Commodity wrap - Oil, Natgas, Gold, Cocoa (17.12.2024)

Oil:

• Brent Crude is undergoing another price correction move, after reaching its highest levels since November 22nd, hovering just below $75 a barrel.
• OPEC has recently revised downwards its growth forecasts for demand in 2024 and 2025, justifying the recent decision to postpone the restoration of production.
• OPEC+ intends to restore production by 180,000 bpd from April. The United Arab Emirates is also delaying the increase in production by 300,000 bpd to April.
• If OPEC’s voluntary production cuts of 2.2 million bpd were reintroduced earlier as previously planned, the market would face a significant surplus, potentially pushing prices below $50 a barrel.
• Without a rebound in demand from China, Europe, and the US, oil prices will largely depend on supply dynamics and geopolitical developments. Moreover, a price decline to the $50-60 per barrel range could potentially stimulate economic activity, ultimately boosting demand growth.
• The IEA indicates that oil demand will grow by 1.1 million bpd next year, 100,000 bpd higher than the EIA forecast. The International Energy Agency (IEA) forecasts that non-OPEC+ countries will increase production by a total of 1.5 million bpd in 2025, compared to the EIA's projection of approximately 1 million bpd for non-OPEC+ nations.
• OPEC+ states in its latest report that supply growth next year will amount to 1.45 million bpd, which is a downward revision from the previous forecast of 1.54 million bpd.

Oil remains under pressure, although theoretically, the crack spread could suggest a slight recovery towards the end of the year, in line with seasonality. On the other hand, the same indicator suggests a return to the current price levels within the next few weeks. Source: Bloomberg Finance LP, XTB

US oil inventories are lower compared to the previous year and the 5-year moving average. Nevertheless, significant global uncertainty and expected oversupply are keeping oil prices at low levels. If inventories rebound next year, this could weigh heavily on a sharp price decline. Source: Bloomberg Finance LP, XTB

The price is under pressure, just ahead of contract rollovers, which are expected to open lower than the current price. Key support for prices is around $71.5-72.0/barrel. Source: xStation5

Gas:

• Gas prices have come under selling pressure, just before the rolling of futures contracts. The term structure is currently in short-term backwardation, meaning the next few rollovers will be negative.
• The recent price increase above $3.5/MMBTU was driven by a sharp decline in inventories. Calculations based on the daily gas market balance suggest that the decline in inventories for the previous week could be around 110 bcfd. However, this week’s decline of inventories (that will be published next week) is estimated to be half that amount.
• A decrease in gas consumption is observed, linked to rising temperatures. A return of lower temperatures is expected for a few days in the eastern US around the holidays, but significantly higher temperatures are forecast for the last days of December, which should lead to continued declines, in line with seasonality.

Gas consumption has returned to lower levels. Source: Bloomberg Finance LP, XTB

Weather forecasts for the end of the month point to extremely higher temperatures compared to the standard. Source: Bloomberg Finance LP, NOAA

Gas prices are under pressure, just before the rolling of futures contracts. Source: xStation5

Gold:

• The market fears a hawkish rate hike from the Fed which is significantly important for the price of gold 
• US 10-year bond yields have risen to 4.4%, which could suggest a higher neutral rate in the future.
• Gold currently appears to be significantly undervalued compared to the strong equity market, looking at valuations from April or November.
• Gold is also cheaper from the perspective of the US dollar's strength. Gold has also been more expensive relative to oil this year.

Gold relative to key global assets. Although gold was priced quite high in November, we are currently observing consolidation. Source: Bloomberg Finance LP, XTB

The price of gold has been retreating for several sessions, but it is approaching a demand zone between $2600-2625 per ounce. Seasonality points to a stronger rebound at the end of December and the beginning of January. However, a negative temporary reaction to the Fed's last decision this year, which will take place on Wednesday, December 18th at 8 PM CET (2 PM ET), cannot be ruled out. Source: xStation5

Cocoa:

• The first days of the second half of December are bringing new record cocoa prices.
• Cocoa prices are approaching the $12,000 level, surpassing previous record levels from April this year.
• Current cocoa harvests in West African countries are of lower quality due to earlier heavy rains. On the other hand, excessively high temperatures are currently reducing harvest prospects in the mid-crop season, which begins in April.
• In the 2023/2024 season, the largest production decline occurred in the mid-crop sector.
• Despite ongoing deliveries being approximately 20-30% higher than last year, inventories tracked by ICE continue to decline and stand at just over 1.4 million bags. The lows from the turn of 2003 and 2004 were 1 million bags.
• The International Cocoa Organization (ICCO) recently increased its deficit forecast for the past 23/24 season to -478,000 tonnes. This deficit was the largest in history.
• At the same time, we have a decline in inventories available for consumption to just 27%, the lowest level in 46 years.
• A Bloomberg survey indicates that production in Côte d'Ivoire in the 24/25 season will reach 1.9 million tonnes compared to government forecasts of 2.1-2.2 million tonnes.

Cocoa inventories on the ICE exchange have fallen to their lowest level since 2004. Source: Bloomberg Finance LP, XTB

The deficit in the cocoa market in the past season amounted to 478,000 tonnes. Source: Bloomberg Finance LP, XTB

The price of cocoa is close to $12,000 per tonne. Source: xStation5