Just when I think I’m starting to understand a bit about markets they surprise me.
Before the weekend there was lots of talk about a planned meeting of many of the world’s crude oil exporters and the impact of their decisions on crude oil prices and the value of the Canadian dollar.
Also, wheat markets already depressed by large global stocks were watching to see if the dry U.S. southern Plains region would get the heavy rain that had been forecast. The rain would end worries about impending severe wheat crop downgrades because of drought.
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In oil, Russia, Saudi Arabia and 16 other exporters met to try to nail down a proposal to freeze production at January levels.
There had been informal talks for weeks with little headway, but some felt this meeting was a big deal with the potential for oil to make a big move up or down depending on what was decided.
Crude values have a big influence on the loonie and it has a big impact on grain prices.
For example, the loonie’s rally since mid January has helped to limit optimism in canola futures even as soybeans rallied and year-end canola stock forecasts dropped.
But Iran would not attend the meeting because it wants to build production to pre sanction levels and the Saudis wouldn’t agree to anything when their regional rival was not part of the deal.
When I checked news feeds Sunday, things were proceeding as expected in the wake of the failed meeting. Crude oil was down seven percent and the loonie was trading down one cent.
Also, the rain had covered the southern plains, saving the winter wheat crop.
But when I arrived at work Monday, crude had regained much of its loses, the loonie was higher than the Friday close and wheat was surging three percent higher.
Huh?
An oil workers strike in Kuwait was limiting production and that was enough to steady the oil market’s nerves. Traders apparently had put little faith in the meeting after all.
Too much rain fell in some spots of the U.S. plains but the main reason for the wheat rally was that the trade was surprised by a weekly report showing non commercials, the hedge funds and speculators, had taken a record large net short (sell) position last week.
They were all betting on the price dropping, and when everyone is in the same boat, that presents a risk to lose money if the weather changes and the price starts to rise.
So on Monday they started dumping those short positions. The buying built momentum and the rally was surprisingly large.
Weather can change crop supply assumptions quickly. Excessive rain last week in Argentina, with more expected this week, could slash final production to 55 million tonnes from the 60 million expected.
In Brazil, dry weather now threatens the second corn crop, which is planted after harvest of the early soybean crop. The corn forecast was 57 million tonnes, but some analysts think that if the drought continues, that could fall by four to nine million tonnes.
