Analys

El Niño: the impact on agricultural commodities

Publicerat

6 år sedan

den

8 februari, 2019

El Niño refers to a climate cycle in the Pacific Ocean that has a global impact on weather patterns. The name, which loosely translates to ‘Christ child’, traces its origin back to Peruvian fisherman in the 1600s, who observed that fish yields would often decline around Christmas time as sea water temperatures rose. The effects of El Niño include specific wind patterns across the Pacific Ocean, heavy rain in South America, and droughts in Australia and parts of Asia including India and Indonesia.

With the National Oceanic and Atmospheric Administration (NOAA) forecasting a 96% probability of an El Niño weather event during the current Northern Hemisphere winter, there is a strong chance that we could see some weather abnormalities in the coming months.

Figure 1. The probability of El Niño occurring this year

Why El Niño matters for agricultural commodity prices

El Niño can have a significant impact on the fortunes of the agricultural industry, as the growing of agricultural products is highly sensitive to weather patterns. The right amount of sun and rain at the right time is important to produce the optimal yield. For example, droughts can ruin a crop because of insufficient water, while floods can wash away plants, or delay the process of harvesting a good crop from the ground, causing it to spoil.

While El Niño can have a considerable effect on agricultural commodity prices, the specific impact on the price of any individual commodity will depend on the El Niño’s amplitude and timing, as well as locational factors such as where the crop is grown and how prepared the farmers are for extreme conditions.

Figure 2. Weather impact of El Niño

Analysing the impact on agricultural commodity prices

When assessing likely El Niño effects, the first step is to consider the time of the year that El Niño is likely to begin. In this case, the NOAA believes that the event is likely to arrive in the Northern Hemisphere winter this year, but there is a good chance that it could linger into the Northern Hemisphere summer with a lower intensity. The next step is to assess which part of the crop cycle it will affect. According to research by Iizumi et al., a weather disturbance during the ‘reproductive’ growth period of the crop cycle tends to have the largest impact on crop yields.

Using insights from Iizumi et al. we have assessed the possible near-term impact from an El Niño on crops that are in the reproductive phase of growth. We summarise our key thoughts below:

Bullish on sugar, cocoa, and wheat

Agricultural commodities that we are bullish on in the event of an El Niño include sugar, cocoa, and wheat.

Sugar production is highly concentrated in India and certain regions of Brazil. If El Niño occurs, it’s likely that both countries could see below-average rainfall and drier conditions, and this could drive prices higher.

Indonesia, which produces 10% of global cocoa supply, could also be directly affected by an El Niño, and dry warm weather in Indonesia could potentially drive cocoa prices higher.

Annons

Australia, which produces 4% of global wheat supply, is another country that could face dry weather if El Niño emerges. This could have a positive impact on wheat prices, although much of the wheat harvest is expected to be completed by mid-January, which should limit the impact of an El Niño.

Bearish on soybean, corn and Arabica coffee

In contrast, we are bearish on soybean, corn, and Arabica coffee.

Brazil and Argentina, who together are responsible for almost half of the world’s soybean supply, are likely to experience favourable growing conditions in the event of an El Niño. As such, an El Niño could prove to be price negative for soybean prices.

Figure 3. The effect of El Niño on soybean growing during the December to March reproductive growth phase

Source: Adapted by WisdomTree from “Impacts of Southern Oscillation on the global yields of major crops” by Iizumi et al, May 2014

The effects of El Niño on corn are less significant, but could be mildly positive for growing conditions in South America and parts of Australia, and hence slightly price bearish.

Arabica coffee production is highly concentrated in Brazil, Mexico, Colombia and Central America. These countries could experience favourable growing conditions, and given that most of the coffee in these regions will be in a reproductive growth phase in the months ahead, we could see a positive supply shock to the commodity, which would be bearish for prices.

Other factors

We caution that the analysis above is based on the pure effect of an El Niño event and does not consider the many other factors that can impact crop yields. We’ll also point out that agricultural commodity prices can be affected by a number of other developments such as exchange-rate movements and trade policies. However, the analysis is useful as a rough guide as to how commodity prices could potentially be affected if we do experience an El Niño event in the near term.

Relaterade ämnen:el nino wisdomtree

Nästa

Biggest Brent/WTI curve-shape-divergence since Feb 2016

Missa inte

Trade war and Nopec-shake, but market looks like tightening

Fortsätt läsa

Annons

Analys

Brent prices slip on USD surge despite tight inventory conditions

Publicerat

3 dagar sedan

den

19 december, 2024

Redaktionen

Brent crude prices dropped by USD 1.4 per barrel yesterday evening, sliding from USD 74.2 to USD 72.8 per barrel overnight. However, prices have ticked slightly higher in early trading this morning and are currently hovering around USD 73.3 per barrel.

Ole R. Hvalbye, Analyst Commodities, SEB

Yesterday’s decline was primarily driven by a significant strengthening of the U.S. dollar, fueled by expectations of fewer interest rate cuts by the Fed in the coming year. While the Fed lowered borrowing costs as anticipated, it signaled a more cautious approach to rate reductions in 2025. This pushed the U.S. dollar to its strongest level in over two years, raising the cost of commodities priced in dollars.

Earlier in the day (yesterday), crude prices briefly rose following reports of continued declines in U.S. commercial crude oil inventories (excl. SPR), which fell by 0.9 million barrels last week to 421.0 million barrels. This level is approximately 6% below the five-year average for this time of year, highlighting persistently tight market conditions.

In contrast, total motor gasoline inventories saw a significant build of 2.3 million barrels but remain 3% below the five-year average. A closer look reveals that finished gasoline inventories declined, while blending components inventories increased.

Distillate (diesel) fuel inventories experienced a substantial draw of 3.2 million barrels and are now approximately 7% below the five-year average. Overall, total commercial petroleum inventories recorded a net decline of 3.2 million barrels last week, underscoring tightening market conditions across key product categories.

Despite the ongoing drawdowns in U.S. crude and product inventories, global oil prices have remained range-bound since mid-October. Market participants are balancing a muted outlook for Chinese demand and rising production from non-OPEC+ sources against elevated geopolitical risks. The potential for stricter sanctions on Iranian oil supply, particularly as Donald Trump prepares to re-enter the White House, has introduced an additional layer of uncertainty.

We remain cautiously optimistic about the oil market balance in 2025 and are maintaining our Brent price forecast of an average USD 75 per barrel for the year. We believe the market has both fundamental and technical support at these levels.

Fortsätt läsa

Analys

Oil falling only marginally on weak China data as Iran oil exports starts to struggle

Publicerat

6 dagar sedan

den

16 december, 2024

Redaktionen

Up 4.7% last week on US Iran hawkishness and China stimulus optimism. Brent crude gained 4.7% last week and closed on a high note at USD 74.49/b. Through the week it traded in a USD 70.92 – 74.59/b range. Increased optimism over China stimulus together with Iran hawkishness from the incoming Donald Trump administration were the main drivers. Technically Brent crude broke above the 50dma on Friday. On the upside it has the USD 75/b 100dma and on the downside it now has the 50dma at USD 73.84. It is likely to test both of these in the near term. With respect to the Relative Strength Index (RSI) it is neither cold nor warm.

Lower this morning as China November statistics still disappointing (stimulus isn’t here in size yet). This morning it is trading down 0.4% to USD 74.2/b following bearish statistics from China. Retail sales only rose 3% y/y and well short of Industrial production which rose 5.4% y/y, painting a lackluster picture of the demand side of the Chinese economy. This morning the Chinese 30-year bond rate fell below the 2% mark for the first time ever. Very weak demand for credit and investments is essentially what it is saying. Implied demand for oil down 2.1% in November and ytd y/y it was down 3.3%. Oil refining slipped to 5-month low (Bloomberg). This sets a bearish tone for oil at the start of the week. But it isn’t really killing off the oil price either except pushing it down a little this morning.

China will likely choose the US over Iranian oil as long as the oil market is plentiful. It is becoming increasingly apparent that exports of crude oil from Iran is being disrupted by broadening US sanctions on tankers according to Vortexa (Bloomberg). Some Iranian November oil cargoes still remain undelivered. Chinese buyers are increasingly saying no to sanctioned vessels. China import around 90% of Iranian crude oil. Looking forward to the Trump administration the choice for China will likely be easy when it comes to Iranian oil. China needs the US much more than it needs Iranian oil. At leas as long as there is plenty of oil in the market. OPEC+ is currently holds plenty of oil on the side-line waiting for room to re-enter. So if Iran goes out, then other oil from OPEC+ will come back in. So there won’t be any squeeze in the oil market and price shouldn’t move all that much up.

Fortsätt läsa

Analys

Brent crude inches higher as ”Maximum pressure on Iran” could remove all talk of surplus in 2025

Publicerat

1 vecka sedan

den

13 december, 2024

Redaktionen

Brent crude inch higher despite bearish Chinese equity backdrop. Brent crude traded between 72.42 and 74.0 USD/b yesterday before closing down 0.15% on the day at USD 73.41/b. Since last Friday Brent crude has gained 3.2%. This morning it is trading in marginal positive territory (+0.3%) at USD 73.65/b. Chinese equities are down 2% following disappointing signals from the Central Economic Work Conference. The dollar is also 0.2% stronger. None of this has been able to pull oil lower this morning.

Bjarne Schieldrop, Chief analyst commodities, SEB

”Maximum pressure on Iran” are the signals from the incoming US administration. Last time Donald Trump was president he drove down Iranian oil exports to close to zero as he exited the JCPOA Iranian nuclear deal and implemented maximum sanctions. A repeat of that would remove all talk about a surplus oil market next year leaving room for the rest of OPEC+ as well as the US to lift production a little. It would however probably require some kind of cooperation with China in some kind of overall US – China trade deal. Because it is hard to prevent oil flowing from Iran to China as long as China wants to buy large amounts.

Mildly bullish adjustment from the IEA but still with an overall bearish message for 2025. The IEA came out with a mildly bullish adjustment in its monthly Oil Market Report yesterday. For 2025 it adjusted global demand up by 0.1 mb/d to 103.9 mb/d (+1.1 mb/d y/y growth) while it also adjusted non-OPEC production down by 0.1 mb/d to 71.9 mb/d (+1.7 mb/d y/y). As a result its calculated call-on-OPEC rose by 0.2 mb/d y/y to 26.3 mb/d.

Overall the IEA still sees a market in 2025 where non-OPEC production grows considerably faster (+1.7 mb/d y/y) than demand (+1.1 mb/d y/y) which requires OPEC to cut its production by close to 700 kb/d in 2025 to keep the market balanced.

The IEA treats OPEC+ as it if doesn’t exist even if it is 8 years since it was established. The weird thing is that the IEA after 8 full years with the constellation of OPEC+ still calculates and argues as if the wider organisation which was established in December 2016 doesn’t exist. In its oil market balance it projects an increase from FSU of +0.3 mb/d in 2025. But FSU is predominantly part of OPEC+ and thus bound by production targets. Thus call on OPEC+ is only falling by 0.4 mb/d in 2025. In IEA’s calculations the OPEC+ group thus needs to cut production by 0.4 mb/d in 2024 or 0.4% of global demand. That is still a bearish outlook. But error of margin on such calculations are quite large so this prediction needs to be treated with a pinch of salt.

Fortsätt läsa