Views on commodities and energy
On the second day of financial services turmoil, CNBC keeps a live update of the crude oil price on lower-right of the screen. An interesting choice for a sentiment indicator, particularly with the benchmark stock indices little changed.
Lehman Brothers, Merrill Lynch and American International Group all are clearing members on major commodity exchanges. All three had been active in getting clients to invest in the rally that made commodities the best performing asset class of the past few years, Barani Krishnan writes in an analysis on the apparent breakdown in relationships in asset classes.
(U.S. crude traded down $3.96 to $91.75 a barrel by 9:55 a.m. EDT in what’s seen as a move to cash. The Reuters-Jefferies CRB Index, a global commodities benchmark, neared eight-month lows on Monday.)
Some other stories we’re watching in commodities today:
Hurricane Ike did not appear to inflict heavy damage on oil refineries, FEMA told reporters. Nonetheless, several offshore platforms in the Gulf of Mexico — including BP’s big Mad Dog facility — were damaged. It’s a sign a full recovery of oil and natural gas production in the region could be a long way off.
Farm Foundation Forum on rural health insurance issues.
Expecting Mexico and Central American coffee exports data and Nicaragua coffee figures
Venezuelan Oil Minister Ramirez and Chile’s Mining Minister on a visit to sign exploration contracts
And the question for the day… What now for the pension funds and commodities diversification theory?
U.S. crude futures have just settled down 5.4 percent at $95.71 a barrel. Turmoil in the stock market plays a role but early signs Hurricane Ike spared key energy infrastructure also weighed on prices. In Texas, Chris Baltimore writes “widespread power outages were the key hindrance. Electricity is the lifeblood to Gulf coast refineries.”
Early indications are that the storm caused only minor to moderate damage to platforms and coastal refineries.
The Chicago Board of Trade soybean market certainly provided some fireworks on Friday when the September soybean contract shot up a whopping $2.74 a bushel, or 22 percent just before it expired at midday.
It caused a few gasps on the trading floor on Friday. But most traders had long ago exited their Sept positions before Friday’s explosion.
“I don’t remember anything going that ballistic on the closing day of trade in beans … in wheat, yes but not beans,” one trader said Friday.
“Obviously somebody was caught short. There wasn’t a lot of open interest coming in today so it didn’t take much to do it.”
The CME Group, parent of the CBOT, said late Friday that after researching their historical data going back to 1972 – it was the biggest move in soybeans since then.
A strong cash market helped fuel the explosion. CIF soybean basis bids at the U.S. Gulf for first-half September jumped 75 cents by Friday morning as exporters and processors wrestled for nearby supplies. A combo of tiny year-end stocks and a rain-delay harvest has limited the amount of U.S. beans moving into the pipeline.
As far as the week ahead, grain traders will be looking at the bigger economic picture for direction. Early in the week, the biggest driver will likely be crude oil as traders react to whatever devastation that Hurricane Ike may have left behind.
The Midwest has already gotten soaked this weekend (7-10 inches in northern Illinois by Sunday morning). The eastern belt could see even bigger rains on Sunday into Monday – a fallout from Ike.
No surprise that it is stalling harvest, especially in the south where the crop is ripe. USDA’s weekly crop update issued late Monday will post harvest progress, which is already about 2 weeks behind even before Ike.
The National Oilseed Processors Assocation will release its August monthly crush figures before the CBOT markets open on Monday. But with the likely volatility in crude, rains stalling Midwest harvest, and the dollar on a roll it will be on the back burner compared to the bigger macro economic picture.
All eyes on what happens with Lehman Brothers. Regulators and bankers resumed a third day of talks on Sunday in a desperate attempt to reach a deal to sell Lehman and prevent the struggling bank from flooding financial markets with assets at fire sale prices.
Oil prices are rising as Hurricane Ike moves within 24 hours of striking the coast near Houston with a possible 20-foot (6-meter) wall of water. A slew of oil refineries located in Galveston Bay that account for around 12 percent of U.S. capacity were also in the storm’s likely path. Weather forecasters at Planalytics saw “major and long-term damage likely at the major refining cities.”
Ike, the federal response and updates of output will set the tone for the day. Here’s a look at output shut in the Gulf and list of oil companies shut and some other events in commodities:
The latest projections pointed Hurricane Ike toward the middle of the Texas coast, skirting to the west of the main region for offshore production in the Gulf. Nonetheless, oil companies have shut more than 95 percent of offshore production and 90 percent of refining capacity on the mainland. Weakening demand is still the driver for the market this morning; crude oil prices are under pressure
Elsewhere in the oil patch, an U.S. Interior Department report makes for unusually salacious reading, with claims that employees who oversaw oil drilling on federal lands had sex and used illegal drugs with workers at energy companies. “When confronted by our investigators, none of the employees involved displayed remorse,” inspector general Earl Devaney said.
It’s like deja vu for the top mining executives who are presenting their corporate pictures this week at the Denver Gold Forum, an annual industry get-together. Just like last year, top mining executives are still grappling with the touchy issues of renewing reserves, controlling costs and struggling to put projects into production.
Here’s a look at some of the latest Reuters stories out of Denver from reporter Frank Tang:
A surprise cut in production from OPEC and Hurricane’s Ike’s looming presence in the U.S. Gulf of Mexico are supporting oil prices above $100 a barrel. Just a daily move? Not to some. On OPEC, UBS told clients: ”We think this is a serious deal for a real cut… In this market, direction matters and this is a turn.”
It’s hard to grasp just what’s behind the volatility in oil prices lately, says Jim Landers of the Dallas News, taking on the Bubble Theory for the $40 a barrel drop in oil prices since July 11. (Pictured above: Havana before Ike hit)
Mining executives gathering this week for the Denver Gold Forum can’t be blamed for keeping at least half an eye on the market. Gold fell sharply earlier today with the sell-off spilling into other precious metals.
Among the companies presenting, Russia’s Polymetal forecast gold output of 250,000 ounces this year, 300,000 ounces in 2009, and 335,000 ounces in 2010, increasing to 460,000 ounces by 2011. More news from Denver here
Hurricane Ike kept oil prices ahead Monday as the storm barrels toward southern Florida but the wider trend on crude prices is less clear. Credit Suisse cut its third quarter 2008 U.S. crude oil forecast to $120 per barrel and fourth quarter forecast to $110 per barrel.
Here are some of the stories Reuters is watching today in other commodities markets.
Chicago Board of Trade grain markets deflated last week as the dollar soared to an 11-month peak. It’s a pattern that began last month and will continue as long as the dollar rises and makes US grains more expensive to overseas buyers.
A big part of the record rallies in commodities over the past 18 months or so was tied to the weakness in the dollar. As the greenback hit new lows, grains soared to record highs. Now that the dollar is up as inflation fears underpin ideas of firm U.S. interest rates, commodity funds have lightened their long positions in CBOT markets – clearly marked by the big drop in open interest over the past month.
In the most active CBOT grain contract, corn, open interest fell 3 percent in the past week — down 32,000 contracts to 1,050,883 contracts by Friday’s open. Since August 1, corn open interest has dropped 14 percent.
Commodity funds have been hit hard as they’ve seen portfolio values slide.
The latest fund to close was the Ospraie Management LLC flagship fund after it plunged 27 percent in August on losses in energy, mining and natural resource equity holdings. It was one of the biggest closures ever of a commodities-focused hedge fund.
Besides the firming dollar, Chicago grain traders will be keeping an eye on crude oil as a sign for market direction. Hurricane Ike, the second storm to hit or threaten the Gulf Coast in less than a month, could spark a rally in crude oil if it appears to threaten coastal refining operations. If that happens, grains will likely follow higher, traders said.
By midday on Sunday Hurricane Ike was bearing down on Cuba and forecast to swirl into the Gulf of Mexico by Tuesday. Its path is uncertain but the U.S. Gulf Coast from Texas to Florida look to be at risk.
Any hit to that area also threatens U.S. grain exports. Grain elevators in the New Orleans area as of Friday were still trying to reopen from Hurricane Gustav’s hit last week.
Last but not least, traders are waiting for USDA to issue its next U.S. corn and soybean production forecasts on Sept. 12. Floor traders have been arguing about the size of the U.S. corn and soybean crop since USDA’s surprisingly big yield forecasts last month. USDA pegged the second largest corn crop in history at 12.3 billion bushels and the fourth biggest soybean output at 2.97 billion — despite the shaky start to the growing season and after one of the worst floods on record to hit the heart of the Midwest Corn Belt in June.
But it remains a mixed bag among grain traders and analysts whether the government will raise or cut its production outlooks. Bottom line: the September report should give traders a clearer picture of production as both corn and soybeans were still far from maturity last month when the first USDA field surveys of the season were conducted for the August report.