June 5 – Stock futures were mixed overnight in quiet trading as traders put the debt crisis behind them to focus on the next Federal Reserve meeting coming up next week. Stocks found a boost from last week’s debt deal, although they also face modest headwinds from declining manufacturing activity here, in Europe, and in China, and also expectations of more cuts from OPEC+. Yet, the VIX continues to trade near 15 this morning, reflecting calm on Wall Street. The dollar index is trading near 104.3 in early trade. Yields on 10-year Treasuries are trading near 3.74% this morning, while yields on 2-year Treasuries are trading near 4.55%. Crude oil prices are trading 2% higher this morning on expectations of more production cuts down the road from OPEC+, while the grain and oilseed markets were mixed to firmer.
The risk of higher crude oil prices “increased a lot” following a new oil output deal agreed to by OPEC+ on Sunday, according to the head of the International Energy Agency (IEA). OPEC+ members produce roughly 40% of the world’s crude oil. Saudi Arabia indicated that it will make a deep cut to its output next month, on top of a broader deal by the cartel to limit supplies into next year to support prices. OPEC+ agreed to extend its current cuts of 3.66 million barrels per day, in addition to reducing overall production targets from January 2024 by another 1.4 million bpd, bringing its combined output to 40.46 million bpd. OPEC+ cited concerns about China’s sluggish economic recovery in making its decision, along with geopolitical risks, the U.S. banking crisis risks and general risks of a global recession. Saudi Arabia indicated that it will start things off with a 1 million bpd cut next month, dropping its output to 9 million bpd, although it could add that production back to the supply in August, unless market conditions justify extending the cuts. Russia is expected to produce roughly 9.5 million bpd through the end of the year, dropping to 9.3 million bpd next year. U.S. production meanwhile is expected to rise 5.1% to 12.53 million bpd this year, adding another 1.3% to 12.69 million bpd next year.
A near collision between a Chinese warship and an American destroyer in the South China Sea near Taiwan over the weekend illustrates the risks of an “accidental” war in the region, even as tensions continue to rise between the two countries. Beijing claimed that its warship was conducting a lawful warning against North American provocations, while the United States stated that the actions of the warship were unsafe and that they violated the maritime “Rules of the Road” of safe passage in international waters. The incident took place coincidentally during the international defense summit in Singapore. China had declined an invitation from the United States to participate in the summit. The two countries are expected to continue to deleverage trade ties as tensions continue to build.
Unconfirmed estimates indicate that 20 million metric tons of winter wheat may have quality problems in China this year, which amounts to 15% of its total expected production. Sprouting and other disease quality issues are a product of persistent wetness in southern portions of the wheat belt, spurring many farmers to harvest the grain wet and then to artificially dry it. Nonetheless, many farmers are dumping their wheat onto the feed grain market due to the quality problems, accepting discounted prices that are $120 - $250 per metric ton cheaper than corn. The weather forecast is drier going forward, which should allow much of the remainder of the harvest to take place in the next 10 days. Nonetheless, this is expected to dramatically reduce the demand for corn, while increasing imports of milling quality wheat, with Australia most likely to benefit if it can still produce a good crop under El Nino conditions.
Russia states this morning that it has re-started inspecting some ships to move through the “safe corridor” to and from Ukraine for the first time this month. But it also stated that it sees no prospects for extending the grain initiative beyond July 17. Ukraine states that it has a “Plan B” for continuing shipments beyond July 17, utilizing a special insurance fund of about $547 million to subsidize coverage for shippers, although shippers would still have to be willing to accept that risk. Furthermore, Polish officials stated today that they’ve seen a copy of the European Union document that would extend a ban of four major grains from being imported from Ukraine into five adjoining eastern European countries. The bottom line is that shipments of grain out of Ukraine are increasingly more challenging.
The rains continue to out-perform the forecast models in the western Midwest, which is a condition of the changing atmosphere. Those rains remain too little to support the crop thus far, but they’re a move in the right direction. Heat is expected to shift with the high pressure to the north and to the west into the western Canadian Prairies, bringing milder conditions to the Midwest going forward. A frontal system is then expected to reach the Midwest in roughly five days, increasing rain chances for central and western portions of the belt, with another front coming roughly five days later that adds moisture to those areas while working moisture further east into dry areas of the eastern Midwest. Potential kernel count on corn is set as the seventh to fourteenth collared leaves are formed, so it’s imperative that this rain transition happen soon to maintain this crop’s production potential.
