Crude oil: demand concerns still weighing
Crude oil spent the week consolidating following an early May slump that was the culmination of weeks of weakness following the surprise OPEC+ production cut on April 2. Weak refinery margins raising the prospect for lower crude oil demand, China growth concerns and traders being forced out of longs that was initiated following the OPEC production cuts all played their part in sending prices sharply lower. Once support at $80 in Brent and $76 in WTI broke, the floodgates opened and a March-style sell-off driven by fresh short selling followed before support was found near the March lows, potentially raising the prospect for price supportive double-bottoms being established.
In the short term, weak demand concerns continue to pile up for the crude oil market, with US economic data on cooling inflation and labor market conditions further igniting slowdown concerns and China’s inflation and credit data also pouring water on the China demand surge hopes. There were however also some reports that underpinned oil prices later this week, most notably US energy secretary Jennifer Granholm saying the government aims to purchase oil to refill the Strategic Petroleum Reserve after a congressionally mandated drawdown ends in June. OPEC meanwhile increased its outlook for China’s 2023 oil demand, thereby supporting expectations for a rise in global demand of 2.33mb/d, a prediction that contradicts the current downward trend in oil prices.
For now, crude oil remains challenged and a lot of work in terms of stabilization and consolidation is needed to change that. We would consider a move back above the mentioned levels, most notably the psychologically important $80 level in Brent as a sign of emerging stability.
Most shorted grain market since 2020 as planting gather momentum
The outlook for a strong production year recently drove the Bloomberg Grains index to a 15-month low before bouncing, and speculators responded the weakness by shifting to a grain sector net short position for the first time since August 2020. In the week to May 2, all six grains and soy contracts saw net selling led by corn and soybeans. One current focus is the weekly planting progress reports, released on Mondays by the USDA and in the latest they said that 35% of US soybeans were planted as of May 7, the second fastest pace on record. Corn was 49% planted, ahead of the 5-year average at 42% and last year's 21%. Meanwhile, wheat was only 24% complete, well below the 5-year average at 38%.
The market was also looking ahead to Friday’s World Agriculture Supply and Demand Estimate report from the US Department of Agriculture. The report included the USDA’s first expectations for stock levels of key crops at the end of the 2023/24 crop season. According to surveys carried out by Reuters, the average trade guess for 2023/24 corn stocks could reach a five-year high at 2.1 billion bushels and up 53% from the current. Soybeans stocks meanwhile could reach a four-year high at 293 million bushels an 38% increase on the current year.
Recently under pressure wheat, currently the most shorted of all futures, contracts according to weekly data covering hedge fund positions across the major commodity futures markets, could see the report provide some support with surveys pointing to the smallest US ending stocks in nine-years, and the smallest global crop in eight. Driven by production challenges in war-torn Ukraine as well as drought across the US Plains, but partly offset by a large carry over crop in Russia from last year’s bumper harvest.