Weekly Commodity Update – Higher supply and demand uncertainties

by: Hans van Cleef

Gas prices under pressure

Earlier this week, European/Dutch TTF gas prices dropped. Lower consumer demand resulted in storage inflows, pushing prices to the lowest level of 2013. APX TTF dropped below EUR 25/MWH before nudging higher. Despite the storage inflows, stock building is much behind schedule compared to last year. We expect continued winter storage building in the coming weeks, which could be supportive for natural gas imports and natural gas prices. However, total storage building could be lower than we’ve seen in the past years as some of the gas demand is being replaced by coal due to low prices. Also in the US, natural gas prices are under pressure. In fact, the Henry Hub contract dropped to the lowest level in 5-months due to mild weather conditions in the Midwest and Southeast. Currently, natural gas is trading at USD 3.30/mmBtu. As a result, the downtrend remains intact. This downtrend started very late this year, namely mid-April, due to extremely cold weather conditions. We don’t expect US natural gas prices to drop much further as industrial demand as well as winter stock building demand will continue to increase while the dip in seasonal demand will soon be over.

Supply driver weigh on oil

Signals that Libya increased its production, and news about higher production in the North Sea, resulted in increased downward pressure on oil prices. The fact that the American Petroleum Institute reported a bigger than expected draw from weekly US crude stocks (-3.66 million barrels vs -1.2 million barrels expected), hardly had any impact on oil prices. However, tonight’s EIA weekly crude data will be closely watched and could result in some extra pressure if released around expectations. Nevertheless, the downside is limited after US services sector showed stronger growth in July and the stronger than expected PMI (50.3 vs 49.9 expected) for China.

Brent versus WTI

The new Iranian President Rouhani indicated that Iran is ready for ‘substantive’ nuclear talks and signaled its willingness to reopen the discussion on its nuclear programme. If these talks indeed prove to be constructive, increasing hopes for a lasting diplomatic solution, the risk premium which is priced into oil prices could decline further. As a result, oil prices could drop several dollars. Focus for this week will be on the Chinese and US data as well as the release of the IEA and OPEC monthly oil reports.

Mixed direction in softs

The performance of soft commodities were mixed. Weather related news in different areas resulted in opposite directional moves for some soft commodities. Corn, for instance, dropped to the lowest level since 2010 as favourable crop weather could lead to a record crop in the US. Currently, US corn is trading at USDc 460/bushel. This is almost 40% below this year’s high of USDc 747.50/bushel set in the first week of February.

Cocoa, on the other hand, touched a 3-month high triggered by dry weather conditions in top cocoa producer Ivory Coast. The drought threatens the cocoa crop and pushed prices up to USD 2.399/tonne, which is in line with our expectations.

Some other remarkable news came from the International Sugar Organisation (ISO). The ISO indicated that the world sugar surplus will shrink to 3.5 million tonnes in the 2013/14 crop year which begins on October 1st. This is almost 70% lower than this year’s surplus. The main reason is found in the fact that some countries, including China, Russia, the EU and the US, have reduced their output as a result of the low sugar prices.

Copper benefits from momentum

Copper prices gained somewhat and even neared the upper line of the downtrend channel. The support was triggered by an expected rise of Chinese demand after the stronger than expected PMI data, in combination with a weaker USD. However, our growth outlook for China suggest that, while a huge drop in copper demand is unlikely, a significant boost cannot be expected either. A similar move was seen in platinum and palladium. It was remarkable that other base metals were trading more or less sideways. Later this week several Chinese figures will be released like: the trade balance, PPI, CPI, industrial output and retail sales. These data releases will almost certainly lead to increased volatility in many base metal prices, especially if the outcome is different than consensus. We expect copper prices to rally if Chinese data surprises on the upside. Our three-month forecast for copper is USD 7,100/lb versus current spot at USD 7,005/lb.