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North American crude weekly bulletin #2

Price cuts: Three men are controlling the price

During the last month we have seen OPEC losing control of the oil market as it ever had. The action of Presidents Donald Trump, Prince Mohammed Bin Salman and Vladimir Putin will determine the course of oil prices in 2019 and beyond.

While OPEC struggles to find solution, the three countries dominate the global supply. As we can see below, together they produce more oil than the remaining members of OPEC including condensates and natural gas liquids.

 

(U.S 15.2M barrels per day / Russia 12.3M barrels per day / Saudi Arabia 12.2M barrels per day)

Forward price and spread Brent-WTI curves:

We can see on the chart above that during a short term it will be still profitable to store and sell in the future as the WTI and the Brent price curve are in contango.

On the both curves, we can see a slow increase during Q1 2019, but probably due to the price/production war between U.S, Russian and Saudi Arabia the Brent curve will sooner turn in backwardation while the WTI forward curve will remain stable during a short due to U.S influence as big supplier.

The yellow curve shows the spread between the price for Brent Back month contracts and the price for WTI back month contracts.

Canadian Crude Oil.

Since mid-May heavy Canadian crude has been in a downward spiral.

A recent increase in Western Canadian production caused a glut because the production was running into limited pipeline capacity. It has caused that heavy and light Canadian production has been trade at record discounts in comparison to world oil benchmarks. The discount was, one year ago, less than USD 15.

Another issue that had an impact on Canadian oil prices is that most of the U.S. refineries that process the Canadian heavy oil have been in maintenance for the last two months.

BP Plc just restarted a crude unit as well as a coker which help prices to recover.

Although U.S. refineries are restarting, the crisis is far from done. Canada is still producing more oil than the pipelines can handle and his storage capacity has reach his maximum.

BP has recently signed a multi-year contract with rail companies in order to load Western Canadian oil and increase volume of imports. In October, they reached an average of 274’000 barrels a day and they are looking to double this volume by next year.

As Heavy Western Canadian Select’s discount to WTI futures narrowed to USD 39.25 a barrel.

 Shale oil production:

According to the department of energy, the U.S. oil production will reach 12 million barrels a day, 6 months sooner than expected. Shale oil producers from the Texas oil patch have added the past 12 months a volume equivalent to the entire output of Nigeria.

This is why some suppliers from the Permian region want that the U.S government add three more pipelines. With those new pipelines, the suppliers from this region will try to produce 2 million of barrels per day.

Recommendation

Due to this instability/price war in the oil market, it will be judicious if we want to sell future contract to not sell future contract after Q1 ending in 2019. Having no real information about how U.S and Saudia Arabia will act those last month (cut a little bit the supply, continue to supply or increase ) people have better time to ensure themselves from a loss of money.

Appendix:

https://www.bloomberg.com/news/articles/2018-11-21/opec-s-worst-nightmare-the-permian-is-about-to-pump-a-lot-more

https://www.bloomberg.com/news/articles/2018-11-16/canadian-crude-rallies-as-u-s-demand-and-rail-shipments-rise

https://www.bloomberg.com/opinion/articles/2018-11-18/bin-salman-trump-and-putin-control-the-oil-price-now

https://www.bloomberg.com/news/articles/2018-11-22/oil-holds-gain-as-u-s-fuel-inventory-drop-counters-trump-tweet

https://www.bloomberg.com/news/articles/2018-11-20/canadian-oil-patch-plunged-into-crisis-by-historic-price-crash

 

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Copper Weekly Bulletin – N°2

G20 as the last hope for trade war resolution and global economic growth

The copper three-month future price rose for the fifth straight session on Monday reaching $6,259 a tonne and having gained 2.5 percent since last week. This was due to the prospect of a resolution to the US-China trade war, with President Trump announcing that China was willing to take steps to resolve the issue.

However, the hope of a resolution fell short at the APEC summit last weekend, where for the first time, US and China fail to agree on a communique. Divisions were evident at the summit and Vice President Mike Pence even threatened China that they will double the tariffs if they do not accept US demands. Therefore, the prices fell down to $6,240 on Tuesday and to $6,239 on Wednesday. It dropped again on Thursday to $6,217 following another clash between the two world’s biggest economies at a WTO meeting on Wednesday, however the price is supported by a weakening dollar therefore making it cheaper to buy dollar-backed commodities

In general, the price of copper as well as the other metals traded in a narrow range the whole week, but the price outlook could improve if the sigh of a potential resolution in the trade conflict rise with the G20 summit at the end of the month.

Since last bulletin, the premium price for cash over 3-month dropped from $31 to $18.50 on Friday, and it rose again to $21.50 which still points toward tight market.

Negative sentiment of the market has a huge impact on the copper price.

Strengthening supply

According to mining.com, the supply is quite strong at the moment and is expected to be even stronger thanks to a 3% increase expectation of Chile. This 3% increase expectation is due to an increase of 54,100 tonnes in the first three quarters of 2018, a 13% year-to-date growth over the same period of 2017. It makes experts confident that Chile is going to continue with the current pattern. As a reminder, Chile is the biggest world’s exporter and account alone for more than 30% of total world’s supply.

Moreover, it appears that this trend is not only happening in Chile but also in other countries such as Zambia for example. According to Kitco, Zambia has currently done 10% better than last year during the same period. It is thanks to the biggest mining companies improving machines to extract copper.

As the global supply of copper is strengthen, there price of copper is supposed to decrease in a near future.

COPPER SUPPLY: Headline inventories of copper in LME-registered warehouses MCUSTX-TOTAL fell by 9,400 tonnes to 151,625 tonnes, nearing last month’s 10-year low of 136,675. tonnes.

Since two weeks ago, the level of the open tonnage LME copper stock (tradable warrant) remain pretty stable.

Such a stability means that for the moment, copper supply and demand meet pretty well.

Backwardation in the future

The forward curve is in backwardation, as we can see on the table below, the current cash price was increasing until a few days ago (12.11.18 – 20.11.18) before decreasing these last two days. The reason of this backwardation is still due to the negative sentiment toward the slowing chinese economic growth as well as the trade war. People prefer to trade to go short and sell at the cash price rather than at the future price which is the reason why the LME still has a premium of $21.50 cash over the three-month.

 

Data valid for 21 november 2018

Source:

https://www.kitco.com/news/2018-11-21/Zambia-apos-s-copper-output-up-10-4-year-year-in-September.html

https://www.reuters.com/article/global-metals/metals-copper-edges-higher-ahead-of-g20-summit-idUSL4N1XU3ZK

http://www.infomine.com/investment/warehouse-levels/copper/1-month/

http://www.mining.com/copper-output-spike-worlds-top-producer-chile/

 

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Bulletin 2 – “The rally of LNG and NG”

Main hubs of natural gas

Let us starting with an introduction about the meaning of a gas hub. A gas hub is a central infrastructure networks for natural gas when transported through pipelines and for liquified natural gas when transported through vessel. This network is used as central pricing point for the stakeholders.

Henry Hub is the US benchmark for natural gas and considered as the biggest natural gas hub. The second one situated in Europe is the Britain’s National Balancing Point (NBP) used as an the main indicator for Europe wholesale gas market. Finaly the Dutch Title Transfer Facility (TFF) which is mainly due to its huge Groningen onshore gas field and being the center of a large pipeline network. EAX hub stand for East African Commodity Exchange.


https://www.erce.energy/graph/uk-natural-gas-futures-curve

A Therm (thm) equal 100’000 British thermal units (Btu).

The graph above is taken from the National Balancing Point introduced before. It represents the future price from January 2019 to May 2025 taken at four different points in time. There are 3 trends that can be analysed. The first one being the seasonality which we have already seen last week, then the global trend in time and finally the variation of expectation from May compared to the three other months.

We can observe a global trend over time which is price decreasing. This fact is mainly due to the new American technology to extract gas named shale gas. The so called shale gas revolution allowed United States to change from gas importer in 2007 to an exporter in 2017 and expected to become a global LNG player. However, the decrease of price is quite low for the main reason that the Asian demand for the next 5 years is expected to grow for its low C02 gas emission and replace coal energy still largely used in China.

Finally, the variation of expectation from May compared to the three other months, from our point of view is due to the announcement of China to try to stop using coal and consume more natural gas as mentioned before.

Price movement, demand & supply analysis

From November 1st, 2018 until Friday November 16th, 2018, the price of natural gas has raised by 31%. The three reasons that demonstrate this increase are the winter, the current low inventories of this commodity and the drop in oil’s price. Indeed, the cold season is coming earlier and is colder. This season increases the demand of natural gas and LNG to heat homes.
The price of oil has dropped by 14% for the month to date (November 1st to November 16th, 2018). The reason is that companies which produce oil, LNG or NG are switching their production to natural gas in order to meet the huge and growing demand of this commodity. As a result, this switching is influencing the increase of 31% of natural gas.
On the supply side, US Energy Information Administration reported that total stocks stand at 3,247 trillion cubic feet, which is 528 billion cubic feet lower than the prior year at the same period. Inventories are facing a storage deficit which makes the price subject to be greater than previous years.

As a whole, the demand and supply side effects seen above influenced the price movement of NG and LNG. Until the end of the year, the demand will push the price higher, in a quickly or gradually way. This could be seen also on the future contracts which show an increase until the end of the cold season (between February and March 2019).

We recommend in a short period to be prepared to sell LNG and NG because the spot price will certainly show a backwardation against the forward price.
Until the end of the winter (long-term period), we also recommend to sell LNG and NG, knowing that the houses would be frozen by the cold, the spot price will be higher than the forward price.

Anecdote

Storage of natural gas (in US):

Depleted natural reservoir (about 80%): Old reservoirs of gas that are empty: reused as a storage facility.

Salt caverns (about 10%):  Highly reliable because of the salt is very strong and retain gas well. Capital intensive.

Aquifers storage caverns (about 10%): Usually once a year because it is very capital intensive and to control.These types of storage facilities are usually used only in areas where there are no nearby depleted reservoirs. In normal times, facilities are operated with a one winter withdrawal period during high peaks. May be used to meet peak load requirements as well during other times (summer).

Total underground storage in US: about 10mio Cubic Feet

Above ground: Gas tanks: Very short term but easy to fill up and take from. In the pipelines: line packing (inject higher quantity through the pipelines) LNG: 1/600th of normal gas space, more flexible than pipelines (can change suppliers and/or sellers). Capital intensive ($billions).

Capacity in Million Cubic Feet

Sources

Caverns: Home. (2018). Underground Natural Gas Storage. [online] Available at: http://www.energyinfrastructure.org/energy-101/natural-gas-storage [Accessed  Nov. 2018].

Eia.gov. (2018). U.S. Underground Natural Gas Storage Capacity. [online] Available at: https://www.eia.gov/dnav/ng/ng_stor_cap_dcu_nus_a.htm [Accessed Nov. 2018].

SAEFOND, Myra P, 2018. “Natural gas will soon find more fuel to feed its rally”. Market Watch (online). November 18th, 2018. (Consulted on November 20th, 2018). Available to the following URL: https://www.marketwatch.com/story/natural-gas-will-soon-find-more-fuel-to-feed-its-rally-2018-11-16?siteid=rss&rss=1

Market Watch’s forward prices, 2018. “Recent contracts”. Market Watch (online). November 18th, 2018. (Consulted on November 20th, 2018). Available to the following URL: https://www.marketwatch.com/investing/future/ngf19

Market Watch’s Natural gas spot prices, 2018. “Natural gas (Henry Hub) in USD – Historical prices”. Market Watch (online). November 18th, 2018. (Consulted on November 20th, 2018). Available to the following URL: https://markets.businessinsider.com/commodities/historical-prices/natural-gas-price/usd/1.11.2018_19.11.2018

SAEFOND, Myra P, 2018. “Natural-gas futures drop further with weekly U.S. supply up 39 billion cubic feet”. Market Watch (online). November 15th, 2018. (Consulted on November 20th, 2018). Available to the following URL: https://www.marketwatch.com/story/natural-gas-futures-drop-further-with-weekly-us-supply-up-39-billion-cubic-feet-2018-11-15

HOGUE, Tom, 2018. “Q&A: What is a gas trading hub, and how are they established?”. Reuters (online). December 29th, 2017. (Consulted on November 20th, 2018). Available to the following URL: https://www.reuters.com/article/us-china-gas-exchange-q-a/qa-what-is-a-gas-trading-hub-and-how-are-they-established-idUSKBN1EN0I1

ERCE, 2018. “UK Natural Gas Futures Curve”. ERCE (online). (Consulted on November 20th, 2018). Available to the following URL: https://www.erce.energy/graph/uk-natural-gas-futures-curve

ICIS, 2018. Comparing natural gas prices as Europe and Asia compete for US LNG”. ERCE (online). (Consulted on November 20th, 2018). Available to the following URL: https://s3-eu-west-1.amazonaws.com/cjp-rbi-icis/wp-content/uploads/sites/7/2018/09/03034112/comparing-natural-gas-prices-as-europe-and-asia-compete-for-us-lng.pdf

USAID, 2018. Futures market a boosts for the EAX”. USAID (online). (Consulted on November 20th, 2018). Available to the following URL: https://www.eatradehub.org/futures_market_a_boost_for_the_eax

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Coffee Bulletin N2 – Coffee takes a BREAK

In the 1st Bulletin, when looking on the graph of ICO (International Coffee Organization) composite indicator price of green coffee beans of all major origins and type, we can notice a decrease that started in 2nd of November (price of 116 cents/lb) continues to the 2nd Bulletin until 13th November (price of 108 cents/lb) and then stabilized from the 17th of November (109 USD cents/lb).

1st Bulletin

2nd Bulletin

 

 

Therefore there is a decrease in the price which can be explained by the following:

The Brazilian currency real had strengthened comparing to the USD which meant the traders demand decreased while the supply level stayed stable and this sent the prices down.
In addition, According to the ICE the number of coffee future contracts this year so far has declined from 287,732 to 247,618[1] which confirms us the demand had decreased. (Explained in the 2 graphs below)

However, for this second bulletin, there was a smaller variation in the price comparing to the first bulletin. we can assume that the presidential election in the leading coffee export country, Brazil, still has a lower impact on ICO composite price indicator comparing to the 1st bulletin. There was a slight decrease in the price of 8 cents overall which is about 9% (116-108/116). We assume that enough time has passed after the recent elections in the Brazil, the political situation in Brazil stabilized and this can explain the decrease in volatility of the price of coffee beans there is slight price decrease as previously mentioned.

 

Forward curve

As we can notice in the forwards curve for Arabica and Robusta presented below, the correlation between these two graphs continues to be similar compared to our first bulletin.

The coffee market continues to be a Carry market – the cash price today is lower than the futures prices in a stable trend which we assume it is due to lack of impactful news and events.

There was a slight decrease in the spot prices for Arabica beans that are represented by the first point in the forward curve .
There was a steeper decrease in the spot prices for Robusta beans that are represented by the first point in the forward curve .

 

 

 

 

Coffee Terminal Markets Explanation:
There are two major terminal markets for the coffee commodity which are the following:

  1. The most active terminal market is without doubt for the Arabica coffee as it is the most exported worldwide (around 70%) represented by the “US Coffee C” contract and traded on the ICE
  2. Robusta coffee contracts are traded on the “London-based London International Financial Futures and Options Exchange known as “LIFE” and which is owned by the ICE.

In order to be accepted in those terminals, there is a need for a testing grade as well as cup testing for the flavor and the ICE establishes a “standard” with using certain coffees.

Interesting trends in the Coffee Sector: Reviving Colombians Coffee Culture

Article: “In Colombia, kids learn barista skills with the goal of saving the country’s coffee culture”
The article speaks about the goal of Colombia, one of the leading export country of coffee, in motivating and getting children invested in the coffee industry and profession. In fact, there are some general issues that decrease the interest to enter the industry such as “farmers’ low coffee prices, climate change, and a rapidly aging coffee workforce” These threat the future of coffee sector in Columbia.
According to Colombian Coffee Growers Federation, there are only 10%[1] of Colombian coffee farmers currently looking at coffee as a business for the next generation. This means that the younger generation do not believe in coffee business as a way of life. This can be a huge problem in the next 15 to 20 years for the whole coffee supply as the country represents high market share and as the demand for coffee is constantly increasing (supply-demand unbalances). In addition, we can see the same issue in other producing countries such as Tanzania and Uganda, important coffee exporters, where the average age of coffee farmers is 5 to 6 years older than other farmers.

References:

https://www.nbcnews.com/news/world/colombia-kids-learn-barista-skills-goal-saving-country-s-coffee-n937466

https://www.theice.com/products/15/Coffee-C-Futures

https://www.theice.com/products/37089079/Robusta-Coffee-Futures

https://forexfocus.com/commodities/coffee-futures-trading-in-a-narrow-range/

https://seekingalpha.com/article/4221712-coffee-retreats-higher-low-will-build-base

http://www.ico.org/prices/pr-prices.pdf

https://tradingeconomics.com/brazil/currency

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Winter is coming (iron ore #2)

Movement of the 62%, Fe fines iron ore Price

At the begging of the month of November the price was at 73$/Mt and started to increase till the 9th November, since than the prices is decreasing till today at the price of 74.81$/Mt

The causes:

This is due to the arrival of the winter and to the regulation from the local government of Hebei in China. Hebei is the largest steel production province.

The local government of Hebei announced an “orange” alert for smog in the air forcing the mills of steel to reduce their production until 16 November.

Steelmakers want to maximize their output of steel before winter; therefore, they need a high quality of iron ore in order to obtain the higher margin as possible. That is why the prices went up.

Since the prices of steel is decreasing, in consequence the margin is lower for the Chinese mills. Which push them to buy low grade of iron ore (58%Fe) in order to maintain their profit margin because low-grade iron ore reduce cost.

Since the announcement of “orange” alert, Chinese companies has halve their production, which decreased iron ore, 62%Fe demand.

This graph shows the basis evolution of iron ore from July 2018 to October 2018.

From the middle of July until the beginning of August, the future price is higher than the spot price, which means it is a contango, there is enough supply and lower demand. It is a normal state of the market and the signal of it is that we should store.

Then the situation changes: the spot price is higher than the future price in August, so it is slip to a backwardation which means demand is greater than supply, the market is hot, people want to buy so we should sell and do not store.

Finally, from the beginning of September until October, we can observe that the situation of the market changes again into a contango state. There is more supply than demand and we should store the iron ore.

As the whole of Chinese steelmakers companies count for 74% of the iron ore global market share, if their demand in construction or transportation sector increase, the price of the iron ore will rise also.

Recommendation

We recommend going long because today the prices for future contract are decreasing until the end of 2019, show in the table below.

Sources:

Market Index. (2018). Iron Ore. [online] Available at: https://www.marketindex.com.au/iron-ore [Accessed 15 Nov. 2018].

Investing.com. (2018). Iron ore fines 62% Fe CFR Futures Historical Prices – Investing.com. [Online] Available at: https://www.investing.com/commodities/iron-ore-62-cfr-futures- historical-data [Accessed 15 Nov. 2018].

Argusmedia.com. (2018). China’s steel profit margins accelerate falls. [online] Available at: https://www.argusmedia.com/en/news/1790676-chinas-steel-profit-margins-accelerate-falls [Accessed 15 Nov. 2018].

Scutt, D. (2018). Iron ore prices slump. [online] Business Insider Australia. Available at: https://www.businessinsider.com.au/iron-ore-prices-china-steel-demand-hebei-2018-11 [Accessed 15 Nov. 2018].

U.S. (2018). RPT-COLUMN-LME bets on new contracts to force steel industry…………………………………………………………………………………………………………………………………………… [online]

Available at: https://www.reuters.com/article/steel-pricing-ahome/rpt-column-lme-bets-on- new-contracts-to-force-steel-industry-change-andy-home-idUSL8N1XH4OV [Accessed 15 Nov. 2018].

MB, F. (2018). Iron ore pricing explained | Metal Bulletin.com. [online] Metalbulletin.com. Available at: https://www.metalbulletin.com/Article/3811904/Iron-ore-pricing-explained.html [Accessed 15 Nov. 2018].

Foundation, T. (2018). China’s Hebei province issues orange alert for smog. [online] news.trust.org. Available at: http://news.trust.org//item/20181112011729-8eqc1/ [Accessed 15 Nov. 2018].

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Response to US sanctions, Russian record oil output & an OPEC cut of production in sight ?

Russian crude – Weekly bulletin #2

Price movement

We can observe that there has been a significant fall in the general prices of crude oil following the trend already set during the previous weeks. Russia’s oil production has hit record high during the previous month at 11.41 million bpd and OPEC’s forecast of a rather slowing demand for next year have contributed to this drop.

Nevertheless, Iranian sanctions were put in place on 4th November and the OPEC proposal to cut 1.4 million bpd in production 10 days later led the market to believe in recovery of the prices. This was halted as the USA are expected to boost their production to 11.43 million bpd in the last quarter of 2018 and continue ramping up.

Moreover, American crude stocks climbed to 426 million barrels and their weekly build in inventory was 8.79 million barrel, stated by the API, almost 5 million over analysts’ expectations. These are all factors that have contributed to halt the price recovery and to push them further down.

This week was also an important turning point on prices as differential for the Urals went from a discount of 2.18$/bbl on October 15th to a discount of 0.18$/bbl on November 15th. Event explainable as the market reacted prior to US sanctions by shifting its supplier and paying the price.

As for the ESPO, the spread has also known a similar variation since they were traded at 3.60 to 3.70$/bbl premium during mid-October to almost 6$/bbl premium for mid-November contract.

This event is explained by the Chinese refiners needing to fulfil their quotas by the end of the year if they do not want to see it diminished for 2019.

Supply and demand dynamic

The physical trade market was trading around 85$/bbl in the first days of October. The high price for BFOE (BFOE is a forward contract for light-sweet North Sea crude oil that can be satisfied with any of four grades of crude: Brent, Forties, Oseberg, or Ekofisk. The contract was created to add volume to the market for Brent as production from the Brent field has declined.) grades push many refiners to medium sour grades like Urals crude.

“I’m not going to say anything about whether or not we need to limit oil production, we have to be very careful, as every word impacts the state budget,” President Vladimir Putin said. Following the announcement of the OPEC to reduce their production, participants of the previous agreements will meet in early December to discuss the about the deal, which may cause a cut in previous output targets.
Despite the disputes over price volatility, the Russian president is rather pleased with the current price.

Internationally geopolitical events have heavily influenced once again global crude prices. Market participants focus their attention on the rising tension between US and China and also the deteriorating relation between Saudi Arabia and US due to the murder of the journalist Jamal Khashoggi.

Geopolitical risk and increased Saudi crude production are among the factors that have heavily influenced global crude prices and that contributed to the spike in market volatility during October.

Recommendation for the future

The forward curve was still backwardation until October 19 and almost contango around October 31. Dated Brent dropped significantly during October and the Dated Brent CFD forward curve moved from a steep backwardation in the first trading days to almost a contango by the end of October. As of the state of the market on 9th November, we can expect that there should be a slight contango over the next six months. Taking into account the sanctions applied by the USA and a probable cut of production from OPEC, we recommend to be long for the next 3 months.

Sources :

‘Crude Build Halts Oil Price Recovery’. OilPrice.com. Accessed 15 November 2018. https://oilprice.com/Latest-Energy-News/World-News/Crude-Build-Halts-Oil-Price-Recovery.html.
‘Crude Recovery? OPEC Eyes 1.4 Million Bpd Production Cut’. OilPrice.com. Accessed 14 November 2018. https://oilprice.com/Energy/Crude-Oil/Crude-Recovery-OPEC-Eyes-14-Million-Bpd-Production-Cut.html.
‘Far East Russian ESPO Blend Crude Premiums Surge for Nov on Demand from China | S&P Global Platts’, 21 September 2018. https://www.spglobal.com/platts/en/market-insights/latest-news/oil/092118-far-east-russian-espo-blend-crude-premiums-surge-for-nov-on-demand-from-china.
‘IEF Head: Oil Prices To Wobble In $60-80 Range Short Term | OilPrice.Com’. Accessed 13 November 2018. https://oilprice.com/Latest-Energy-News/World-News/IEF-Head-Oil-Prices-To-Wobble-In-60-80-Range-Short-Term.html.
‘Non-OPEC Oil Output Soars Despite Price Slide’. OilPrice.com. Accessed 14 November 2018. https://oilprice.com/Energy/Crude-Oil/Non-OPEC-Oil-Output-Soars-Despite-Price-Slide.html.
‘OPEC+ Said to Weigh Bigger Output Cut on Increasing Risk of Glut – Bloomberg’. Accessed 15 November 2018. https://www.bloomberg.com/news/articles/2018-11-14/opec-said-to-weigh-bigger-output-cut-on-increasing-risk-of-glut.
‘Russia Committed to Continuing OPEC Cooperation, Satisfied with Current Oil Price: Putin | S&P Global Platts’, 15 November 2018. https://www.spglobal.com/platts/en/market-insights/latest-news/oil/111518-russia-committed-to-continuing-opec-cooperation-satisfied-with-current-oil-price-putin.
‘Russia’s Oil Production Sets New 30-Year-High Record In October’. OilPrice.com. Accessed 5 November 2018. https://oilprice.com/Latest-Energy-News/World-News/Russias-Oil-Production-Sets-New-30-Year-High-Record-In-October.html.
‘U.S. Mulls Fresh Sanctions On Russian Oil | OilPrice.Com’. Accessed 13 November 2018. https://oilprice.com/Latest-Energy-News/World-News/US-Mulls-Fresh-Sanctions-On-Russian-Oil.html.

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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/