23 August 2010 at 10:30 GMT
Written on behalf of Ole S. Hansen by Kjeld Lynggaard, Senior Manager, Saxobank Trading Advisory.
ENERGY
The stock market traded on a weaker note last week which put pressure on the energy complex. Crude oil continued to trade in wider range of USD 75-80 with the Bollinger-band bottom still around 73.24, which will act as support for Crude. Inventory buildup had continued during the US driving season to the surprise of market analysts, so despite intact risk appetite, crude oil has decoupled from its 100% correlation with S&P during the summer 2010.
The hurricane season is approaching and seemed to put a floor under the market as the La Nina weather pattern normally causes higher hurricane activity following a calm 2009 hurricane season on the back of El Nino. The Gulf Of Mexico oil spill risk factor has now been priced out of the market and is not supporting crude prices unlike the previous couple of months.
The most significant event has been the widening gap between Brent and WTI oil during last week with WTI dropping from USD 1.5 premium to USD 1 discount to Brent on the October contracts. This is down to lower Brent production due to North Sea maintenance and inventory buildup of WTI in North America as floating storage is taken onshore and Canadian crude supply comes in.
The second most significant event has been the increased contango of crude forwards due to the above-mentioned inventory build. This put pressure on the front contracts.
Natural Gas also drifted lower on weaker demand as the US heatwave retreated, meaning less electricity demand - mainly generated by use of coal and natural gas. Late week inventories were in line with expectations, but natural gas was dragged lower by oil.
SOFTS
Coffee prices rallied to a 12-year high on speculation that too much rain in Colombia and potential frost could damage crops in Brazil, the world's 2nd largest producer of Arabica beans. The commodity has gained 33% this year and is at its highest level since 1998 despite crop conditions remaining intact. Global tightening of inventories is the cause of the rally as speculative investors have increased long positions, according to CFTC data from CME.
Arabica coffee is grown mainly in Latin America and brewed by specialty companies including Starbucks Corp. Robusta beans, used in instant coffee, are harvested mostly in Asia and parts of Africa.
Cocoa was trading weaker every day - ever since a now renowned hedge fund took supply of 7% of annual production a few weeks ago. Cocoa fell to an eight-month low in London before new crops in West Africa may add to supplies. The Ivory Coast and Ghana, the world’s largest growers, usually start the bigger of two harvests in October
Sugar was the winner of the week. Sugar prices remained the most volatile soft commodity with the weekly change of weather patterns, with Pakistan flooded and Russia scorched, both having crucial impact on sugar prices recently. Sugar had continued to shine on signs of tightening supplies up front. White sugar’s price premium over raw sugar continue climbing along higher prices in general. The curve is moving into backwardation which normally signals a shortage.
GRAINS
The major move in relative terms was selling of wheat, after a massive rally, against buying of corn The price ratio dropped almost 30% from 0.75 to 0.52 in a matter of days on the back of the Russian drought trigger, which spurred speculative shorts to be covered in wheat prices causing a 60% rally.
The replacement for feed wheat is corn and when panic settled, corn prices caught up with wheat rally and ratios improved.
Global wheat inventories remain much higher than corn and soybean stocks at ratios of 25%, 8% and 10% respectively. So a wheat shortage is not imminent. But wheat remains supported by ongoing rumors of Russian imports and Black Sea regions' export bans.
PGM’s
Precious metals had a volatile week, with gold demand from ETFs recovering, physical demand from India picking up and safe-haven demand on the back of weaker stock markets. China did open for exports and imports of gold and the liberalization could be interpreted as bullish for gold.
Both silver and platinum prices dipped this week and gold remains the best performer of the PGM’s in the last 2 weeks. The chart below shows gold prices relative to platinum prices, with significant volatility during the last 2 weeks.
