Weekly Update (Week of 2/6/23)

 Weekly Update: February 6, 2023

This will be the general format for a weekly update post. I will be following closely a select handful of commodities that are of the most interest to me, providing technical and fundamental analysis of each. Products may deviate from time to time based on what is hot and trending, but generally, these will be my main focus. As of this post, the bulk of my interest lies in Coffee/Cocoa (Softs), Gold (Precious Metals), and Crude Oil (Energy).

General Major News/Economic Developments

U.S. Trade deficit hits a record $948.1b in 2022 as the US continues to rely heavily on imports

• Major imports include Machines/Computing, Vehicles, and Oil/Fuel. In-country developments in these areas could be key to unlocking a lower trade deficit and cheaper prices for technology and fuel domestically. 

North Dakota city turns against plans for a Chinese-owned corn mill

• $700mm corn mill near the Minnesota border by a Chinese company was in the works, citing new jobs, added tax revenue, and expansion of corn commerce. The mill was declared a security risk by the Air Force, and the plans are now being rejected.

Metals

Developments/News

Gold

Technically, gold spot prices have been stuck between $1700/oz and $2000/oz with prices currently trading at about $1800/oz. We have been in this range since the run over the Summer of 2020. 

Inflationary expectations are one of the main drivers in gold prices in terms of shorter-term movements. As Powell and the FOMC continue to increase interest rates, it could be expected that Gold prices follow suit as investors flow in to find a better store of value than cash/bonds/equities.

Silver

Technically, silver spot prices are range-bound between $22/oz and $28/oz.

Silver prices are more volatile than Gold due to the more illiquid market and demand fluctuations, but it is still generally seen as a "safe haven investment" like gold. In crisis situations, there is generally strong upwards pressure on silver prices. There have been developments in new types of aluminum alloys that are acceptable replacements for silver in certain technologies. However, it is new solar photovoltaic systems that make for a net bullish stance on silver's use in technology.

Copper

Technically, copper prices seem to be in an uptrend since October. They have crossed above their 8-period moving average and are now seeming to hold value around $4.05/pound. 

Copper prices are significantly affected by the health of the global economy due to its widespread demand across a variety of sectors. Power generation, transmission, construction, electronics, and factory equipment are all sectors that have copper applications.

There is no substitute for copper's use in EVs, wind, and solar energies. Its appeal to investors is that of a key green metal for which demand will rise as the United States (one of the biggest producers and consumers of vehicles) moves towards electric vehicles. 

Agriculture

Developments/News

Corn saw a 176% increase in exports from the USA as measured in Nov 2022. If the plans for the new $700mm corn mill had gone through, this number could have risen significantly, resulting in a larger domestic supply (lower domestic prices) and a larger world supply (lower world prices).

Coffee

Coffee prices declined in January, but regained momentum by the end, closing in at about 174.95 cents/pound. The first period of the coffee year 22/23 (Oct 22 - Dec 22) saw exports decrease by about 2.8% to 30.27mm bags. 

In the 12 months ending Dec 22, exports of Arabica totaled 79.67mm bags, and Robusta had about 48.29mm bags.

Prices are affected by foremost supply and demand and secondly by geopolitical factors. One of the biggest factors is frosts in Menas Gerais, Brazil (a significant exporter of Arabica coffee). Further impacting the price are the transportation costs and costs of production. Tumultuous weather such as heavy rains also leads to coffee rust and delays in pesticide application resulting in the possibility of a lower crop yield.

Consumer discretionary income also plays into the demand side of things as coffee drinkers grapple with the options from their local coffee shops, chain stores, and at-home coffee brewing. Coffee is increasingly becoming a popular beverage choice for the young adult. 

Non-chain, independent coffee shops sell around 100 lbs of coffee per week. This typically costs between $3.50 - 4.25 per pound.

Columbia exports for January are down 19% YoY

Vietnam export estimates are up 14.1% YoY

Brazil Arabica crop estimates are up 14.4% YoY

Cocoa

Cocoa prices have been relatively stable throughout the last 5 years, ranging between $2,200/tonne and $2,800/tonne.

In general, when a currency value goes down, the assets that are priced in that currency soar. For example, on Tuesday, the British Pound fell to a 1-month low against the Dollar which sent London cocoa (priced in Sterling) soaring.

Nigerian Dec cocoa exports fell a staggering -73% YoY to 36,571 metric tonnes.

Ivory Coast cocoa farmers sent a total of 1.62mm metric tonnes to ports from Oct 1 - Feb 5

Global demand is tepid as it remains relatively stable with a -8.1% fall YoY for Q4

Wheat

The wheat market experienced a large supply shock during Russia/Ukraine conflicts. /ZW futures skyrocketed as ports and trade closed cutting off 30% of the global supply. /ZW futures prices experience an average of about 15pt swings in intraday trading.

December wheat shipping numbers reported around 1.079mm T. That was the lowest volume on record for any month since reporting started in 1967.

Energy

Developments/News

Crude Oil (Brent)

The price of Brent Crude oil can be seen to be riding a general uptrend over the last few years. We are currently in pullback territory. 

Saudi Arabia has raised crude prices for March delivery, sending prices higher after a lackluster morning.

Initially, oil prices fell to a 7-week low following a rally in the dollar (trend to notice between commodity prices and currency value) to a 3-week high.

OPEC controls a large chunk of the supply in the markets. Goldman Sachs predicts that OPEC will only start to reverse supply cuts in the 2H23. 

Further, there have been signs of weakness in China's economic recovery. Although spending soared around Lunar New Year, there were signs of weakness in manufacturing and the sales of cars and homes which is indicative of the idea that China is not yet set steadily on the path to recovery. 

Crude Oil (WTI)

WTI Crude closed sharply higher (+4.09%) on 2/7/23 following an expectation for increased demand for energy in China. Weekly inventories are expected to climb 2mm barrels. U.S. crude production numbers remain unchanged this week.

The significant data points to track when it comes to oil seem to be inventory (current supply), future supply, and expected global demand. OPEC decisions are also highly influential.

Liquified Natural Gas

Natural gas enjoyed quite the uptrend over the last couple of years, but has experienced a significant downturn in recent months. Interestingly enough, this pullback in prices is continuing as demand actually rises for the product. 

Russia has largely cut off its gas supplies to Europe in retaliation against sanctions imposed on it by other countries. The cutoff has largely disrupted trade flows and led to fuel shortages in many emerging and developing economies. Russia shattered its reputation as a reliable supplier leaving the market in no man's land as investors and consumers try to deduct the next moves. 

Footnotes

For my first post, I went a little deeper into things I ended up rabbit-holing into and picked up on a number of important terms when discussing the status of each product. Next week, I will be looking into how each product is quoted and priced and ascertain what the best possible method of tracking prices will be for the foreseeable future. For now, enjoy these Thinkorswim and TradingView charts as well as my takeaways and summarized research found on Barchart, Reuters, WSJ, The Financial Times, and other great sources.