A stumbling energy market
The week was highlighted by the energy market collapse. The Brent – which serves as reference for Petrobras – dropped 9.4%, closing out Friday at 94 dollars per barrel. The WTI also melted 11%, while the RBOB gas shrank 9%. Natural gas, diesel, coffee and wheat also experienced falls between 3 and 5%. Sugar was the honorable exception, closing out the week with October/2022 at 17.95 cents per pound, a 41-point high against last week’s closing, or a little over 9 dollars per ton.
With the energy market fall, Petrobras has room to reduce the gas price at the refinery, which should affect the hydrous price and its arbitrage with sugar. The short term should bring more pressure to the commodities with the fall in global consumption, fear of uncontrolled inflation and increase in interest rates.
In Brazil, the situation isn’t any different, with the Central Bank increasing the interest rates to 13.75%. The NDF (Non-Deliverable Forward) curve, affected by the increase in the spread (internal interest rates minus external interest rates), increases the curve in real generating more revenue for long-term export sugar fixations. The 2023/2024 crop average went up R$30 per ton this week. The dollar closed out the week at R$5.1656.
From the recent low of open interest at the NY exchange, commented on here two weeks ago, which came to 697,000 contracts last July 21, we have seen a recovery of more than 60,000 contracts. This additional volume can be a sign that more hedges have been made covering left-over volumes from the 2022/2023 crop which were waiting on a more conclusive number about the production of the mills so they can still offer more products (sugar) in this crop and also pricing for the 2023/2024 crop, hedge speed-up caused by the fear of a weak oil and dollar binomial.
It’s also worth pointing out that the non-index funds increased their short by 24,500 lots bringing its short position to total of 65,600 lots, based on the COT (Commitment of Traders) number, published based on last Tuesday’s position.
That’s where all the instability, volatility, dichotomy and neurasthenia of the funds are at. That is, any fundamentalist spark that increases sugar prices in NY for some reason can show the vulnerability of the funds. I will explain: a major part of the short position was built close to the minimum values traded by the market (17.20 cents per pound on Monday), the lowest one since July/2021.
The average price of the daily NY closings in July, converted and adjusted by inflation, was R$2,273 per FOB ton, slightly better than the R$2,200 per ton seen in June.
The mills are concerned about the legal uncertainty over the CBIOS (Decarbonization Credit) due to the discussion about a possible disclaimer of goals for the distributors to reduce the emission of greenhouse effect-causing gases. Let’s wait and hope this instrument won’t be done away with.
Our analysis about the 2023/2024 crop of the Center-South is still constructive. We believe the sugar production cost for next year should suffer a fall because many inputs will be more available and will come from a higher base price following the shortage and/or logistics problems caused by the war. The chances the conflict between Russia and Ukraine come close to a solution is the major factor that backs up our view that there will be a fall in the production cost.
The gradual shift of the energy matrix in Europe will inexorably open a window to the use of renewable fuels, which can demand not only sugarcane ethanol but also corn ethanol. A “contamination” of a possible global demand can appeal to the Brazilian ethanol (sugarcane and corn) if the price is more competitive. In a stressful scenario, without government interference, ethanol Brazilian export (keeping in mind that we have once exported 5.4 billion liters already) can narrow the arbitrage of sugar with ethanol making the sugarcane production (without great area expansions in the horizon) pretty disputed between one product and another. There is still time, but I can’t get this possibility off the radar.
The counterpoint is a weaker energy market, the dollar devaluing against the currency of emerging countries and the commodities market getting pretty bearish. Besides, the strong increase in the number of jobs in the USA can provide ammunition to the FED (American Central Bank) to increase the interest rates even more there, and so the commodities…
You all have a great weekend.
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