Market Comments – April 19, 2018

NY futures moved sideways this week, as July dropped just 18 points to close at 82.82 cents.

The market remained in ‘wait-and-see’ mode this week, well supported by mill fixations and other trade short-covering, but not quite ready to push to new contract highs yet. Since February 23 the July contract has settled all but one session in a tight range of just 405 points, between 81.18 and 85.23 cents. The lone exception was the quick dip to a 79.72 cents close on April 4, when the market became fearful of a potential trade war between the US and China.

It has been smooth sailing for commodities lately, with crude oil trading at its highest level since late 2014 and commodity baskets like the CRB or GSCI index all reaching multi-year highs this week. Commodities have been an undervalued asset class for several years, reaching a historically low ratio to equity markets in January, but now they are suddenly back in the limelight. Underinvestment due to years of low prices, strong global demand and inflationary forces are all combining to this renewed strength in the commodity space.

Crude oil serves as a proxy for the strong commodity demand over the last couple of years. Daily crude oil consumption is expected to move above 100 million barrels/day this year, up from 96.7 million barrels/day in 2016. It is only thanks to the shale oil boom that production has been able to keep up, but there is no end in sight to this increase in oil demand, with the EIA (Energy Information Administration) expecting consumption to reach 102.2 million barrels/day next year. This makes the market vulnerable to a potential supply shock.

Despite lower fuel consumption by cars and an increase in alternative energy sources, coal and crude oil are still powering most of the globe, including a digital universe that is getting hungrier for power. Just think of the internet, cell phones, computers and massive storage servers that need to be powered every day. Higher energy prices will sooner or later translate into higher prices of just about everything else.

This commodity revival is not what mills were hoping for, because it is likely going to keep specs longs in the game for now. This could lead to a lack of sell-side liquidity at a time when mills are faced with fixing their remaining on-call sales in current crop.

Today’s on-call report showed that as of last Friday there were still 1.28 million bales unfixed on May and 5.11 million bales on July. Most of the remaining May contracts are probably fixed or rolled out to July by now, but with just about 9 weeks to go before old crop futures are history, mills will have their work cut out to get everything squared away without igniting a rally.

US export sales for the week from April 6-12 topped even the most optimistic expectations, as net new sales for Upland and Pima amounted to 524,900 running bales for both marketing years. The futures market traded between 8150 and 8350 that week, so not much lower than we are now. There were 19 markets buying, while 27 destinations received shipments of 371,300 running bales, which was a little below the pace of recent weeks. It was interesting to see that China bought 103,500 running bales net, despite all the rhetoric about import tariffs.

Total commitments for the current season have now reached 16.4 million statistical bales, of which 9.55 million bales have so far been exported. Sales for shipment August onwards have already reached 3.2 million statistical bales. We don’t know how many of these August onward shipments will be supplied from current stocks, but we guess that it is probably over 1.5 million bales.

Statistically we could make the case that the US is now basically ‘sold out’. Out of a supply of 23.75 million bales (beginning stocks + crop), the US has so far committed 19.75 million bales (16.4 export + 3.35 domestic) for shipment and/or consumption until the end of July. Then there are a further 3.2 million bales in export commitments for August onward, while 0.9 million bales are needed to tie US mills over to new crop. If we sum it all up, we get to just about a square position. We realize that the calculation is more complicated in reality because of the quality mix as well as exisiting stocks vs. new crop considerations. But needless to say, it’s getting tight!

So where do we go from here? Assuming that speculators are not going to bail out of their net long anytime soon given the more optimistic outlook for commodities, it is difficult to envision how mills will escape their fixation trap. Similar to what happened last season, mills have been kicking the can down the road, but they are now reaching a dead end since rolling to December is not a realistic option.

A year ago the July contract had closed at 78.32 cents on this date and four weeks later it topped out almost 10 cents higher. The current setup is quite similar if not more bullish, so we wouldn’t be surprised to see July reach new highs over the coming weeks. 


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