December 1 – It’s the first of December, and the new month is starting with a bit of a negative tone across the board for the equities and the commodities today. The war resumed in the Gaza Strip after the recent cease fire, global factory activity remains weak, with particular focus on China this morning, while the world adjusts to a higher interest rate environment. Yet, the VIX is again trading near 13 this morning, reflecting a lack of panic on Wall Street, while the dollar index is trading near 103.6. Yields on 10-year Treasuries are trading near 4.34%, as they consolidate above multi-month lows, while yields on 2-year Treasuries trade near 4.70%. Crude oil prices are mixed this morning, following yesterday’s OPEC+ meeting, while the grain and oilseed markets are mostly lower. Overall, we remain in a commodity deflationary sentiment on Wall Street, with traders anticipating weak demand as the global economy continues to struggle.
Chinese banks reportedly held intense meetings with various domestic property companies recently, reflecting the government’s concern for the sector that continues to be one of the weak links for China’s economy. It also leads one to ask, what else do authorities know about problems in the sector. A few cities reported a rebound in property sales in November, but overall sales for the top 100 developers dropped 0.6% on the month, with sales for the first 11 months of the year down 14.7% from the previous year’s pace, with that pace gaining momentum. On a somewhat related note, China says that the mystery virus spreading through the country is a variant of influenza that is likely to have very limited impact on the economy. Authorities say that the virus is hitting so many people due to low antibody levels following the recent Covid lockdowns. But do consumers trust this assessment after Covid?
OPEC+ decided to increase the current round of cuts to roughly 2.2 million barrels per day as we start 2024 in a month, but the market is thus far unimpressed. That would put total cuts at more than 5 mbpd. The cuts, resting primarily on eight members of the cartel, include a million barrels already being voluntarily cut by Saudi Arabia, that it will roll into the new year. The need for these cuts emphasizes the problem with global demand, but it also shines a spotlight on the shrinking influence of the cartel on controlling prices. First, there is reason to question the effectiveness of the quotas, and whether various members are cheating the system. Saudi Arabia has done a good job of controlling the cartel over the past several years, but cheating tends to increase when members start hurting, and they start questioning the effectiveness of the quotas to support prices. Many of the member economies are dependent on oil revenue, which is a product of price and quantity. The inability to achieve the desired price – likely close to $85 or above – necessitates greater volume to achieve that needed revenue.
Second, the quotas are designed to work within demand growth projections issued by the cartel and by the international energy community. Those growth projections are largely based on expectations for consumption growth in Asia. Growth in China has been positive, along with India, although less than desired. However, that growth has been offset by weak demand in other Asian countries. The third factor at play is the price of oil itself. The price is largely set by seaborne crude oil imports. Seaborne crude oil movement totals roughly 41.2 million barrels per day through the first 11 months of this year, which is up 4.6% from 2022 levels. However, much of that increased growth in movement is being serviced by rising output from non-OPEC+ members, further reducing the influence of the cartel on the price of oil with its output cuts. These increased production levels for non-OPEC+ members are largely coming from increased technology that increases well efficiencies. On a related matter, Brazil accepted an invitation to join OPEC+ starting in January, but on the condition that it would not take part in the quotas agreed to for January. In fact, the chief executive of Brazil’s state-run oil company Petrobras stated that, “we would never be part of an organization that imposes quotas to Brazil. Petrobras is a publicly traded company, and we cannot have quotas.” Brazil is being accepted as a non-voting member without quotas.
Soybeans posted double-digit losses overnight as rains scheduled to begin falling in dry areas of Center-West Brazil continue to move forward in the forecast to this weekend. Prices went into the morning pause sitting just above key levels of chart support, so today’s action will be critical for the market. Otherwise, the grain and oilseed markets continue to face headwinds from the predominant commodity deflation environment that we are still in. with this week’s short-covering rally running out of steam overnight in the corn and wheat markets. Fundamentally, these markets still lack a story to justify a complete reversal in positions by the funds.
