Views on commodities and energy
Oil prices have slumped more than 10 percent in less than two weeks as traders focus on signs a slowing U.S. economy could cut into world energy demand growth. After climbing to a record over $99 a barrel Nov. 19, the price of crude has dropped to below $88.
The decline in crude prices may eventually filter down to consumers in the form of cheaper gasoline and heating oil. But it could also lead oil cartel OPEC to decide against a widely-requested increase to crude output when it meets in Abu Dhabi on Dec. 5.
Now that November is in the books, some CBOT grain traders said commodity index funds will also begin to close their books for the 2007 year, cementing robust gains. For the first 11 months of 2007, wheat posted the biggest jump — up 73 percent — followed by soybeans, up 58 percent.
USDA skips December for U.S. crop production reports, with final harvest ideas pretty well set and next year’s planting ideas too vague to feed trading as yet. South American weather is a volatile factor after the first of the year. The year-end holidays also drain the markets of liquidity as traders take time off.
Producer and director Aaron Woolf’s new film “King Corn” has provoked a rich debate among moviegoers about the wisdom of U.S. farm subsidies, but taking on big corn was so difficult it has left him poor.
The film profiles two recent East Coast college graduates, who after reading reports of the declining nutritional value of U.S. food, move to Iowa to grow one acre of corn.
With oil prices flirting with the $100-a-barrel mark, analysts are wondering how much the U.S. consumer can bear.
A Reuters/Zogby poll released Wednesday shed some light on the question, showing that more than three-quarters of Americans will cut fuel use or slash spending on retail and entertainment if their energy bills keep on rising.
Potash is a hot commodity, what with exploding grain prices, limited world supplies, and soaring fertilizer company stocks. But potash also became very funny fodder for popular Canadian political satirist Rick Mercer, who traveled 3,000 feet underground in a Potash Corp mine on his television show. “It’s like Dr. Evil’s cave,” said Mercer, who confessed he knew nothing about potash before his trip to Allan, Saskatchewan.
Traditionally, trade during the week of the U.S. Thanksgiving holiday is slow — especially late in the week. But there’s nothing traditional about these markets, so it is anybody’s guess how much volume and volatility there will be.
The soy complex — soybeans at a 19-year high and soyoil at a 33-year top — will likely be the leaders again next week, whether it’s profit-taking or fresh speculative buying. If January soybeans break $10.99-1/2 — it will be the highest price for a spot contract since the summer of 1973 when it reached $11.05 a bushel.
There’s been rumblings around the Chicago markets during the week ended Nov. 16, especially after Thursday’s broad-based sell-off in U.S. commodities, that the “funds” may be getting ready to liquidate some long positions before the holidays.
Commodity funds added about 5,000 contracts to their net long soybean position during the week that ended on Nov. 13, based on Friday’s CFTC report.
Other factors to watch:
Australian and Argentine wheat harvest. Traders are waiting for Southern Hemisphere wheat supplies to move into marketing channels. They got a scare on Thursday when the heading wheat crop in Argentina was hit with a freeze, which sent the market higher, bucking a broader sell-off in commodities.
South American planting weather for soybeans. Of most concern is Rio Grande do Sul and Parana, Brazil where it’s been too wet and slowing plantings. The areas saw up 2.0 inches over the weekend with another 1-2 inches forecast for this coming weekend.
U.S. winter wheat conditions. Crop condition have been declining due to dryness in the southwestern hard red winter wheat belt. USDA will issue its next crop update on Monday afternoon.
Export demand. There was floor talk late Friday that China may be covered for soybeans through January after this week’s buying spree.
And of course — and most influential — the movement in the crude oil market and the value of the dollar.
Members of the U.S. congress may face pressure from voters as they head home for the Thanksgiving break to pass new legislation to improve vehicle fuel efficiency as pump prices look to approach record levels once again.
Supporters of the legislation say that in addition to the environmental benefits, increasing efficiency levels will help push down prices by cutting U.S. demand.
In the words of the head of Brazil’s largest coffee coop Cooxupe, Joaquim Libanio, “Any attempt to put a number on the new crop (now) is just a crap shoot.”
Unlike many coffee producing countries, Brazil’s coffee belt goes through a peak and trough of production every other year in what’s called its biennial cycle. The current season that ended a 32 million bag harvest in July was a low output year as trees recovered from the bumper crop of 42.5 million bags in the previous year, by official estimates. If we crudely take the 27.6 percent upward swing between the 2005/06 crop of 33.3 million bags and the 42.5 million bag crop of 2006/07 and apply it to the current crop looking forward to the new crop we get the number 40.8 million bags.
The above graph shows open interest for calls and puts for crude oil contracts on the New York Mercantile Exchange, with a mass of open interest in calls that won’t make money unless oil rises over $110 a barrel by December 13.
The influence of options positions in oil markets is growing but the financial fundamentals that drove this month’s rally to near $100 a barrel are unlikely to repeat soon.
The International Energy Agency said Tuesday that high oil prices were starting to cut into global energy demand growth, a factor that fed into oil’s dramatic sell-off of about $8 from last week’s all-time high.
Have you found ways of cutting your energy use, either by cutting road travel, opting for a smaller car, or turning down your thermostat?