A V-Shaped Recovery
We have noted for several weeks now that there are more and more examples of countries or sectors returning to work. GDP figures show China has returned to growth, with many other countries reversing the dramatic trend that befell their Q1 economic data. It is, so far, a V-shaped rebound that has mirrored much of the commodity movements across the first half of this year.
The dry freight market is the latest to show signs of this recovery, having rocketed to over $30,000/day last week and, although this has tapered off somewhat, it’s holding itself at a decent rate once more. Vale is still committing to its production targets for Brazilian iron ore which keeps sentiment buoyant and the shipping congestion off China is also helping to restrict available tonnage somewhat.
For the oil markets, we have had further evidence of this V shaped recovery with the US reporting large stock draws for crude and products. Crude inventories fell 7.5 million barrels in the week to July 10 to 531.7 million barrels, compared with analysts’ expectations in a Reuters poll for a 2.1 million-barrel drop. The decline was driven by a steep drop in imports, which fell by a net 2 million barrels per day (bpd), the EIA said. U.S. gasoline stocks fell by 3.1 million barrels in the week, compared with expectations for a 643,000-barrel drop. Distillate stockpiles, which include diesel and heating oil, fell by 453,000 barrels. These kinds of figures have helped to keep that Brent price above the $43 mark.
These numbers are a promising sign for recovering demand that is so needed by producers to return the market to some normality. They have also been a vindication of OPEC’s announcement that it will be relaxing its production cuts by 2 million bbls to 7.7 million bpd. Its stage-managed transition from cuts to turning on the taps is going to be a tricky navigation, but one that is necessary. The market is in a precarious balance between lower production and returning demand. Any return of the virus or rush to move to higher production will have only one impact on prices. So, keep an eye on those news feeds to monitor that transition.
Fertilisers are also seeing their V-shaped movement upwards as India is expected to tender more than 1 million tonnes, with sales figures up on last year and a bumper crop. Paper markets reacted immediately to the tender announcement with nearby contracts being bid up significantly across the board on both international and Nola urea markets, and sellers all but evaporating on the international side. All of the trading volume in futures last Thursday was in the Nola market, with 44kt clearing through the CME. Nola urea traded up over $10 across the curve out to the end of the year, with Q4 being valued at $220 late last week.
‘Iron ore, iron ore, for where art thou iron ore?’ Clearly it’s in dream world and has paid no attention to events at the beginning of the year, it also has zero cares about the current situation. It is mirroring the unending upward march (till Thursday at least) of Chinese equities towards a similar high on 8th June 2015 and it would take a trader with nerves of steel to sell into this sentiment. Levels surged to over $109 in early trading midweek this week, and has taken the crown of the best performing commodity of this year.
So, forget gold, iron ore is commodity king. Oil is creeping sloth-like up a very slippery branch, all too aware that another fall will set back the slow progress to higher prices again. Fertilisers are flying up so much it hurts and freight has taken a breather after its launch into space last week. It’s giving us a general picture of that longed for V-shaped recovery. Long may it continue.