Commodities Watch: Transparency, and its Lack, in the Oil Market; Someone Cornering Supply of Lead; Global Corn Supply Estimate Raised

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Commodity news today begins with a look at counting barrels of oil. There are also reports of a single buyer holding as much as 89% of the lead in storage in London, and new estimates are released on corn and wheat production.

Saudi Arabia has consistently maintained that it has increased production over the last couple of months to accommodate any oil shortage due to the loss of about 1.3 million barrels/day in Libya. The Saudis produced 9.125 million barrels/day in February and had been expected to produce about the same amount in March.

Instead, Saudi production was reported to be just 8.292 million barrels/day in March, nearly 800,000 barrels less than expected. The lower production cause traders to conclude that maybe the oil markets weren’t as tight as previously believed, and the price of crude fell.

As one London-based oil consultant told The Wall Street Journal, “Markets are fueled by a lack of reliable information. Nobody knows if we are short of oil.” That about sums it up.

The US Energy Information Administration, the International Energy Agency, the Joint Oil Data Initiative, OPEC, and just about any other oil watcher that projects crude production follows its own methodology and calculates its own totals. Because no one really knows, or can figure out, how much oil is available, the price of oil includes more than a dollop of guesswork. It’s no wonder then that any conceivable event that could have even the remotest impact on crude production often has a disproportionate effect on the price.

The lack of transparency in crude production leads to an inevitable lack of transparency in pricing. Whether WTI crude is fairly priced at around $112/barrel today is irrelevant. Whether that price represents anything other than guesswork is relevant, but unlikely ever to be satisfactorily explained.

In London, one company is believed to own up to 89% of the lead in London Metal Exchange warehouses according to a report from the LME called the Warrant Tom Banding Report. The lead is worth about $704 million at current prices according to a report in Bloomberg Businessweek.

The lead cash buyer price on the LME has risen from about $2,300/metric ton a year ago to about $2,660/metric ton today, a rise of almost 16%. The price peaked at more than $2,900/metric ton in March.

Lead is primarily used in batteries and plumbing supplies, and recent mining stoppages in Australia and expected demand for batteries after the disaster in Japan have pushed the price up.

LME rules require that dominant owners of a commodity lend the commodity out at a fixed rate and a limited premium. Prices for near-term deliveries of lead are also higher than prices for later-dated deliveries, a market condition known as backwardation. Even though there is a single owner of much of the LME stockpile, once the near-term premium disappears, the owner is likely to disappear too.

The International Grains Council has published its April 2011 report, bumping its supplies forecast for the 2011-12 crop year by 4.5%, to 1.808 billion tons. The Council’s consumption forecast was also raised by 1.5%, to 1.818 billion tons.

Global corn production is expected to fall by 0.8% in the 2010-11 crop year. High prices have not cooled demand for corn, leading to inventory tightening as the world moves into a new crop year. The Council projects a 60% drop in US corn inventories by the end of June.

Corn plantings for 2011-12 are forecast to rise by 3%, leading to production rise of almost 5% and a record harvest of 847 million tons. Tight supplies and high prices are expected to limit consumption growth and a switch to wheat for livestock feed. Wheat production is expected to total 672 million tons, up 22 million tons from 2010-11. Consumption of wheat is expected to match production exactly, even though wheat is projected as a partial substitute for corn as animal feed in 2011-12.

Paul Ausick

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