The copper price exchanged on the London Metal Exchange suffered over the
week as the prospects of the world economy have darkened.
This turbulence zone is due to the downward revision of growth prospects in
the Euro area and the Chinese’s data on exports, which shows a decline. The
equation is complicated for Beijing, which is still in the midst of a trade war
with Washington.
In dollars, Chinese exports fell by 20.7% over one year in February,
while they had increased the previous month announced the customs
administration. The imports also continued to fall, dropping by 5.2% which was
stronger that January.
It is important to remain that the metal market is particularly
vulnerable to these figures, as China is the world’s largest importer of raw
materials.
Indian Copper Smelter
Vedanta Ltd. (Mumbay
based company) was hardly impacted when an indian court refused to authorised
the resumption of the company copper’s smelter with a capacity of 400’000
metric tons a year which reprensent 40% of the country capacity. Indian imports
of refined copper jumped, even though the country was already a net importer of
refined copper.
This decision also
impacted the copper price in London which started to increase. The demand rise
and put pressure on the supply side.
On the other side,
imports on concentrate copper slump as the country has no capacity to refine
it. That would mark the lowest imports in the last 13 years.
Price
Price:
USD$/Tonne
The chart below shows
the copper price evolution for 1 month (Feb – March). We can notice a huge
increase from mid-February to the 1st of March. The increase is
probably due to the low stocks and important Chinese demand. LME warehouses reached 139,500 tonnes, close to the 10-year low of
122,500 tonnes in December 2018.Nevertheless, from the beginning of march,
there is a small decrease due to some rising inventories and drop (-0.5%) in
copper premium grade-a (Shanghai). The stock in LME warehouses rose to 120 075
tonnes from 116 872 (lowest since 2008). In term of supply, the market seems to
be undersupplied. The existing mines are already operating at full capacity and
therefore cannot at the moment respond to tighter markets.
Forward curves
The forward curve below
shows the state of the market today. We can notice a small backwardation from
March to April 2019. It means that there is an undersupply situation (Demand
> Supply). The market is relatively a bullish (strong) market. However, from
April to May 2019, there is a kind of “incertainty”. Finaly from May 2019, the
situation is changing for a contango.
Recommandation for the future
Investors that want to profit from the move in copper prices should buy
long-dated copper futures contracts as we are heading to a contango situation
around May 2019.
From the beginning of the year, Colombian coffee farmers are suffering of a huge fall or Arabica coffee price at the New York market which affects the country.
Because of a decrease of the coffee price below $1 per pound, coffee growers in Colombia are not able to cover their production costs and to generate a profit.
The reason is that the New York market is highly focusing in Brazilian coffee production and not enough on Colombian and Central American production. We will talk about it in details further in the bulletin.
The result of a fall of the coffee price will decrease the production of Arabica coffee from Colombian farmers. Knowing that Arabica coffee production in Colombia is highly correlated with the country’s GDP, a fall of their production will decrease the country’s economy because its coffee exports will decrease as well.
Moreover, a fall in price of coffee will impact the income of Colombian farmers because in this country, the coffee harvests are managed by farmers and not by giant coffee plantations operated by multinational corporations such as in Brazil (540’000 families’ farmers).
According to our opinion, an increase of the level of poverty is possible in Colombia. As a conclusion, Colombian coffee farmers would like to sell their coffee beans without being tied to market prices. They would like to set by themselves a price amounted to $1.50 – $1.60 per pound in order to ensure at least the coverage of the production costs.
Details about the factor that impact the Colombian coffee harvest – increase of Brazilian coffee supply
A part of the reason that decreases the global price of coffee is a bumper harvest in Brazil. Indeed, Brazil made a record by producing 62 million bags of coffee beans in 2018 that had increased its supply. A significant information to know is that Brazil produces Arabica and Robusta coffee beans, Colombia produces only Arabica coffee beans. Knowing which type of coffee beans Brazilian coffee producers produce will make clearer how the increase of Brazilian coffee supply had impacted the coffee price at the New York market.
As a whole, an increase of the supply will decrease the price of a commodity and makes it more interesting for buyers. This is what occurred, even if the expected production of Brazilian coffee beans were planned to be 53 million bags for 2019, Brazilian coffee supply would still be considered as a record and would probably keep the coffee price low at the New York market.
Another reason that affects the decrease of the coffee price is the ongoing fall of the Brazilian currency. Coffee is traded in US dollars, Brazilian currency is losing its value at 45% below its 20 year average against the US dollar. As a result, this fall in the currency will strengthen the competitiveness of Brazil against producers in Colombia and Guatemala because the purchasing power of coffee buyers will be higher in Brazil.
Coffee futures/forward curve
Price quotation: USD cent and hundredths of a cent up to two decimal places.
By comparing the historical spot prices of coffee on the graph above and the coffee’s futures/forward curve, we could conclude that the coffee market is currently in contango since the futures/forward curve is upward sloping.
Having the coffee’s forward price higher than the spot price, this means that currently the coffee’s market is a bearish market.
As a conclusion, we would recommend coffee producers to store their coffee beans and to sell with futures or forward contracts.
Coffee and worldwide daily warehouse levels
By using the certified data about the warehouse stock report from ICE – Intercontinental Exchange, we could see that from the beginning of 2019 Brazilian daily warehouse levels were low compared to Colombia. The fact that Brazil reported low inventory level than Colombia demonstrates the interest of the New York market and the roasters (buyers) in buying Brazilian coffee beans which are at a low price.
The second graph shows the “worldwide” daily warehouse stock of coffee beans. The countries included in each total are Brazil, Burundi, Colombia, El Salvador, Guatemala, Honduras, India, Mexico, Nicaragua, Papua New Guinea, Peru, Rwanda and Uganda.
Certified data about the warehouse stock report from ICE – Intercontinental Exchange
Ghana: Dying Cocoa plantation
Let us remember the presentation from Eric Bourgeois (head of cocoa department) at Walter Matter (family owned business, niche market, medium size).
Some Facts on Cocoa:
Coco trees needs : hot, humid, shadow, Tropical regions (in the equatorial region).
Total production 4,65 mio tons.
Cote d’ivoire 2 mio tons (43%),
Ghana 0,9 mio (19%),
Indonesia (0,29 mio, used to be 0,3; 0,4, but reduced by taxes and investment in other commodities more profitable like palm oil),
Ecuador (0,28mio),
Cameroon (0,24mio),
Nigeria (0,23mio)
Main processing countries (semi-finished product)
Cote d’ivoire 0,58 mio
Netherlands 0,55 mio
Indonesia 0,45 mio
Germany 0,41 mio
USA 0,39 mio
Brazil 0,23 mio
Ghana 0,22 mio
News from Ghana
Ghana is the second largest cocoa exporters. However, it could lose its position because of badly managed plantations and drought.
Small farmers growing Cocoa have been using chemical pesticides and fertilizers, and clearing woodland to boost production.
Better planting methods would negate the need for such chemical treatments. NGOs such as SNV, a Dutch organization, are encouraging the farmers to plant shade trees such as banana or Cassava (manioc) trees to keep the cocoa trees cool and reduce the use of water. Moreover, these farmers will be able to increase income since they have bananas and Manioc to sell too.[
Details about the project over there:
Project goal: Modernizing cocoa farming in Ghana by improving growing conditions for new trees and helping farmers to overcome lean times.
Project size: Some 750 farmers are preparing their fields for new trees. Four tree nurseries are being built to grow 600,000 new cacao trees. Approximately 20,000 shade trees will also be planted.
Project partners: SNV Netherlands Development Organisation – Smart Development Works, International Climate Initiative (IKI).
Project budget: The initiative is part of a larger project taking place in Vietnam, Peru and Ghana, which IKI financed with€1,966,384 ($2,243,791).
Sources
Coffee historical price. Market Insider (online). (Consulted on 5thMarch 2019). Available at the URL: https://markets.businessinsider.com/commodities/coffee-price
View of the price fluctuations for the last 3 months:
Measurements: USD per container
In the yearly perspective graph of
the global container index, we can see a drop between 10 December and 24
December 2018. We assume that this drop is connected to Christmas Holiday and the tendency of businesses to order before
this time period to have high level of inventory. Thus, there is not a lot of
delivery at that time right before the holiday, so the demand decreases with
the freight rate accordingly.
One of the major influencers of freight price movement is China as it is one of the largest exporter of goods and importer of commodity. The movement of fluctuation in freight price is affected by the Chinese New Year (“CNY”) which is on the 5th of February with the overall price movement of freight. Chinese people have three weeks of holidays before “CNY” to travel across the country which means most if not all trade activities are stopped during this time.
When looking on the freight price fluctuation for the different
routes, the only freight rate that decreases over the time is the route between
China/East Asia and USA (Pacific) compared
to the others such as Atlantic and Suez route.Even though it is the only route decreasing, it still has an impact on the overall freight index
(decrease of 2%) as China is one of the
most influential players in regards to international trade.
A background factor for the decrease in the price of freight may be the trade war between the US and China, as the barriers to trade increase between these two larger players in the world’s economy. The trade between those two is therefore declining which then results in the decrease of demand for transporting goods. This creates a situation where the supply is higher than demand and which the therefore drives prices down.
Freight rates set to rise in the future
New regulations on sulphur oxide emissions
implemented by the International Maritime Organization 2020 (“IMO 2020”), would
likely increase freight rates. The reduction of sulphur oxide emission is set
to decrease from 3.5% m/m (sour) to 0.5% (sweet) m/m. At this time, fuel costs
already represent more than 50% of total operating costs for the carrier. If
the new regulations would take place, the fuel costs will potentially rise to
around 75% of total costs. This increase in price comes from the fact that now they
will need to buy low sulphur fuel costing more than the fuel with high sulphur
percentage. This is why the IMO took this decision in order to reduce pollution
derived from shipping.
End of 2018 was disastrous for big trading houses, what about 2019 with the U.S. / China trade war ?
Trade news
Trade-war between the USA and China deeply impacted agribusinesses as all of the ABCD recorded a loss during the fourth quarter of 2018. For instance, AMD net income dropped by $315 millions, Bunge has suffered a $125 millions mark-to-market loss, Cargill reported a 20% fiscal profit drop and Louis Dreyfus sustained a $65 millions mark-to-market loss on oilseeds hedging.
These impressive loss are mostly due to tariffs imposed on each other by the rival nations. China, in response, turned to Brazil for its soybean and grain traders, ABCD’s, jumped at the chance to ship them from South America, resulting in a price increase. However, as tensions eased, price for Brazilian soy returned to its normal state and most trading companies lost money on their hedging operations.
For the current year, the US Department of Agriculture forecast an increase in unsold crop from 13.5 millions tons, stocked, by the end of 2018, to 25 millions tons. This huge setback in sale will mostly impact farmers as Financial Times estimates the 2018 loss to almost 8 billions dollars.
Price movement
(Prices expressed in USD$ per bushel)
Soybean prices keep falling as traders wait for improvements in US / China trade war. March futures fell 11.5 cents to move back, closing at 8.89 dollars. Preliminary estimates of volume were 87,770 contracts, down 25% from the final figure of 117,490 set earlier this week.
Bids for soybeans remained virtually unchanged on Wednesday, but rose 2 cents in an Illinois river terminal and 3 cents less at an Iowa processor today.
Poor road conditions resulted in the closure of Brazil’s main agricultural transportation route, BR-163, until Friday, which allowed repairs to be made. The country is transporting millions of bushels of corn and soybeans on the BR-163, where it is finally loaded onto ships in its northern ports. It only resulted in minor shipping delays as the market was already shifting back to US soy.
Despite all the tensions on the soybeans market, some smaller actors like Egypt took advantage of the situation, placing several 42,000 metric tons orders of Soyoil in an international tender March 6, for arrival in late April.
Recommendation for the future
China and USA are close to sign a trade deal this month however that does not mean the trade war ends. Trump warned that he can still walk out on China like he did with North Korea.
However, based on the forward curve and other information presented, we suggest to go long on the futures as we deem the chinese demand on the verge of increasing. Plus, we are confident that large trading companies will not make the same mistakes as they once did in the last quarter of 2018, if the trade war starts over.
Sources
‘ADM Fourth-Quarter Profit Misses as U.S.-China Trade War Stings,…’ Reuters, 5 February 2019. https://www.reuters.com/article/us-archer-daniels-results-idUSKCN1PU19R. ‘China Will Buy More U.S. Soy in “Good News” for Trade Talks’, 22 February 2019. https://www.bloomberg.com/news/articles/2019-02-22/china-will-buy-more-u-s-soybeans-in-good-news-for-trade-talks. GmbH, finanzen net. ‘25 Million Tonnes of US Soybeans Will Go Unsold This Year as a Direct Consequence of the Trade War with China | Markets Insider’. markets.businessinsider.com. Accessed 7 March 2019. https://www.businessinsider.com/trump-china-trade-war-25-million-tonnes-of-us-soybeans-to-go-unsold-2019-2. ———. ‘Soybeans PRICE Today | Soybeans Spot Price Chart | Live Price of Soybeans per Ounce | Markets Insider’. markets.businessinsider.com. Accessed 7 March 2019. https://markets.businessinsider.com/commodities/soybeans-price. ‘Soybean Outlook – Soybean Market Defies Logic’. Farm Progress, 15 August 2016. https://www.farmprogress.com/story-weekly-soybean-review-0-30767. ‘U.S.-China Trade War Rattles Agribusinesses, Especially Bunge’. Reuters, 20 February 2019. https://www.reuters.com/article/us-usa-trade-china-agribusiness-idUSKCN1Q92UQ.
Low stocks and Chinese demand in the second quarter boost the prices of copper to a 7-month high. Indeed, last week, the LME copper price ended at $6,405 its highest since July 2018. This is due to the low inventories, the LME warehouses reached 139,500 tonnes, close to the 10-year low of 122,500 tonnes in December 2018. The reason the depleting inventory is the seasonally strong demand of China as well as the resolution of the trade dispute. Demand is typically high in the second quarter as the third quarter is the period in where construction activity rises in China. The global demand is estimated at 24 million tonnes and nearly half of it will be consumed in China. The country is also expected to stimulate its economy using new monetary and fiscal policies. An indicator of the future economic activity in China is the new loans. Loans hit a record of 3.23 trillion yuan ($481 billion) in January as policymakers tried to boost the decreasing investment in the country and prevent the economic slowdown. Concerning the trade dispute, President Trump said on Tuesday last week that talks with China were doing well and even suggested to extend the deadline of March 1 to complete the negotiation. Citi is expecting the price to rise to $6,700 a ton over the next 3 to 6 months. The premium for cash over three-month contracts hit $58 a tonne on Monday which is the highest since October as the market worried about the short-term availability of the commodity, however it now stands around $23.15 a tonne.
Copper’s inventory level at the LME’s warehouses almost reached the historical low end of December. As demand is increasing, the price do so and therefore it is a usual phenomenon that these inventory decrease. Nevertheless, the very low level brings insecurity regarding the supply side, as constructions in China are going to start again in the 3 quarter and big lots are to be order soon. Indian rise in demand: The rise of price of copper is also supported (in a smaller extent than China) by the rise of demand in india. Indeed, the Indian’s consumption has been rising significantly over the past decade. In 2018, the annual indian copper consumption was 650’000 tonnes. According to the asian copper conference in Shanghai, the copper demand in india will double by 2026. The Indian’s consumption is expected to rise to 1.433 million tonnes by 2026. India has forecasted its nation refined consumption to hit 843’000 for 2019. This is 200’000 tonnes more than in 2018. Even more interesting, this assumption is not taking into account the fact that electrical vehicles will become more copper intensive into the future. To conclude, it seems that nothing suggest that the price of copper will decrease anytime soon. The Chinese continues to increase its demand for copper, especially for this third quarter. Inventories are historically low and no change are forecasted into a near future. India’s copper demand is rising at a rapid paste.
Forward curve Backwardation: In February, the trend in the 3-month future price shows that there is shortage on the supply side as the spot price is higher than the future price. It is quite a logical fact as the market is bullish (hot). As we can see on the table below (data the 28.02.19), the current cash price was increasing until 6545$ (01.01.19 – 25.02.19) before decreasing a bit to 6470$, and then increase again until 6532$.
Million Btu stand for million British Thermal Units.
We can observe above the Henry Hub Natural Gas Spot Price from 16 Jan to 11 Feb. A small reminder for ones coming back from holidays, Henry Hub is the US benchmark for natural gas and considered as the biggest natural gas hub.
On 4 Feb, the price went down to 2.54 (2540) USD per Million Btu which is quite impressing as the price didn’t fall at that stage since almost 1 year ago on 16Feb 2018. Since 3 years, the lowest price of LNG ca be found in the month of February. Therefore we can explain this fall to a seasonality trend.
What represent British Thermal Units.
First of all, below some acronyms to understand better their meaning. (US Energy Information Administration)
Btu—British thermal unit(s) Ccf—the volume of 100 cubic feet (cf) M—one thousand (1,000) MM—one million (1,000,000) Mcf—the volume of 1,000 cubic feet MMBtu—1,000,000 British thermal units Therm—One therm equals 100,000 Btu, or 0.10 MMBtu
Used as a unit of measurement for natural gas prices, Btu is the Amount of heat required to raise the temperature of one pound of water by one degree Fahrenheit in practical terms, the amount of heat generated by one lighted stick of match. So we understand that it’s a representation of energy.
The heat content of natural gas may vary by location and by type of natural gas consumer, and it may vary over time. We can see the similarity with oil where the quality will change in function of the location. Therefore it’s important for Consumers/buyers to inform themselves about the natural gas distribution companies or natural gas suppliers for information on the heat content of the natural gas they are supplying. Some natural gas distribution companies or utilities may provide this information on customers’ bills.
As seen in the prior bulletins, the worldwide demand for natural gas and liquefied natural gas raises during the winter season. Being close to the end of the winter period, we could assume that the worldwide demand for natural gas and liquefied natural gas will decrease, mainly for the production of heat. A progressive decrease of the demand could be demonstrated by looking at the historical closing prices from 25thJanuary 2019 that amounted to USD 3.18per mmbtu to the closing price of USD 2.63per mmbtu dated on 15thFebruary 2019.
By referring to the below natural gas’ forward curve which shows the 25 natural gas back-month contracts, we could determine that the natural gas market is currently in contango since the forward curve is upward sloping. Having the natural gas’ forward price higher than the spot price, this means that currently the natural gas and liquefied natural gas’ market is a bearish market.
Some significant definitions to know in futures trading are “the front month contract” and the “back-month contract”.
A front month contract is a future month contract with an expiration date closest to the current date. Most of the time, this is in the same month as the current date and is the most actively traded month (Chen, Front Month, 2018). The front month is also called the spot month.
The back-month contract is a type of future contract that expires in any month past the front month futures contract(Chen, Back Month Contract, 2009). You will find below the forward contract expiration dates of natural gas. These expiration dates are necessary to notice the convergence point of each forward contract. The convergence point is when a future/forward contract becomes a physical contract.
As seen in the bulletin no. 3 “LNG and NG, the best performing commodities in November 2018”, the factor that appreciates the future price is the change of season that will pass from the winter to the spring. As a conclusion, we recommend natural gas and liquefied natural gas’ producers to store their commodity and to sell with future/forward contracts.
LNG news
The Commonwealth project is one of more than 10 LNG export terminals under development and construction in the United States along the coast of the Gulf of Mexico (in Louisiana, where the Henry Hub is) to take advantage of demand for the gas production in the US, thanks to the shale gas.
Commonwealth LNG has received commitments from European buyers to take almost half of the liquefied natural gas (LNG) from the planned 8.4-million-tonnes-per-year export terminal in Louisiana. First shipments are planned for the beginning of 2024.
The project was also aiming Japan, the largest LNG importer in the world for many years. Surprisingly, Japanese companies were not so keen on signing long term deals with the American project: reasons mentioned were that the country is reopening slowly tis nuclear power plants, 8 years after the tsunami in 2011 and are focusing on renewable energies such as the offshore Wind Turbines, expected to bring more and more electricity in the future years. Will it be enough and how is the Japanese population going to react towards the reopening of these nuclear plants? Some reports are saying that Japanese are investing in Russian LNG projects near the Asian sea coasts.
Some suppositions:
We have seen that China and Russia are working together to put in place pipelines going through China. This is creating a second major gas buyer for Russia who has been ‘’stuck’’ with Europe as its only main buyer until now. Russia will be able to have better price bargaining power. On the other hand, US has begun to be a shale exporter thanks to its shale gas production. Europe is starting to buy from them expecting Russia to bargain more about its gas?
Could the Japanese also be thinking about negotiating with Russia now that they are expending their pipelines towards the sea?
References
Chen, J. (2009, February 15th). Back Month Contract. Retrieved February 19th, 2009, from Investopedia: https://www.investopedia.com/terms/b/backmonthcontract.asp
Chen, J. (2018, March 8th). Front Month. Retrieved February 19th, 2019, from Investopedia: https://www.investopedia.com/terms/f/front-month-contract.asp
Above we can see the composite price for coffee done by the International
Coffee Organization. What’s visible here is that the price of coffee is on a
downward curve.
If we look at the last graph we did in our bulletin, back in November, we had a decrease in price going from 114 to 106 US cents/lb. During December it continued its bearish run until it stabilized at around 100. Then, in January, it stayed stable during the whole month around 99 and 103. Now, as we saw earlier, it’s continuing its bearish run after a brief halt in January.
Brazilian Real:
Price movement in general:
Generally, if anyone wants to know why the coffee price is either bearish
or bullish, they should just look at the Brazilian currency and see which way
it is going. They will often find both going in opposite directions. Both are
extremely correlated. If one is up, the other is down and vice versa.
Following the last bulletin, we can see the same behaviour of the price
which keeps in decline. For example: Arabica – drop to 1.10 USD per pound which
is well below 1.2 USD from the required level to make a profit for Latin
American farmers.
This decrease is continuing mainly because of the weakening of the Brazilian
Real against the US Dollar and the over supply of coffee beans especially from
Brazil.
As we mentioned in the last bulletin, the main
reason for the weakening of the Brazilian Real is the new Brazilian President
Bolsonaro’s policies that have not been implemented yet which create
uncertainty, and this creates economical and political unstability (for example
for investors).
The over production of Brazil is due to the historical trend of coffee production following a cycle.
Forward curves: US coffee C futures (Arabica):
Price in cents and hundredths of a cent up to two decimal places USD
Robusta Coffee Futures
Price per metric tonne in USD
In terms of the forward
curves, we now already know that it is generally always in carry. There is constant
supply from all around the southern part of the globe thus keeping the curve in
this position.
What we can notice however is that the Arabica price has stayed the same to the graph in our last bulletin, but the Robusta has decreased slightly
Potential usage of Blockchain technology in the future in the Coffee Commodity in order to boost business:
According to an article in Forbes, The Moyee Coffee brand (Ethiopia) is using blockchain to differentiate between 350 farmers in order to provide buyers with full transparency in the supply chain and full price discovery. This transparency allows the buyer (the roasting companies) to keep the price balanced and not go too low in order to keep the farmers motivation to produce the coffee beans. In the Moyee case it allowed the increase the price by 20% above market rate. The article also states that the UN food and agriculture organization believe that the blockchain has huge potential to solve challenges of small coffee holders regarding uncertainty (for example: fluctuation in supply) and trust among market players.
Chinese refiners are looking for new opportunities:
Shale oil boom has made it difficult to predict global supplies. Shale oil producers are much more responsive to oil prices movements than classic producers and it’s really difficult to understand how numerous individual drillers decisions will impact global oil supply. Before shale oil it was easier to predict what could be the future supply without taking in consideration outside political events. Nevertheless, with WTI price around USD 50, it affects shale oil production as well as it is likely to boost the demand. China is likely to take advantage of the cheap oil and following the recent 90 days trade-war truce agreed between the USA and China, some Chinese refiners are looking for opportunities in the US. However, the long-distance voyage between the US Gulf Coast and China makes it difficult for refiners who buy shale oil until the 1st march, date on which the truce ends. Chinese refiners demand the more assurances from the government, asking that cargo wouldn’t be affected with possible tariffs if shipment arrives after the 1st March.
America’s top oil producing region (Permian basin) has a new problem:
Shale crude oil is trading at 40$ a barrel in the Western Texas region. At this price, the oil is sell for less than the cost of developing new wells. That is a rude prospect for a region where oil production is booming and because Permian has permit to the United States to reach his highs production of barrels per day, making them the world’s top crude oil producer. So it will be better if the US government could find a solution in order to avoid a potential recession in this sector due to a production decrease and falling prices. During this time, we can see that West Texas Intermediate for January delivery fell $1.32 to settle at $49.88 a barrel on the New York Mercantile Exchange. Bears gained steam after the official close, with oil falling to $49.01, the lowest level since September 2017. The WTI February contract fell to $49.47. Brent for February settlement closed down 67 cents to $59.61 on London’s ICE Futures Europe exchange. The global benchmark traded at a premium of $9.41 a barrel to same-month WTI.
Spread between Brent and curve spot price:
This graph shows the spread between the brent spot price and WTI spot price from 2nd January 2007 to 14th December 2018. In grey at the bottom of the graph, there is a glimpse of the variations in the spreads. From 2007 to the end of 2010, it was not surprising to see the spread in favor of the WTI. Several times the spot price WTI was higher than the Brent. From January 2011 to today, the trends have reversed. The reason was the oversupply of WTI crude in USA from 2011. The spread value decreases from the begin of the year 2015 to the end of 2017 because Barack Obama try to take some government restrictions on the extraction of shale oil and gas. A lot of people after the government restriction thought that the problem was solve. But as we can see in the graph it was not the case due to the lobby of US crude company who member/ have link with the US congress. As the Republicans have the congress majority and that some judges invalidated government measures to regulate shale oil’s extraction. The hopping spread trend didn’t follow Obama’s expectation. One month before his departure, Barack Obama banned the creation of news crude oil’s extraction in the Arctic Ocean. But when Donald Trump became president in 2017, he began to facilitate the extraction of shale oil. It why we can see an increase in the spread during the year 2017. Currently his team is working on a presidential decree in order to allow the extraction in Arctic. Since Donald Trump arrival, we can see that the crude production increase due to easing regarding the extraction process (reducing or eliminating restriction).
Future WTI curve
For the future curve, we have for the two last contracts (November and December) a contango situation. The future curve from June and September are in a situation of backwardation. The latest decisions from Donald Trump administration creates uncertainties about the price.
Due to the pressure from Donald Trump to reduce the price of crude, Brent as wellas West African Qua Iboe and Nemba prices were dropping down till the end ofNovember to less than $60 a barrel.
However, in the beginning of December, oil prices increased more than 2%. Saudi Arabia, Russia andother producers in OPEC decided to counterattack by cutting output in order to “drain” global fuel inventories and support the market. Consequently, Brent crude rose 2,9% to $61,70 a barrel.
Markets reacted well (hence the slight increase in prices early December) following the annoucement of OPEC. However, markets are still over supplied and therefore prices return to normal levels
Supply & Demand
Once again, high freight rates and weak Asian refining margins “kept buyers at bay” in West African market, which created a situation of unsold cargoes. Globaldemand growth of crude oil has weakened, especially from China, where refinershave a surplus of oil in storage.
“The Angolan market, which tends to be dominated by Chinese refiners, has beenslow to move. Traders said the Angolan market still has around 17 cargoes ofunsold January cargoes available, out of a total of 43 in the final loadingprogramme.” (reuters)
“The Nigerian market has suffered the most from freight rates and it’s heavily over supplied, to the tune of around 30 cargoes for December and early January,which traders said was “worrying” at this point in the supply cycle, with just a little over two weeks to go until the February loading programmes emerge.” (reuters)
Forward Curves
There is no significant change concerning the forward curves. It is still in a contangosituation and still better to store crude. Nothing has changed since the last bulletin.For September and October 2019 we can notice a slight decrease of the futureprice surely due to the output cut from the OPEC countries.
OPEC and selected non-OPEC countries agreed last week to cut their output by1.2 million barrels per day during the first six months of 2019. This 1,2millions bpdcut is based on the production of October 2018.
Most of the cuts will come from Saudi Arabia, with smaller contributions likely tocome from Russia, the United Arab Emirates, Kuwait and Oman.
Other OPEC and non-OPEC countries are unlikely to reduce their output voluntarily by any significant amount so their participation in the agreement is mostly symbolic.
As we can remark on this graph, after the
previous falling price to 62,99 USD per Metric tonne on the 27th of
November, we see an upward trend earlier this month. However, the slight drop
on the start of this week indicates a current price at 66,82 USD /metric tonne
especially due to the weakness in Chinese steel Futures Contracts.
Small decreases are present for the Lower and
Higer grades of Iron Ore. The price of the iron ore fines 58% is fix at
42 USD/Mt and the 65% fines at 82,80 USD/Mt.
Supply and demand
Chinese steel production is still slowing due
to the trade war with the US and also because China took measures to reduce air
pollution. For instance, the city of Tangshan – China’s top steel production
hub – announced on the December 8th, second-levels smog alerts which has led to
an even more severe decline in steel production.
Therefore, 86.25million tonnes of iron ore
was imported in December, down 2.4% from October and 8.8% from the same month a
year earlier.
So far this year, China has imported 977.89
million tonnes of iron ore, down slightly from 991.26 million tonnes in the
same period the previous year, according to calculations from Reuters (global
news agency in London).
As a consequence, steel mills in the
smog-prone city have to shut their sintering capacity by 30-60% or even shut
down based on their emission level.
Deep future curve
The reason is the weakness in Chinese steel
futures contract leading a decrease in futures contract number of iron ore.
Moreover, it is predicted that the iron ore
supply will increase thanks to new investment in Brazil for the iron ore
exploitation and cost decreasing by 5 %.
The Singapore Exchange (SGX) launched on the
3rd December the world’s first high-grade iron ore derivatives in order to
answer the Chinese demand and to be in line with the new context of China’s
environmental policy. Indeed, the new swaps and futures reference the 65% Fe
Brazilian fines index, CFR Qingdao to manage high-grade segment exposure, with
grade differentials in iron ore more volatile amid strong mills’ margins and
the Chinese government’s targets to reduce emissions.
For instance, the top larger iron ore
producers Vale is negotiating changes in its iron ore pellet contracts for 2019
from its current 62% Fe to the 65% Fe.
Recommendation
We should go long, we are expecting to see
the price decline due to the rise of iron ore production.
