February 28, 2017

By João Paulo Botelho and Loredane Pereira

March delivery may be the largest ever recorded for the month on ICE/NY

With a holiday in Brazil and few changes to the macroeconomic/fundamentals scenario, the sugar market focused today on the expiration of March/17 on ICE/NY. The contract expired at 19.31 cents/lb, up 22 points from the previous settlement and with 8 points of inversion from May/17.

Delivery has been rumored to be big over the last few days, especially considering the high open interest. Short after expiration, traders talked about deliveries totaling 23,700 lots, or 1.2 million tonnes. Regarding the origins, most sugar is likely to come from the Brazilian Center-South region, with smaller volumes from the country's Northeast, South America and Argentina. On the buyer side, the same Singaporean trading company that took most of the amount in recent deliveries is expected to be the only receiver this time around.

Deliveries against the NY exchange

*March/17 figures are not official

Source: ICE/NY. Design: INTL FCStone


If official numbers confirm market expectations, this would be the largest delivery ever made against a March contract, as well as being 55.6% over October/16 and more than double March/16.

At first sight, the market usually sees large deliveries as a bearish indication, as the situation tends to mean weakness in the physical market (most sellers' first option). In addition, a delivery this big could glut demand from major consuming centers over the next few months, especially if the buying company does not quickly assign the ship that will be receiving sugar.

On the other hand, the spread's inversion at the end of the session along with a relatively sustained premium for VHP sugar in Santos last week suggest that buyers' appetite might be bigger than expected. Furthermore, this trading company has received larger volumes in the past, with an already assigned destination, which reduces the negative impact over demand for following months. Lastly, the elevated London-NY differential also meant a powerful incentive for refineries to buy.

In this sense, it is still difficult to know how the market will react to deliveries, as the next moves made by deliverers and receivers will be key to determine the path of sugar prices over the next few days and weeks.

Time of uncertainty for crude oil market

The lead WTI crude oil contract traded at the New York exchange has been trading relatively stable since the beginning of the year, primarily inside the US$ 51 to US$ 54 range. This level is clearly above that seen in 2016, when crude oil was negotiated at around US$ 40, but also far from the US$ 60 to US$ 70 range seen when OPEC announced its production cuts late last year.

Contradicting skepticism around the plan to curb output, major OPEC members have been complying with the goals. Even Russia, which was seen as one the main unknowns, has complied with the agreement in January. According to a survey conducted by a news agency, 94% of total cuts are expected to be made by February.

However, there are many doubts about whether cuts will be continued. Some of those nations have been reluctant to meet the targets, leading Saudi Arabia to account for most of the production cuts. To make matters worse, analysts note that Saudi the impact for exports has been almost null, as the decline in production is absorbed by domestic use. It will be more difficult to maintain production cuts during summer in the Northern Hemisphere, as the Arab country's domestic demand tends to rise with the use of air conditioners.

Another red flag for the crude oil market is the spread between prices of WTI (benchmark in the US) and the spot price in Dubai (reference for the Middle East). This differential, which recorded an average of US$ 2.4/barrel in 2016, has been in a negative level since Jan. 20.

WTI-Dubai differential

Source: Bloomberg. Design: INTL FCStone

Traders in this market have pointed out that Arab producers have been managing to sell their product to Asian consuming centers at slightly higher prices than other players due to physical proximity, which eases logistical concerns. However, they report larger volumes of crude oil coming from unusual origins to Asia, such as Russia, Canada, Brazil and the US. If the price differential fails to be corrected, these loadings may intensify, which could lead some Middle East producers to rethink their cuts in order to protect market share.

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