International Energy Week kicks off in London this week and it is clear what the key discussion points will be for the participants. Russia/Ukraine tensions dominate the market. There has been an increase in activity along the Russian/Ukrainian border in recent days and therefore the market will panic over the fact that we are not seeing de-escalation. While there is much uncertainty about what Russia can do, there is even more uncertainty about how the West might respond. The US has suggested it will retaliate with sanctions, however, it is unclear how far-reaching these will be or whether it will affect Russian crude exports. Given that Russia is the second largest crude oil exporter, any impact on Russian crude oil flows will be sharp. The Ural gap appears to be weakening, given that refiners are reluctant to commit to Russian crude when sanctions threaten.
While sticking to sanctions, Iran will also be a key discussion point at International Energy Week. "We have never been close to a deal" comments Iranian foreign minister. A deal would clearly be a bearish development for the market, especially if Iran is able to increase exports fairly rapidly. However, the slowdown will depend on where we are with Russia-Ukraine by that time.
The physical oil market will be another topic of interest. The North Sea physical market has been very strong lately, helped by good refinery margins. In addition, uncertainty over Russia and the prospect of sanctions would have led some European refiners to prefer to lock in North Sea crude rather than Russian oil. Middle East grades also showed strength, which would have been supported again by refinery margins along with expansion in Brent/Dubai spreads. The strong spread would mean that Atlantic Basin crude is too expensive for Asian refiners, so they will increasingly turn to Middle East grades.
The latest positioning data shows that speculators increased their net longs in ICE Brent from 456 lots to 223,353 lots at last Tuesday's position. This is still some distance from the record net of around 632k lots seen in 2018. It is quite surprising that the current situation is not huge, given the strength in the market as well as the geopolitical risk. Obviously, the limited positions we see from speculators give them plenty of room to add to their long run with the right catalysts. Even if we look at the speculative position in USD terms, it still suggests that speculators have a lot of room to add to their current positions. The USD value of the current net-long is slightly over US$21b, as against US$46b in April 2018.
Metals
Base metals were adulterated on Friday. LME Nickel continued to trade higher and closed at US$24,144/t (highest closing price since 2011) backed by low exchange inventory. There will also be a risk premium given the potential for disruption from Russia amid rising tensions with Ukraine. A strong new energy vehicle (NEV) market in China also continues to build optimism for demand for battery metals and copper. According to the latest data from the China Association of Automobile Manufacturing (CAAM), China's NEV sales grew by 136% year-on-year in January.
As for aluminium, Norsk Hydro ASA said that operations at its Albras aluminum smelter in Brazil were disrupted after an internal power failure on Saturday morning shut down one of four production lines . The affected line produces 110kt of liquid aluminum annually; However, the other three lines are working normally. The total production capacity of the smelter is 460kt per annum.
Latest CFTC data shows speculators increased their net long positions in COMEX Copper, buying 12,055 lots in the previous reporting week, leaving them with a net long position of 36,868 lots as of last Tuesday. For the precious metals, speculators increased their net longs in COMEX Gold by 40,757 lots, leaving them with a net long of 125,646 lots (the highest since the week ended November 9), while their net longs in silver increased. increased by 7,506 lots.
Agriculture
Soybeans continued their gains on Friday with CBOT soybeans ending the week at a nine-month high of USD 16.02 per BU on strong demand for US soybeans. Strong crude palm oil prices in Asia also remain supportive of the entire oilseed complex as consumers switch from CPOs to premium soybean or other edible oils. Speculative interest in Soybean remained high during the last week and managed money net longs rose by another 9,057 lots. This was the fourth consecutive week of longs increasing their positions, which pushed net longs to a 9-month high of 175,372 lots.
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