Commodities Week Ahead: Oil Bulls Under Siege; Shock For Coffee Bears?

On the broader commodities front, the worsening US-China trade war will potentially take center stage again, hammering prices of most natural resources. The Bloomberg Commodities Index, a measure of 26 raw materials, lost 2.7 percent during the week that was, the most since February. Soybeans were the hardest hit, falling 6.5% to a near decade-low, as China’s duties on US supplies took effect.

Even so, some commodities may rebound on improving fundamentals. Arabica, for instance, could soon land a sting on coffee bears who misread Brazil’s bumper harvests, say veteran traders who’ve started amassing longer-dated futures for the bean.

US crude, pegged to the West Texas Intermediate (WTI) contract on the New York Mercantile Exchange, rose 1% to settle at $71.01 a barrel on Friday. Brent, the North Sea, UK-based global oil gauge that trades on the Intercontinental Exhcange settled up 0.6% at $74.92 per barrel on Friday.

Despite rising on the day, both oil benchmarks lost nearly 4% on the week. They were also in the negative for a second straight week as mixed supply signals scaled back investor expectations for a global oil supply shortage. Both have also started this trading week by moving lower.

Data showing US crude supply fell by 12.633 million barrels for the week ended July 6 were overshadowed by Libya's plan to reopen four oil export terminals, which could bring as much as 0.7 million barrels per day back to the market. The White House’s consideration of sanctions relief for some buyers of Iranian crude—beyond a previously determined November deadline—also led to the notion that the outage of Tehran supplies may not be that severe after all.

That, and rising output by the Organization of the Petroleum Exporting Countries (OPEC), the powerful oil cartel that steadily drove up prices the past year by cutting production instead, created a perfect storm for crude prices last week. Brent plunged almost 7 percent on Wednesday alone, the steepest one-day drop in two years.

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This week, WTI looks particularly vulnerable, as it returned, as of this writing, to $60 levels. A year ago, WTI was trading below $50 around this time, before rallying a whopping 50% on OPEC output cuts.

“High prices fix high prices,” Scott Shelton, energy broker and analyst for ICAP in Durham, North Carolina, wrote in his pre-weekend note on US crude. “WTI, for a long time, was the cheapest barrel and now it isn’t. This market is driven by flow, not differentials or margins or inventories,” Shelton added, referring to speculative money.

Mindful that more oil bears might show up after this, OPEC President Suhail al-Mazrouei cautioned last week that volatility in the crude market was undesirable and that the cartel preferred a more stable price environment. Many read that as a desire for higher-for-longer prices.

Some analysts with a bullish view on oil think the market will be in for a wild ride, regardless of what OPEC says, although prices could eventually work to the cartel’s favor. “While the next few weeks will be crazy, our beginning of the year target of above $80 a barrel remains firmly in place,” Phil Flynn of the Price Futures Group wrote in his Friday analysis.

“The global oil market can flip from a global supply surplus to a global supply deficit at the drop of a hat,” said Flynn, who typically has a long bias toward crude. “The balance between daily production and global demand is too tight to be ignored and eventually will demand higher oil prices.”

Those who tasted blood by selling WTI short before Wednesday’s plunge seem determined to go for the kill at below $70. That could happen this week. “The summer demand for oil has peaked and without additional supply issues, there’s no reason for WTI to be trading above $65,” noted Phil Davis, founder of PSW Investments in New York.

Davis says he “made a ton” selling US crude at $70 a barrel when it was trading above $74 before the 4th of July holiday. His bet: the market had overestimated gasoline consumption for the peak summer driving period.

Likewise, prices of arabica, the coffee bean of choice for top retailers including Starbucks (NASDAQ:SBUX), has been languishing, down 12% on the year, because of “sheer hype” of a seasonal anomaly in Brazilian production that led to fears of a glut, said Davis. To underscore his point, Brazil’s coffee exporting group Cecafé said on Friday that June’s end-season arabica exports slumped instead by 10 percent to 26.16 million bags.