Oil hit 20 month lows in morning trading (NYMEX Crude $57.39 -$1.61) as demand fears persist throughout the world. On Tuesday, the World Bank revised its 2009 growth forecast to 4.5%, down from 6.4%. It also stated that these projections could be on the optimistic side as some developing countries could see negative growth.

November HDD northeast contracts (BOS, LGA, PHL) will likely trade higher into the end of Nov.  Look for these contracts to stay here or become a little more ‘undervalued’ within the next few days - as warm weather is here for the next couple days. However towards the middle of November you will see these values correct - or the market valuation to trade higher for HDD Nov contracts - as cold weather blast materialize later in the month.

Weather Trends has released a new white paper, titled ‘Anticipating the Climate Black Swan’ applying the idea popularized by Nassim Taleb’s excellent book (The Black Swan, 2007).  Go here for the press release and to download the paper.

This table shows the Weather Trends International US HDD outlook for the next 4 weeks at the CME city locations (HDD value and change from last year).  Despite some warmth this week, we do expect another shot of cool air leading to higher heating demand requirements in mid November.

Oil prices and base metals headed slightly lower in what has turned out to be a volatile trading session yesterday. Commodities jumped Wednesday after the Fed cut the key rate to 1.0%. However the gains have been short lived as more evidence points to one of the deepest worldwide recessions in recent memory. Most economists give a formal definition of a recession when two quarters of GDP growth are negative and the first part of this equation rang true on Wednesday when it was announced that the GDP for the third quarter contracted by 0.3%. However, some have dismissed economists citing that the U.S. has been in a recession since the beginning of 2008 or even earlier.

Gold is trading around $735/oz., under some pressure from a recovery in the dollar in the last few days. AngloGold Ashanti, the world’s third-largest gold producer, is reviewing at least $200 million of investments and may sell assets as funding becomes more costly. “We’re tightening our belts,” said Mark Cutifani, AngloGold’s chief executive. Base metals gave back some of this week’s remarkable rebound, which has been driven largely by short covering.

In today’s currencies market, both the Euro and Sterling were losing to the dollar, shedding 1.6% and 2.2% respectively to $1.2707 and $1.608.

In many of our recent weekly and monthly commodity discussions, we have been talking about the potential for a sharp reversal in sugar futures. As we still have several months before expiration of the current contract, many factors are wildcards that can support a constructive pattern, in spite of the overall softening of global markets. While it is too early to call the current activity in sugar a reversal, March09 ICE sugar futures have shown some signs of strength, and this is at least a partial reaction to some the reasons that we have been figuring into our supply estimates.
March sugar has been strong this week, and today’s activity is more confirmation of at least a short term reversal – at the time of this writing, March is trading at 11.86 (+0.72), right at the 50 day moving average. Brazil made news yesterday as traders are increasing long positions on speculation that production will be down. We have maintained that Brazil will still have healthy production numbers, but that they will be a little lower than where most of the industry estimates have been discussing. Any time there is a downward revision in Brazil’s output, we see this type of market reaction. In addition the dollar remains strong, and price levels have been approaching or even dropping below production costs for many major origins; both factors are constructive to the market for globally traded commodities such as sugar. Another factor in a separate yet related market came out of the USDA early this week. The USDA issued an adjustment (downward) to their acreage and production estimates for several crops, including corn and soybeans. While the revision will not affect crop payments made to growers, it will affect the supply balance, which is important in estimating biofuel raw material supply and carryover stocks into 2009. Their statement revised the acreage estimates down 1.2% and 1.4% for corn and soybeans, respectively. As a result, the grains complex showed strength which has been increasing over the last several sessions on reduced crop prospects as a result of the spring and summer weather pattern. Less corn supply will support futures, and this will also serve to support sugar as more cane can then be profitable diverted to ethanol production in Brazil, reducing supply for the sweetener. The market is still below the WTI fair value range for Mar09 sugar (12.5 – 12.9 cents), but the gap is closing. We discussed last week’s sub-11 cent move as a good entry point for March, and traders who were able to execute at these levels are likely in a favorable position.

March09 ICE sugar futures have declined steadily since Monday’s session, now trading below 11 cents. While the current trend is for the technical indicators to place more downside pressure on futures, we continue to watch the dollar for signs of a reversal. The two charts below show the inverse relationship between the two this week – as the dollar strengthens, sugar has steadily fallen, getting as low as 10.73, which are the lowest levels since October 2008. There is a relationship with crude (and the broader weakening across the commodity spectrum), but different factors will start to come into play at we approach the and of 2008. Demand destruction in the oil space is well documented, and it is conceivable that oil will continue to slide further. At the current trading levels, world sugar prices do not have much more downside potential. There are several fundamental reasons to support this. First, even with lower crude prices allowing Brazilian production to swing back in favor of increased sugar (over ethanol), global demand for the sweetener remains strong, and any additional sugar available to the physical market will not have to search for a home, so the global S-D will not be significantly affected by higher stocks. Also, a slight increase from the Centre-South will not offset the reduction to the Indian crop for both the current and next crop year, which is a supply factor that we have been highlighting for months. In addition, despite the fact that US$ is the strongest we have seen in 2 years against the global benchmark currencies (US$ has risen 8% in the last month), this should be viewed as a short term opportunity, and possibly a favorable entry point for MarMay09. The nearby contract is Mar09, and current futures levels are hovering around the cost to produce for the major origins. When production margins are squeezed (and we are approaching this point), high volume producers can and will withhold physicals from the market until the prices move in their favor; if this situation plays out, this will not be the first time the market has seen such a move in recent years. 

With our view of fair value for Mar09 sugar around the 12.5 cent+ range, the time may be good to begin strengthening long positions, as the outlook between now and early 2009 is constructive for the market. This recent pullback below 11 cents may be the only time we see prices at these levels for the near future, even if the broader commodity market continues to slide. The next WTI monthly commodity review (for clients only) will be held the first week in November, and will address the outlook for carry over stocks and crop potential in more detail.

current activity (09:55 eastern):

SBH09: 10.9 (-.06)

SBK09: 11.26 (-.04)

SBN09: 11.43 (-.03)

As we discussed last week, the current pattern is quite a change from last week’s weather influenced energy demand. The east is in the midst of a cold week this week, and will see the heat switch staying ‘on’ for the next 6-8 days. HDDs for most eastern cities will be above both normal and last year for this stage in October. The outlook extending into next week will remain cold, and this will be supported by the shift to a negative trending NAO and AO. Despite the cold weather and an anticipation of OPEC production cuts, crude has softened further, with expectations of weakening demand weighing heavy among traders’ views. The strength of the US dollar (recent month rise of over 8%) is a contributing factor towards decreased overseas demand. The weekly pattern in natural gas, however, has diverged from oil and the last 5 days show an increasing slope; the current and extended cool pattern is providing support for NG futures, and traders should look for retracements as entry points for both NG and Heating Oil (NovJan). 

Heavy rains will continue to impede harvest in the western corn belt, as a moisture laden low pressure system moves through the central US.  Soybean harvest will be affected as well, but the timing of the event will have more of an impact to corn.  The US corn belt has seen a series of poor weather events cause problems for harvest operations.  This cooler and wetter fall was part of the outlook that shaped the Weather Trends outlook for reduced yields all summer.  Harvest is well behind last year’s pace - the most recent USDA crop progress update (20 Oct) reported that 29% of the US corn crop had been harvested, versus 58% for the same time last year.  At this writing, corn, soy, and wheat futures are all trading down.