Sugar On A High After OPEC+ Oil Cut; Will It Last? 

​​Raw sugar prices have run higher for four straight weeks now, for their best bullish streak in 18 months. But the rally has little to do with the sweet rush of the impending holiday season.

Rather, credit goes to ethanol—the other major component of the sugar trade, which closely tracks the oil market. 

Charts by SKCharting.com, with data powered by Investing.com

Last week’s rally in crude prices after the output squeeze announced by oil producing alliance OPEC+ has given the ethanol trade a shot in the arm; extending as well the run-up in sugar that has mostly trended higher since the end of June. 

Ethanol, mandated as an additive to motor fuels in many countries, aims to reduce vehicle pollution by cutting the carbon in their emissions. The biofuel is mainly derived from crops such as sugar, wheat and corn. 

As one of the leading sources of green energy, ethanol prices are supported by the transition toward 'cleaner' fuels. But a poor start to the new corn marketing year and relatively higher corn prices have been weighing on the sector.  

Still, various sector analysts are bullish on both ethanol and sugar in the near term.

One of them is Jack Scoville, chief crop analyst at Chicago commodities brokerage Price Futures Group. 

Ethanol prices on their own have barely changed since the start of the year, hovering at $2.16 a gallon. It’s often demand which the trade is more concerned about. 

“Ethanol demand should increase and the pricing power of the mills can increase,” resulting in continued support as well for sugar, Scoville said in a Monday note issued by Price Futures Group. 

According to the note, the New York ethanol market had been worried that reduced ethanol demand due to taxing policies in Brazil will force mills there to continue producing more sugar for export. The Brazilian government lowered fuel taxes lately, squeezing profit margins of ethanol mills. 

“The mills could produce much more sugar over time due to the tax changes, but so far have not produced enough to meet the demand,” Scoville said, adding that this kept both sugar and ethanol supported.

Raw sugar’s high for the year was 20.51 cents a pound (lb), struck in April. From there, it tumbled to the 2022 low of 17.20 cents at the end of July.  

The last four weeks have, however, provided a frisson of hope for the sugar trade as technical recovery and speculation of a potential OPEC+ production squeeze after four months of losses in crude prices combined to send the sweetener’s prices up without stop since the week ended Sept. 9.  

At Monday’s settlement in New York, raw sugar settled at 18.74 cents per lb, up 1.54 cents or about 9% from the July low. 

Will the sugar rally continue? Technically, it’s very much possible. But fundamentally, there are various subplots unfolding in crude markets that could upend the powerful oil rally from last week.

For one, crude prices fell a second straight day on Tuesday in the first extended downside after last week’s rally on the output squeeze announced by the 13-member Saudi-led OPEC, and its 10 Russia-steered allies. 

The tumble in oil prices came as China’s coronavirus controls spawned new fear among oil traders. Chinese COVID-19 cases have risen to the highest since August, with the world’s largest oil importer experiencing the uptick after increased domestic travel during the National Day 'Golden Week' earlier this month. 

On another end, the White House said it was contemplating a reset of its relations with Saudi Arabia after the kingdom sided with Russia in engineering last week’s 2 million barrels per day production cut. The Biden administration had pushed Riyadh to at least delay the cut by a month, in order to minimize hurt to the ruling Democratic Party from another potential spike in oil prices before the Nov. 8 US midterm election. 

US-Saudi relations haven’t hit such a trough in a long time and it’s not known whether Washington’s reprisals, which could impact bilateral and military ties, would negatively impact energy markets as well. But that’s another story for another time. 

For now, it’s about sugar and whether the current rally will extend or abort.

And technical indicators, barring the politics of energy, suggest this run-up could stay, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com. He adds: 

“The current bullish momentum in sugar is a part of a larger bullish ‘cup-with-handle’ formation that's taking place on the monthly charts.”

“It basically means prices are well supported by the major moving averages on the monthly chart.”

Dixit explained that raw sugar’s weekly 5 Exponential Moving Average (EMA) of 18.51 cents was making a positive overlap with the 50-week EMA of 18.50 and that could soon be followed by the weekly middle Bollinger Band of 18.42 doing a similar overlap.

He said the current bullish consolidation within the 17.20 - 18.75 cent range also awaits a breakout that could propel sugar towards the 20.25 target initially. 

“A sustained break above 20.50 and 20.95 will set stage for another big bull run for raw sugar that could target 23 and 24.10 cents, respectively,” Dixit said.  

But he also cautions that trouble lies below the 17.20 base.

“While the broader outlook remains bullish, any reverse break below the horizontal support base of 17.20 may put brakes on the bullish continuation, exposing sugar towards the 16.60 and 15.23 lows.”

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.