11 February 2011 at 11:28 GMT
Global stocks markets finally came to a halt this week due to tensions in NA (North Africa), but this seemingly had mixed impact on commodities due to lower energy prices on profit taking after huge runs in February and hoarding of grains and softs. So the last four months of positive correlations with stock markets finally decoupled in favour of commodities, with several sectors outperforming stocks.
Grains:
The main focus this week was the bullish World Agricultural Supply and Demand Estimates (WASDE) grains global balance report: Bullish corn on lower production globally and higher ethanol grind: As expected, the U.S. Department of Agriculture (USDA) tightened U.S. corn balances with 2010/11 stocks-to-use now seen falling to 5% which is a 15 year-low on par with the record lows set in 1995/96. We have long argued that demand needs to be rationed in this supply constrained environment - and continue to believe that corn will need to trade at at least $8/bu.
The wheat balance was left unchanged this month, whilst weather is having a negative impact on wheat production with China hit by drought at the moment and hoarding in North Africa causing demand for European wheat intact.
A Soybean report was slightly bullish too with lower global carry out whilst inventories remained unchanged as the lower South American production remains supportive for soybeans.
In general, the global inventory situation for corn and soybeans remains very supportive for prices, but neutral for wheat. The chart below displays corn balances in the last 20 years.
The biggest loser this week was Natural Gas:
Despite the continuation of a global cold spell, the previous significant rally in Natural Gas from 3.90 to 4.9, driven by speculative short-covering, came to a dramatic halt with natural gas prices dropping a further 8.1% on refreshing short selling and producer hedging. Compounding this downwards movement was also warmer European weather in the past week. The supply of natural gas remains abundant. The forward U.S. weather forecast points towards Spring. The NA tensions are not having any impact on natural gas.
The biggest gainer was Cotton:
No surprise following our comments in the latest weekly update with cotton futures surging to record highs on rising daily limits simply due to increased U.S. sales boosted by demand growth. The fibre jumped 9.1% this week and since its substitution is polyester, which is made from oil, the current high oil prices give no reason for a switch to polyester. Demand for cotton is not dipping despite a 100% rally in the last quarter and the USDA report was also supportive of cotton. The higher margin requirements for cotton also did not put a lid on the market.
Precious metals a Golden opportunity?
The flood of Exchange Traded Fund (ETF) liquidation that characterised the gold market in January has not spilled over into February. While still in the red, ETF outflows so far this month have been relatively modest. This suggests that the bulk of the ETF holders who wanted to exit gold have already done so.
Silver come-back gaining 5.1% this week.
An article in the Financial Times this week said that as much as 100 moz of silver hedges may have gone through the market in recent weeks. This magnitude is 14% of annual supply. But we're not altogether surprised that producers are increasingly looking to lock in a $30 silver price. First, silver has enjoyed a hugely impressive price runup. Second, silver producers are more likely to hedge than gold producers, because most silver output is a by-product of base metal production - primary silver production representing less than 30% of annual supply - and hedging is a much more common practice amongst base metal producers.
Below is a chart indicating that gold prices relative to silver prices, which are currently trading around 45 have dipped massively during late 2010 and recovered somewhat as silver rallied this week.
Golden opportunity or just a trend?
Oil – is oil WTI or Brent ?
Combined oil prices were flat last week, but we have written several times about WTI/Brent differentials and the fairytale simply continues.
While Egyptian tensions remain the oil market's focal point, the issues are much broader and continue to revolve around the risk of contagion or regional instability. Demonstrations are being planned in major oil exporting countries. Protests continue in Yemen and rapid political reform is being seen in Jordan. In addition, Reuters has reported that in Saudi Arabia opposition activists have been unusually bold by publicly launching a political party and asking to be represented in the governance process.
The increase in risk comes at the same time that inventories have been drawn down to a lower level, leaving the buffer against disruptions dramatically lower than it was 18 months ago. That increases the potential for larger price swings, and hence volatility. It also increases the demand for inventory
Brent oil prices
WTI oil prices
