The attack on Khurais oil field in Saudi Arabia last Saturday might have changed the price brackets on the futures oil market – not so much for the immediate effect on the supply, already duly controlled, but the possible worsening of the geopolitical conflict with totally inconclusive consequences. The speculator aware that there is a risk not previously anticipated raises the price level he would be willing to sell short at, and under psychological effect shifts the price range we had been used to – it’s like “a burnt child dreads the fire” effect.
Futures oil responded strongly to the attack at the reopening of the market, which starts operating on Sunday at 5:00 PM already, and on Monday the sugar market opened at a downward trend. The funds increased their short positions by almost 15,000 lots, driving the total up to 245,634 contracts – the total position which represents a notional value of US$3.3 billion. That is, they started buying energy and selling other commodities less susceptible to upward trends, including sugar.
It’s said that the normal procedure of a fund is to let profits run and cut the losses short. In other words, on markets where they are making money, there is no hurry to settle the position. And that’s what they are doing to the energy commodities, which are long and the market goes up, and to the soft commodities, which are short and the market goes down. The settlement of any of the ends will only come when there is a rupture of the fundamentals or some black swan event, such as what came close to happening in the Saudi Arabia event.
Here in Brazil, the concern of some market sectors was to know Petrobras’ response after the attack and if there would be continuity of the pricing policy introduced two years ago by then-president Pedro Parente. The market wanted to know whether the state-owned oil company would continue with the price transparency policy reflecting the foreign market or would suffer interference with Bolsonaro’s mood. Petrobras dispelled this concern and increased gas price relieving the sector.
A relief, because if prices abroad tend to change levels, but here there is a sign of administered prices comeback, for the sugar-alcohol sector this sounds like having to pick up the bill for the price again. Remember that just during the disastrous Dilma Roussef’s administration – prisoner Lula da Silva’s creature – the sector lost R$68 billion in income and market share shrinking.
Naturally, the company won’t act under the impulse and panic on the market immediately passing the volatility of the commodity and of the exchange rate on to the price at the refinery; however, according to our calculations, taking the average of 20 days, Petrobras pricing is 5-6% below that of the foreign market.
The market estimates that 35% of the sugar sales for Brazilian export for the current harvest are not fixed. If Brazil is to export 18 million tons of sugar from April/2019 to March/2020, in thesis, about 124 thousand lots of futures should be sold to fix the pending physical contracts. If the funds have 245.6, this shows that for each lot the mill has to fix, the funds have 1.65 to buy. The vulnerability is with the funds, not with the mills. This is correct if not for one detail: timing. The mills have to fix (and therefore sell futures) before the shipping/delivery of the sugar while the funds are not pressed for time.
From the point of view of the fundamentals, some news is relieving and will have huge effect on the medium- and long-term. After a long time, the consumption of the Otto cycle fuel has increased by 1.25% in the 12-month accumulated (August/2018 to July/2019). Ethanol continues breaking sale and consumption records and there is strong evidence that next year sugarcane will be destined for renewable fuel repeating the reduced availability of sugar. If this happens, Brazil will have exported 36 million tons of sugar within two years against an average of 51 million tons of Brazilian sugar. Who will substitute for it and how long will it be able to do it?
We will have long 151 days separating the sugar contract for October, which expires at the end of September and the March contract, which expires at the end of February. Our clear and crystal recommendation is a roll-over. There are 100 cost points to be obtained over this period. Things need to go pretty wrong for this strategy not to work, such as oil below 50 dollars per barrel and real strongly devaluing against the dollar.
NY closed Friday at 11.09 cents per pound, but nobody cares. Those who had to roll it over already have. And those who have just have to hope the fundamentals will prevail on the long and winding road.
Make a note on your calendar – the XXXIII Intensive Course on Futures, Options and Derivatives should occur in March/2020, on March 24, 25 and 26 at Hotel Wall Street on Rua Itapeva in São Paulo. Wait for confirmation.
Have a nice weekend.
Arnaldo Luiz Corrêa
