Sugar Bulls, Time to Hold Your Horses

(Seeking Alpha) – 2018 has been a challenging year for sugar bulls with prices dropping 19.4% since the beginning for the year. The large surplus sugar production coupled with weakness in the Brazilian Real (BRL) have caused downward pressure on sugar prices in 2018. This article will discuss several reasons why sugar bulls should still hold their horses as we approach the new year.

Lower oil prices do not bode well for sugar

One of the important factors to consider when determining where sugar will head next would be where the current oil price is trading at. The sugar market is heavily influenced by crude oil prices as consumers in Brazil are able to switch their fuel choice between gasoline and ethanol on their flex-fuel vehicles (FFVs) depending on price and convenience. Crude oil prices have been making lower highs and lower lows on the backdrop of record US shale production, waivers that are granted to crude oil importing countries pertaining to the US sanctions against Iran. Brent crude oil prices have fallen approximately 35% since early October which puts Brent crude oil into a technical bear market. This is further compounded by weakening crude oil demand given the threat from a global slowing growth outlook in 2019. The sharp fall in oil prices would presumably lead to weaker gasoline prices and consequently, consumers would start to switch back to gasoline as their fuel choice over ethanol. This will potentially cause ethanol prices to be negatively affected as well. This would also translate into a fall in demand for sugar to produce ethanol and thereby lower sugar prices moving ahead. Hence, as long as the bearish oil story persists, the upside potential for sugar remains limited.

Sentimental Analysis suggests further downward pressure

We can see in Figure 1 that the net non-commercial long positions (Contracts of Sugar No.11) (Green line) have been in a bearish trend. Speculators have been reducing their longs positions and it has been making lower lows and lower highs since July 2018. Furthermore, net non-commercial short positions (Purple Line) have started to reverse recently in November 2018 where we witness a bullish trend of higher highs and higher lows which suggests speculators are starting to add short positions.