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Further WTI Spread Strength

Energy

ICE Brent has nudged up in early am Asian trading after closing higher for the seventh week in a row. Comments from the Saudi energy minister implying that OPEC+ will continue to be cautious in boosting output are likely to support the market, especially with other OPEC+ members supporting the Saudi position. For the time being, the market does not appear concerned about the COVID-19 outbreak in several Chinese provinces. China, on the other hand, has repeatedly proved its ability to contain breakouts relatively rapidly.

At the time, NYMEX WTI is also providing support to Brent. The WTI/Brent discount has shrunk from over $4/bbl in early October to roughly $1.50/bbl now. The change in this spread is primarily attributable to a tightening market in the United States. Cushing’s oil inventories continue to fall and are now close to 30MMbbls. It has resulted in a significant increase in the prompt time spread recently. The immediate WTI spread is trading at a backwardation of more than US$1.40/bbl. This is the highest since 2018 when Cushing inventories plummeted just under 22MMbbls. If this pattern continues, it will have an impact on US crude oil exports.

Speculators lowered their net long in ICE Brent by 23,754 lots over the previous reporting week, according to the most recent positioning data. This left them with 277,167 lots as of last Tuesday. Longs liquidating rather than new shorts caused the majority of this drop. The speculative net long grew by 20,231 lots in the previous reporting week. This left them with a net long of 346,836 lots as of last Tuesday. Given the recent movement in WTI time spreads, the next set of positioning data could indicate a significant increase in speculative spread holdings.

Metals

Metals on the London Metal Exchange (LME) remained volatile in the face of the energy crisis and China’s efforts to rein in the domestic coal market. On Friday, LME aluminum fell about 1.5 percent, while LME copper fell about 1.3 percent. The attention appears to have rapidly switched to more uncertainty about demand in China, experiencing triple-shocks such as the property slump, Covid-19 outbreaks, and a power crisis.

China stated on Saturday that it would expand trials for a property tax, which could further dampen speculation and contribute to the property sector’s despair and misery. The country’s property sector, a driving force behind metals demand growth, faces rising difficulties. Even if LME warehouses saw a modest increase in on-warrant stockpiles over several days, the copper inventory situation remains fragile. LME on-warrant copper stocks grew to 21.9kt last Friday, after falling to a low of 14.2kt on 15 October, even as total copper inventories at LME warehouses continue to decline. Total LME copper stockpiles dropped to 161.6kt from about 181kt a week ago. Copper imports into LME warehouses have been slow. In contrast, withdrawals have been high, averaging roughly 6.1kt per day over the last week.

Agriculture

The CFTC’s weekly positioning data show that speculative sentiment for grains remained weak, as rising prices were perceived to be harming demand prospects in the long term. Money managers upped their gross shorts by 12,468 lots in the latest week despite rising soybean oil prices and a three-year high in soybean crushing margins. Managed money net longs in CBOT corn fell 8,363 lots last week to 219,568 lots, while gross longs fell 12,017 lots. At the same time, money managers reduced their gross long position and added to their gross short work in CBOT wheat. They increased their net temporary position by 9,192 lots over the last week.

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