Analys
Orange juice: Declining supply meets weak demand
In oranges and orange juice, the outlook for both supply and demand is dim. Especially in the US, a declining supply will meet with softening demand. Supply concerns were in focus for months, causing prices to rise. But disappointing US consumption data and a lack of strong storms in the south of the US turned the price movement around in the summer. Prices were able to regain ground recently as estimates see Florida’s harvest as from October at a 50-year low and California is supposed to harvest fewer oranges as well. The price for frozen concentrated orange juice, which strongly depends on the US market, will probably continue to fluctuate for a long while, driven by declining supply and similarly declining demand.
Prices for frozen concentrated orange juice on the New York exchange have not been able to sustain their month-long uptrend that was intact until June. Instead, they dropped by more than 15% between the middle of June and the first days of August. Only at the current margin could the quotations regain some ground, rising from 139 US cents to nearly 150 US cents per pound. Though the two-year high of mid-June at 167 US cents per pound is still some ways away (chart 1).
The focus was therefore very much on the supply side. The month-long price rise until June had been triggered by prospects of a lower US supply. In fact, the last harvest in the US was already unsatisfactory. In its July report the USDA once more reduced its estimate for the 2013/14 US harvest compared to its last forecast from January. It now envisages only 6.3 million tons of oranges, 16% less than in 2012/13 (chart 2). This is the second large consecutive decline. The plant disease citrus greening, which causes the fruit to drop prematurely, still maintains its grip on large parts of the growing regions. As a result of the lower harvest, US orange juice production should come in at 481,000 tons, 20% below 2012/13 levels, which were already lower than in the previous year.
Moreover, the drought in Brazil spurred doubts as to whether rising production in Brazil would be able to compensate for the decline in the US. For Brazil, the USDA had predicted in January that the 2013/14 orange harvest would increase by 8.5%, but this forecast was cut to 6% in July. This still remarkable rise is largely attributable to high yields. The quantity of oranges used for processing is seen to rise at a similarly strong rate. As a result, Brazil’s orange juice production, which had fallen massively by almost a quarter in 2012/13, is now expected to post a 12% increase.
Unlike global orange production itself, where growth not only in Brazil but also in China will probably more than offset the decline in the US, global orange juice production should stagnate in 2013/14 in the best case according to the USDA. Juice production had already declined in the two preceding years.
However, not only juice production but also the consumption of orange juice is lacking momentum. Global consumption has for years been fluctuating around the mark of 2 million tons (chart 3). Consumption is clearly declining in the US – the most important market alongside the EU. US per-capita consumption of orange juice has reportedly fallen from 46 litres ten years ago to only 35 litres in 2013. According to latest data, US retailers sold 9% less orange juice than one year before in the four weeks ending on 2 August 2014. A wide range of other juices and new developments in other beverages are now competing with orange juice. Also, many consumers prefer beverages with lower sugar content or lower prices. In other developed countries, too, the market for orange juice should be largely saturated. Double-digit growth rates in some other countries, such as China, for instance, cannot reverse this outlook, given the low absolute figures.
But the market is now looking less at the current year 2013/14 than at the coming season. The year 2014/2015 as measured by the USDA begins in October or November in countries in the northern hemisphere. In Brazil, by far the most important country in the southern hemisphere, it even only starts in July 2015. The first USDA forecasts are only expected for autumn. In the US, the orange harvest for 2014/15 should thus get underway in a few weeks. Prospects are far from promising. Estimates are circulating according to which Florida’s orange production, which normally accounts for about 70% of total US production, could fall to less than 90 million boxes of 90 pounds (or 40.8 kilograms) each. This would be less than 3.7 million tons, i.e. the lowest level since 1965. Since according to latest USDA data, Florida harvested 133.6 million boxes in 2012/13 and 104.4 million boxes in 2013/14, this would be a fall by about another 15% compared with the already weak current year. Not all watchers anticipate such a dramatic situation. But there is broad agreement that the harvest will likely remain below 100 million boxes. In California, the only other important growing state in the US, the drought will presumably leave its mark. The situation there has been difficult since 2012 and has become further exacerbated in recent weeks, and more than half of the acreage currently falls in the highest category of “exceptional drought”. The critical outlook for US production has recently given prices a bit of a lift.
It remains to be seen whether in the present situation of weak demand the continuing decline in supply can contribute to noticeable price rises on a lasting basis. We only expect this to happen if supply shortfalls attributable to storms or diseases turn out even larger than currently expected. Fears of a marked hurricane season have driven up prices often already. This year has been relatively calm so far, but the hurricane season only ends in November. Hence, stormrelated crop losses in Florida are still a possibility.
Brent sinks lower as OPEC+ looks likely to lift production in July by another 400 kb/d. Brent crude declined 0.7% yesterday to USD 64.44/b and traded in a range of USD 63.54 – 65.03/b. This morning Brent is down another 0.7% to USD 64/b along with expectations that OPEC+ will lift its production quota by another 411 kb/d in July.
Kazakhstan would be in breach even if the whole 2.2 mb/d of voluntary cuts are unwounded. The eight countries behind the 2.2 mb/d of voluntary cuts, the V8, have lifted their production quotas by close to 950 kb/d from April to June with unwinding starting in April. Over the coming week towards the end of May, the group will discuss what to do with quotas in July. Market expectations as well as indications from within the group is for another 411 kb/d hike also in July. Higher oil demand during summer both in the Middle East and globally is one reason for the hikes. Most of the additional production will not leave the Middle East but be consumed locally this summer. But Kazakhstan is also a major problem. The country produced 1.77 mb/d in April and 300 kb/d above its quota level. To maintain cohesion and credibility the group needs internal cooperation and harmony. Kazakhstan seems to have no plans to reduce production down to its quota. The alternative solution to reestablish internal harmony is to lift quotas up to where production is. The problem is that Kazakhstan only accounts for less than 5% of the overall production of V8. Thus even after unwinding all of the 2.2 mb/d, the quota of Kazakhstan would not rise much more than 100 kb/d. Far from the country’s overproduction of 300 kb/d in April.
A shift to surplus will likely drive Brent towards the 60-line and high 50ies. Losing front-end backwardation implies Brent crude down to the 60-line and high 50ies. Currently the Brent crude curve holds a front-end backwardation premium of USD 1.5/b versus the November price currently at USD 62.6/b. A result of an oil market which is still tight here and now. But if OPEC+ lifts production to a level where the market starts to run a surplus, then the front-end contract will flip from a USD 1.5/b premium vs. 4 months out to instead a comparable USD 1.5/b discount to 4 months out. That would bring the front-end contract down towards the 60-line and the high 50ies. This because a full out contango market usually also will drive the deferred contracts a bit lower as well. But this may not be all doom and gloom. A softer USD and a lower oil price is a powerful combo for global consumption. Global oil stocks are also low. This will help to cushion the downside.
Brent crude forward curve. Surplus and full contango would eradicate the front-end backwardation and drive Brent crude down towards the 60-line and high 50ies.
Brent rising a meager 1% as CNN says Israel prepares to attack Iran. Brent crude traded in a narrow range of USD 64.85 – 66.0/b yesterday and ended down 0.2% to USD 65.38/b along with US equities down 0.4% while it got some support from a 0.3% softer USD. Iran’s Khamenei yesterday that it was outrageous for the US to say it won’t allow Iran to enrich uranium, that the US should not talk nonsense and that Iran’s uranium enrichment is absolutely non-negotiable. These statements did little to the oil price yesterday. But CNN reporting today that Israel is preparing to strike nuclear facilities in Iran is making Brent rise 1% to USD 66.1/b. Either the impact on the oil market in case of an attack is assumed to be low or the probability for an attack is assumed to be low. Because a 1% gain is not much when we are talking bombs in the Middle East major oil producing region.
Trump bully-diplomacy has reach a dead end as Iran clings to its nuclear capabilities. Iran will naturally never give up its ability to produce a nuclear weapon after having seen what Russia has done to Ukraine when they gave up their nuclear weapons and what the US previously has done to Iraq and Libya. Israel can never accept that Iran can have nuclear weapons. And there is the standoff. So far the market is not pricing in much risk for an Israeli strike on Iran. Trump is probably not supporting Israel with respect to an attack on Iranian nuclear facilities as it could drag the US into a wider war in the region. Israel however knows that the US will always have its back even if the US is not giving a green light for an attack. To our understanding it now takes very little time for Iran to produce weapons grade enriched uranium. That is something Israel cannot accept. Logic thus leads to the conclusion that Israel will strike Iranian nuclear facilities at some point given Khamenei’s explicit statement that Iran will continue its enrichment. The finer detail is however whether we are talking about nuclear power plant grade enrichment or weapons grade enrichment. Another close to certain point is that Iran will eventually make a nuclear bomb and there is essentially nothing Israel can do about it. Israel can either choose to accept that this will eventually be the outcome or they can try to prevent it or delay it as long as possible. The latter seems the likely first step. I.e. an eventual attack on Iranian nuclear facilities. Then the question is when. CNN reporting today that Israel is preparing an attack indicates that this could happen sooner rather than later.
US API yesterday released data indicating that US inventories of crude and products fell 2.1 mb (Crude + 2.5 mb, Gasoline -3.2 mb and Distillates -1.4 mb). That is a seasonally counter cyclical draw when US commercial inventories normally rise 3-6 mb per week. Surplus is not yet here. Actual data later today at 16:30 CET.
Normal weekly change in US commercial crude and products in mb/week. Week 20 highlighted.
Brent starting in read after a week of 2.4% tariff relief gain. Brent crude gained 2.4% (+USD 1.5/b) last week with a close of USD 65.41/b and traded the week in a range of USD 64.53 – 66.63/b. Price gains last week aligned with dissipating tariff angst as China – US trade tariffs were lowered to 10% and 30% respectively. Down from a staggering 125% and 145% though with the risk for a snap-back after 90 days. The low of the week coincided with rumors that an Iran – US nuclear deal was near at hand. But was later downplayed. Such a deal may not add all that much more oil to the market as most of Iran’s oil probably already is in the market through different pathways. Brent crude is pulling back 0.9% this morning to USD 64.9/b while the USD index is declining 0.5% as well. That is usually a positive for the oil price as it makes oil cheaper for all non-USD based consumers. US equity futures are also down 1% this morning. Chinese new and used housing prices fell 0.12% and 0.41% respectively last month with property investments down 10.3% YTD YoY. All weaker than expected. Chinese industrial production YoY however came in at 6.1% and better than the expected 5.7%. Overall a rather weak start of the week nonetheless.
While down this morning, Brent crude is surprisingly not shedding all that much value given the rather bearish backdrop of US equity futures in the red and everyone and their grandmothers forecasting doom and gloom for the oil price.
Speculators added 64 mb to net long positions in Brent crude and WTI over the week to last Tuesday. Most likely as a result of US-China tariffs being shifted down to livable levels. Most headlines and forecasts are however overall very bearish for oil. More oil from OPEC+ in the months to come coupled with expectations for a slowdown in global oil demand growth due to the US tariff trade war.
A lower oil price AND a softer USD will likely bolster global oil demand vs very bearish expectations. Global oil demand growth could surprise to the upside amid all the gloom. In EUR/b terms the the current price of Brent crude is now 22% lower than the average price in 2024. A softer oil price AND a softer USD is making oil considerably cheaper in the eyes of the global oil consumer ex-US. And that portion of global oil demand after all accounts for around 80% of global consumption. We could thus quickly see a Brent crude price down 30% versus 2024 average for 80% of the world’s consumers with a little further decline in USD-oil and the USD itself. This will likely help to boost oil demand globally. Remember also that a very important reason for why OPEC+ wanted to lift its oil production in May and June was to meet sharply stronger Middle East summer oil demand. A note on oil demand. India’s road fuel demand was up 5% YoY in April while its PMI rose to 58.2%. The IEA expects India oil demand to rise by only 2.3% to 5.77 mb/d YoY (+130 kb/d) while a 5% demand growth would yield a demand growth of 282 kb/d YoY.
OPEC+ has NOT abandoned market control. This is not 2014/15/16 or 2020. It is important to remember that the group has not abandoned its general plan of adding 2.2 mb/d from April 2025 to December 2026. The path will be decided on a monthly basis and can be moved both up AND down. The group has NOT abandoned market control. Though it is on a gradual pace to retake 2.2 mb/d of market share. US shale oil production has to stand back to make room and global consumers will respond with stronger demand growth in response to a lower oil price made additionally cheaper by a softening USD.
Brent crude forward curve in front-end backwardation. Surplus is not yet here.
Brent crude in USD/b. Little upside conviction to be found anywhere.
US oil drilling rig count fell by 1 last week to second lowest since December 2021. No real shedding of drilling quite yet. But we’ll likely see a drop of 5-10% over the coming months. It could drop as much as 5-10 rigs per week.
Net long speculative positions in Brent crude + WTI rebounded 64 mb to Tuesday last week.
A shift to surplus will likely drive Brent towards the 60-line and the high 50ies
An Israeli attack on Iran moves closer as Trump’s bully-diplomacy has reach a dead end
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