AFKI Commodities Report: Brent Oil Bounces Off 16-Month Low

Written by Lynda Davies

In this AFKI Commodities Report, Brent and U.S. crude moved up from multi-month lows on prospects of a ceasefire between Kiev and Moscow in Eastern Ukraine. Palladium futures eased back from a fresh 13½-year high on the news. Among soft commodities, volatility remained a feature in arabica coffee trading and ICE cocoa futures dipped to a one-month low after recent peaks.

Crude oil futures were sharply higher at midweek after plunging to multi-month lows on Sept. 2. Reports that Kiev and Moscow were working on a ceasefire plan to end the conflict in Eastern Ukraine raised hopes for stability in the region, boosting oil futures. According to unconfirmed reports, Ukraine’s President Petro Poroshenko and the main pro-Russian leader said they’d order a ceasefire on Sept. 5, provided an agreement is signed to end the five months of fighting.

October Brent crude on London’s ICE Futures exchange rallied $2.43 to close at $102.77 a barrel on Sept. 3, its highest settlement since mid June. On the New York Mercantile Exchange (Nymex), light, sweet crude futures for delivery in October climbed $2.66 to finish at $95.54 a barrel — the highest settlement in a week.

Brent crude futures for October slipped to their lowest in 16 months, closing at $100.34 a barrel on Sept. 2, weighed down by the prospect of weakening demand growth in Europe and China. U.S. crude for October fell $3.04 from last week’s close to settle at $92.88 a barrel amid pressure from ample supplies and a firm U.S. dollar. This was the nearby West Texas Intermediate (WTI) contract’s weakest close since mid January. Nymex was closed on Sept. 1 due to the Labor Day holiday.

Crude oil prices have been on a downtrend since the end of June as worries about supply disruptions in Iraq and Libya waned and the market refocused on ample global supplies and a weak demand outlook.

This week saw more concerns about oil demand in key consumer China. The country’s official Purchasing Index, which is a measure of larger state-owned companies’ new orders, production and new export orders, slipped to 51.1 in August from 51.7 in July. The July figure marked a 27-month peak on recovering exports, China’s National Bureau of Statistics reported on Sept. 1. A figure above 50 represents expansion, while one below 50 represents contraction.

HSBC-Markit also reported that its China manufacturing PMI for August fell to 50.2, down from July’s 18-month high of  51.7. “This signalled only a fractional pace of improvement that was the weakest in three months,” HSBC-Markit said a Sept. 1 statement. Eurozone manufacturing fell to its lowest in 13 months in August, as companies faced slower increases in new orders and new export business, Markit Eurozone Manufacturing PMI data showed on Sept. 1.


Gold bounces off 2½-low, palladium eases off recent highs

Gold bounced back at midweek on hopes of a ceasefire in Ukraine after earlier dipping to two-and-a-half-month lows. Gold for December delivery on the Comex division of Nymex touched $1,261.19 an ounce on Sept. 3, the weakest for a most-active contract since mid June. However, December gold clawed back to settle $5.3 up on the day at $1,270.30 an ounce on news that Kiev and Moscow were working on a ceasefire plan.

The precious metal earlier had come under pressure from a strong U.S. dollar, which climbed to its highest since January against a basket of 10 currencies amid further positive signs for the U.S. economy. This reduced the appeal of the precious metal as a safe-haven investment, despite concerns about ongoing conflict in the Middle East and Ukraine.

U.S. manufacturing in August grew at its fastest rate since April 2010, according to Markit. The final seasonally adjusted Markit U.S. Manufacturing PMI reached 57.9 in August, up from 55.8 in July.

“The U.S. manufacturing sector has gone from strength to strength this summer, with August’s improvement in business conditions the sharpest for over four years,” said Tim Moore, Markit senior economist in a Sept. 2 media statement.

Gold has been under pressure amid a raft of positive economic data for the world’s biggest economy in recent weeks which has raised concerns that U.S. interest rates will be raised sooner than earlier had been anticipated. Geopolitical concerns for the time being appear to have taken a back seat.

Palladium eased back to its lowest in almost two weeks amid talks between Kiev and Moscow of a ceasefire in Ukraine. Late last week and in early trade this week, U.S. palladium futures for December delivery on Nymex had climbed to a fresh 13½-year high of $913 an ounce on concerns that the U.S. and E.U. were set to impose further economic sanctions on Russia. In London, the spot metal had been fixed as high as $911 an ounce in the p.m. fix on Sept. 1.

Fears that Russia would reduce its export shipments of palladium in retaliation for Western sanctions have been supporting palladium markets. Russia is the biggest supplier of the precious metal, which is used mainly in auto catalysts, and accounted for close to 40 percent of world supply in 2013. The market already is heading for its biggest global supply deficit this year; Mitsubishi Bank, like many analysts and industry watchers, predicts palladium will record its largest annual deficit this year — at least 2 million ounces, according the bank, “which should help to continue to underpin prices,” it said.

December platinum settled at $875.95 an ounce on Nymex on Sept. 3, down $37.05 on the Aug. 29 close at $913 and the lowest for a most-active contract since Aug. 21. Spot palladium on London’s Platinum and Palladium Market was $885 an ounce in the p.m. fix on Sept. 4.

Platinum, meanwhile, continues to trade mainly sideways. On Nymex, the precious metal for October delivery settled $3.6 up at $1,412.50 an ounce on Sept. 3. It had finished last week at $1,424.70 an ounce.

Arabica coffee volatility continues

Arabica coffee futures continued their rally on New York’s ICE Futures exchange early this week amid ongoing worries over the  size of top-grower Brazil’s crop this year and next.  Prolonged drought earlier this year and cases of early flowering in arabica coffee trees in some of the country’s key southern growing regions have led to output forecasts being slashed for the current crop and the 2015-2016 (April 1-March 31) season.

Benchmark December arabica on ICE touched $2.0995 a pound on Sept. 2, its highest in a month, before settling at $2.0795, up $0.0737 on last week’s finish. The ICE Futures U.S. exchange was closed for the Labor Day holiday on Sept. 1. In April, supply concerns fuelled by Brazil’s drought-damage worries lifted second-month arabica on ICE to a two-year high of $2.19 a pound.

However, ICE arabica coffee futures eased back on Sept. 3 amid a selling spree of arabica holdings and news of the arrival of widespread rains over Brazil’s central and south coffee-growing areas at midweek, albeit mostly light rains. December arabica fell $0.0662 to close at $2.0133 a pound.

Rabobank is among the analysts and industry watchers who expect Brazilian production risks to continue to support the outlook for ICE arabica coffee futures. As noted in its latest Agri Commodities Monthly report, released Sept. 1, Rabobank expects some price volatility to continue through the key flowering period of September to October.

Robusta coffee futures on London’s NYSE Liffe exchange continue to firm, mainly on arabica’s coat tails. November robusta settled at $2,113 a tonne on Sept. 2, up $32 on the day. But Liffe robusta eased back to close $51 lower at $2,062 the next day.

Cocoa futures in New York touched a one-month low on Sept. 3 as the market focused on a favorable production outlook for West Africa. ICE cocoa futures for December delivery dipped to $3,144 a tonne before settling at $3,161 a tonne, down $1.50 on the day. Last week, December ICE futures hit $3,300 a tonne on Aug. 27, their highest since May 2011.

Cocoa futures on Liffe for delivery in the same month finished at £1,996 a tonne Sept. 3, up £6 on the day. On Aug. 29, Liffe December cocoa touched £2,061 a tonne, the highest for a second-position contract since March 2011.

Late last week, the London-based International Cocoa Organization (ICCO) revised its forecast for the global cocoa balance in the 2013-2014 season, which ends Sept. 30, shifting its view to a supply surplus of 40,000 tonnes. It previously forecast a 75,000-tonne supply deficit. ICCO said the revision was mainly on account of a “larger-than-previously estimated” main crop in top-growing country Cộte d’Ivoire and in Ghana, as well as a stronger-than-anticipated mid crop in Cộte d’Ivoire.

Raw sugar futures on New York’s ICE Futures U.S. resumed their downward trend after briefly rallying Sept. 2 amid technical corrections. The October contract on ICE climbed to finish at 15.86 cents a pound, up 39 cents on last week’s close, before heading south again on Sept. 3, as ample nearby supplies and weak physical demand weighed on market sentiment. ICE October raw sugar settled at 15.63 cents on Sept. 3, down 23 cents on the day.

While conceding that the shor- to-medium-term fundamentals for raw sugar remain heavy, Rabobank is among the analysts that see a supportive longer-term price outlook, thanks to a tightening supply-and-demand balance as weather risks persist across top producer Brazil’s Center-South, with declining agricultural yields. The bank in its latest Agri Commodities Monthly widened its 2014-2015 global supply deficit to 2.5 million tonnes, while lowering its 2013-2014 sugar surplus estimate to 350,000 tonnes.

“Nearby sugar futures have traded below the cost of production for the last two years at unsustainable levels and have limited the returns across the sector,” Rabobank said.

“The lack of area expansion and declining agricultural yields across key producers will continue to drive a tightening of the supply-and-demand balance in the upcoming seasons, as consumption growth outstrips that of production, supporting the longer term price outlook,” the bank said.

White or refined sugar on London’s NYSE Liffe exchange traded largely flat, with the benchmark October contract finishing at $425.60 a tonne Sept. 3, down $3.15 on the day but up $2.35 on last week’s close.

While care has been taken to ensure that the information contained in this report is accurate, it is supplied without guarantee. The author can accept no responsibility for any errors or any consequence arising from the information provided.