for the COVID-19 which would re-boost transportation industries as well as the positive macro environment of China as said above leads to a demand optimism in 2022.

Inventory levels

As we can observe, since the middle of July, there has been a constant decrease in the stock. This might be caused by the importation of China of Aluminium, in August and September, they reached the second-highest importation volumes for 11 years. This is the direct consequence of the decrease of stock on SHFE where the price is even higher than on LME. China is consuming almost all its production. As a result, the price of LME is still increasing.

Recommendations

Because of the decrease of inventory and the slight contango, we recommend to secure the supply and to remain long for the next couple of months.

With a possible vaccine on the horizon, we could potentially see an increase in demand in industries such as the automobile and other transportations worldwide.

Beatriz Ferreira Caetano, Virginie Gruaz and Mingxin Ma

References

Aluminum Futures Quotes – CME Group, [no date]. [online]. [Viewed 23 November 2020]. Available from: https://www.cmegroup.com/trading/metals/base/aluminum_quotes_globex.html

Apparent aluminum deficit drives up spot prices against longer dates | MineralPrices.com Breaking news source for precious, battery, platinum group, base, iron and steel, minor, rare earths, quotes and research from various qualified sources., [no date]. [online]. [Viewed 23 November 2020]. Available from: https://mineralprices.com/apparent-aluminum-deficit-drives-up-spot-prices-against-longer-dates/

China reverts to net aluminium exporter in Sept; imports remain strong | MineralPrices.com Breaking news source for precious, battery, platinum group, base, iron and steel, minor, rare earths, quotes and research from various qualified sources., 2020. MineralPrices.com [online]. [Viewed 23 November 2020]. Available from: https://mineralprices.com/china-reverts-to-net-aluminium-exporter-in-sept-imports-remain-strong/

IYENGAR, Suresh P., [no date]. Revival in demand to hold aluminium prices high. @businessline [online]. [Viewed 23 November 2020]. Available from: https://www.thehindubusinessline.com/markets/commodities/revival-in-demand-to-hold-aluminium-prices-high/article33109593.ece

LME aluminium price closed 2.64% higher this week at $1984/t after a dip in the previous week; SHFE grew to $2403/t; Aluminium Extrusion, Profiles, Price, Scrap, Recycling, Section, [no date]. alcircle [online]. [Viewed 23 November 2020]. Available from: https://www.alcircle.com//news/lme-aluminium-price-closed-2-64-higher-this-week-at-1984-t-after-a-dip-in-the-previous-week-shfe-grew-to-2403-t-60756

London Metal Exchange: LME Aluminium, [no date]. [online]. [Viewed 23 November 2020]. Available from: https://www.lme.com/en-GB/Metals/Non-ferrous/Aluminium#tabIndex=2

London Metal Exchange: Stocks summary, [no date]. [online]. [Viewed 23 November 2020]. Available from: https://www.lme.com/Market-Data/Reports-and-data/Warehouse-and-stocks-reports/Stocks-summary

Matières premières: aluminium et café bien orientés, l’or cale | Allnews, [no date]. [online]. [Viewed 23 November 2020]. Available from: https://www.allnews.ch/content/news/mati%C3%A8res-premi%C3%A8res-aluminium-et-caf%C3%A9-bien-orient%C3%A9s-l%E2%80%99or-cale

NIRMAL, Rajalakshmi, [no date]. China’s growing demand for metals stokes prices. @businessline [online]. [Viewed 23 November 2020]. Available from: https://www.thehindubusinessline.com/markets/commodities/chinas-growing-demand-for-metals-stokes-prices/article33162660.ece

SMM Morning Comments (Nov 23): Shanghai base metals were mostly higher as investors watch for coronavirus developments_SMM | Shanghai Nonferrous Metals, [no date]. [online]. [Viewed 23 November 2020]. Available from: https://news.metal.com/newscontent/101324136/smm-morning-comments-nov-23-shanghai-base-metals-were-mostly-higher-as-investors-watch-for-coronavirus-developments

US presidential election result expected to drive direction of US aluminium premium | Metal Bulletin.com, [no date]. [online]. [Viewed 23 November 2020]. Available from: https://www.metalbulletin.com/Article/3960406/US-presidential-election-result-expected-to-drive-direction-of-US-aluminium-premium.html

PRICE

From October to November, the corn spot price has risen to about $4 a bushel, an increase of about 40 cents from last month’s forecast. This is a result of the decrease of production outlook and the increase in the US exports (increased foreign demand and decreased foreign production).

Source : Bloomberg

GLOBAL DEMAND INCREASES AND SUPPLIES REDUCED

Source : https://downloads.usda.library.cornell.edu/usda-esmis/files/44558d29f/rb68z388r/wm118f39n/FDS-20k.pdf  

U.S. maize production is expected to be 14’722 million bushels, based on lower national maize yields, a 178 million bushel decrease from the previous month due to a smaller harvest and lower beginning stocks.

Ukrainian maize production and exports have both collapsed due to hot and dry conditions, establishing a global supply gap for exports giving export opportunities for U.S. corn. Ukraine being the 4th largest exporter of corn. Lower production in Ukraine, the EU, Russia and Moldova more than compensating the increases in South Africa and Laos.

Source : https://downloads.usda.library.cornell.edu/usda-esmis/files/44558d29f/rb68z388r/wm118f39n/FDS-20k.pdf  

EU maize imports are expected to decrease by 4.0 million tonnes this month to 20.0 million tonnes. This is mainly due to a decrease in corn feed use. Indeed, the growth of the EU livestock sector is slow and the price of corn is high. The reduction in the corn feeding is expected to be partially compensated by the region’s use of more wheat and other coarse grains. 

In Mexico, the use and imports of maize feed also decreased, down 1.0 million tons. This decrease is motivated by decreased demand for feed from its pork and beef sectors, where the recovery from the downturn in Covid-19 appears to be slower than expected.

The low speed of imports of Iranian maize (from Brazil and Ukraine) has led to a decrease of 1.0 million tons this month.

However, Chinese imports of corn have increased significantly to meet the growing demand for feed because its livestock inventories and production of meat increased. 

ENDING STOCKS

Ending stocks are forecast at 2’167 million bushels, down 336 million bushels from the previous month. Declining global supply and increased U.S. exports more than compensating reductions in exports elsewhere are driving down ending stock.

FORWARD CURVE

Source : https://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_quotes_settlements_futures.html

We can see that the forward curve has almost the same shape but the prices agreed on the 24th of November are higher than the price agreed on the 31th of October. The prices are higher because production decreased and export increased.

It is a normal curve (it is well supplied) from December to July (the message is to store) and goes into an inverse curve (the demand is hot) from July to December (the message is to deliver). This is due to seasonality.

RECOMMENDATION

As shown, production decreased this month and there is an increase in the demand from China. We can also add that the beginning stocks were lower as compared to the previous year. 

Furthermore, the news of the vaccine for COVID-19 and the end of lockdown in some countries will reassure the economics agents and push them to be bullish.

We also find that the US plans to extend crop acre for next year, that will compensate for the drop in supply this year.

Therefore, we recommend going long.

Léo Millet, Maike Da Silva, Patrice Correia Cardoso & Cassandra Kirchhoff

SOURCES

Bloomberg.com, [sans date]. Bloomberg.com [en ligne]. [Consulté le 23 novembre 2020]. Disponible à l’adresse : https://www.bloomberg.com/europe

Corn Futures Settlements – CME Group, [sans date]. [en ligne]. [Consulté le 23 novembre 2020]. Disponible à l’adresse : https://www.cmegroup.com/content/cmegroup/en/trading/agricultural/grain-and-oilseed/corn_quotes_settlements_futures.html

grain-corn-coarsegrains.pdf, [sans date]. [en ligne]. [Consulté le 23 novembre 2020]. Disponible à l’adresse : https://apps.fas.usda.gov/psdonline/circulars/grain-corn-coarsegrains.pdf

McConnell et Olson – 2020 – U.S. Corn Production Projections Reduced for 2020.pdf, [sans date]. [en ligne]. [Consulté le 24 novembre 2020]. Disponible à l’adresse :https://downloads.usda.library.cornell.edu/usda-esmis/files/44558d29f/rb68z388r/wm118f39n/FDS-20k.pdf

USDA ERS – Market Outlook, [sans date]. [en ligne]. [Consulté le 25 novembre 2020]. Disponible à l’adresse : https://www.ers.usda.gov/topics/crops/corn-and-other-feedgrains/market-outlook/

wasde1020.pdf, [sans date]. [en ligne]. [Consulté le 25 novembre 2020]. Disponible à l’adresse :https://www.usda.gov/oce/commodity/wasde/wasde1020.pdf

Covid-Recovery effects on Sugar Market

In order to make a small recap on the price, let’s remain the last price of the first bulletin. As we can see in the graph below, the 28^th October the price was reaching 0.1379$ per pound. Today’s price is 0.1483$ per pound. We have forecasted that prices will fall down and comsumption as well. However, our predictions were wrong. In fact, prices tend to go up. But still we can see declines. Especially one decrease that can be explained by the US election on the 3^rd November. In fact as we can see just after there is a substantial fall decrease. This is beacause of the market uncertanity due to the US election and also Trump’s reaction.

Sugar price in USD/pound

Source: https://www.fxempire.com/commodities/sugar

Let’s focus on Brazilian production

Brazil will increase sugar production by 11 million tonnes and exports will rise by slightly more than this. We can explain this important production by the fact that the economic crisis has had a very significant impact on the price of oil. In February, the price of oil fell to its lowest level since 2003. On November 19, the price of oil doubled since February, but it still remains relatively low.

The low price of oil has had a direct impact on sugar production. Becoming uncompetitive as a source of fuel, producers focused on sugar production, thus maintaining production at a high level.

Source : Point 3 NEW LMC_Prospects for the World Sugar Market_SMO 12 Nov 2020.ppt

Given that social and economic activities remain uncertain worldwide, this tendency of producers to focus on sugar production rather than ethanol production could continue for a few more months. For us, this trend can only change when the situation and the impact of COVID-19 is fully controlled by countries around the world.

Sugar price evolution in the coming months

For us, the price will continue to increase for various reasons:

• Weather condition: On Tuesday 17th November, there was a storm that turned into a major hurricane which hit the central America. As we know, this region is known for being the main worldwide sugar producer. That is why, this is going to have an important impact on future sugar harvest and therefore on the price.

• Situation in India: India is the second largest sugar producer. India’s food minister has said there will be no sugar export subsidies this year. According to some people, the lack of a subsidy could push the price up in the coming months as well. So, will Indian exports have a significant impact on the prices of the March 2021 ICE 11 contracts? (Bulletin 3?)

• Lack of sugar: Currently, Brazil has sold all its production to China. As said before, its next harvest will be significantly reduced due to bad weather conditions. Also affected by the drought, Thailand’s sugar production should follow the same trend as Brazil’s production. In view of this situation, some producers might even turn to other crops that are more lucrative and less affected by external factors (e.g. soybean). The supply will therefore be less important for March 2021, which would explain the continuation of this upward price trend.

Source: Point 3 NEW LMC_Prospects for the World Sugar Market_SMO 12 Nov 2020.ppt

Recommendation

Previously, sugar production had increased, which had led to increased imports. This had an upward impact on the price of sugar. In the near future, we think that the prices will follow the seasonal pattern and continue to grow. However, due to the still uncertain situation regarding the COVID crisis and the consequences of the hurricane in Central America, prices have to be monitored on a daily basis in order to be protected against eventual inverse price movements.

References

Global sugar market waiting for India’s stand on 2020-21 export subsidy – The Economic Times, [no date]. [online]. [Viewed 18 November 2020]. Available from: https://economictimes.indiatimes.com/news/economy/agriculture/global-sugar-market-waiting-for-indias-stand-on-2020-21-export-subsidy/articleshow/78813137.cms?from=mdr

IDONIBOYE, Ibi, [no date]. How long can sugar maintain sweet exchange price position? [online]. [Viewed 19 November 2020]. Available from: https://www.mintecglobal.com/top-stories/how-long-can-sugar-maintain-sweet-exchange-price-position

Point 1_2 NEW Sugar presentation SMO 12 November 20.pdf, [no date]. .

Point 3 NEW LMC_Prospects for the World Sugar Market_SMO 12 Nov 2020.ppt, [no date]

QSL Weekly Market Update, [no date]. [online]. [Viewed 18 November 2020]. Available from: https://mailchi.mp/qsl/imvgg65mpt-1343698

Sugar: June quarter 2020 – Department of Agriculture, [no date]. [online]. [Viewed 19 November 2020]. Available from: https://www.agriculture.gov.au/abares/research-topics/agricultural-outlook/sugar

Sugar Price | FX Empire, [no date]. [online]. [Viewed 19 November 2020]. Available from: https://www.fxempire.com/commodities/sugar

sugar-market-situation_en.pdf, [no date]. [online]. [Viewed 17 November 2020]. Available from: https://ec.europa.eu/info/sites/info/files/food-farming-fisheries/farming/documents/sugar-market-situation_en.pdf

Why have sugar prices changed?, 2020. Ragus [online]. [Viewed 18November 2020]. Available from: https://www.ragus.co.uk/sugar-prices-changed-2020/