What do Sugar and Crude Oil have in common?
Sugar and Crude Oil are used as fuel, which serves as a commonality. In Brazil, there is a great deal of pride in using sugarcane converted into ethanol to fuel their vehicles. Brazil is the leading sugarcane producer in the world and it would make sense for them to leverage this. Crude oil is still the most prevalent raw source of petroleum in the world despite the media and Wall Street darling that is Tesla. The relationship between sugar and oil actually has a greater depth than fuel.
Sugarcane is the most prevalent source of raw sugar in the world with sugar beets coming in second. Sugarcane is grown in warm climates and has an extremely strong political lobby worldwide. Sugarcane plantations once served as a secondary source of income and commerce in more tropical locations typically dependent upon tourism. St. Kitts and Nevis’ desire to diversify their economy in domestic real estate and agriculture in the wake of the collapse of their sugar industry is being funded (in part) by people participating in the Citizenship-by-Investment program. Sugar is a tough industry to be in and for a small Caribbean nation that is susceptible to hurricanes, it is difficult to compete with Brazil and other large nations that have larger production and subsidies.
Crude Oil production has changed drastically as there are many different players in this market. OPEC, Canada, Norway, Mexico, United States, China, Brazil, Angola and Russia are all major producers of crude oil. The increased production of Crude Oil in the United States and the desire to increase supply by Saudi Arabia to discourage shale oil drilling in the United States have created a market dynamic that has kept Crude Oil prices down.
In the United States, oil refineries and production locations are not necessarily in the same places and do not reflect the oil production levels of a particular region.
North Dakota does not have the number of refineries that Texas, Louisiana and Oklahoma have despite being the 2nd largest producer of Crude Oil in the United States. The oil boom in North Dakota and increased competition in the Crude Oil production market have kept prices down despite catastrophic events in the Gulf Coast that resulted in the closure of oil refineries. The closure of oil refineries meant fuel prices increased in the United States, but they did not result in significant changes in Crude Oil prices.
Houston may have flooded due to Hurricane Harvey and the Gulf Coast of Texas and Louisiana were devastated, but oil prices were falling as the chaos ensued. Prices finally rose once the storm exited the region, but they were not leaving the range it had been in during the Summer of 2017 and never reached the highs of Spring or Winter of 2017.
In the United States, Florida, Texas and Louisiana are three of the four largest sugar producing areas in the country. Would they make a dent in the sugar price on the commodities market? Likely not, unless there is some sort of a fear trade by speculators. Hurricane Season puts a damper on the production of sugar and Crude Oil in the United States and the largest commodities market in the world is in Chicago, which means that parochial, domestic trades could be made. All of this despite the fact that the United States is only tenth in sugar production.
Sugar has been in a bear market since October 2016 and at one point had lost 50% of its value in terms of spot price in less than one year. During sugar and Crude Oil’s price stabilization, there has been a consistent rise in the Crude Oil to Sugar ratio indicating the continued weakness of sugar despite recent stabilization against the U.S. Dollar. In the short term there has been a decline in the Crude Oil to Sugar price ratio.
The U.S. Dollar against the Brazilian Real (USDBRL) tells the story of a currency pair that is lending greater strength to the Brazilian Real. USDBRL has recently been a leading indicator for Sugar prices. Sugar doubled in price in one year and then proceeded to lose all of the appreciated gains in less than a year. The decline of Sugar Prices came toward the end of 2016 while the USDBRL started its slide (greater strength for the Real) in 2015.
The relationship between the Brazilian Real and Sugar has been a roller coaster ride to say the least.
Examining the relationship between sweet Sugar Cane and Light Sweet Crude shows two commodities that have a different sort of energy to them in the commodities market. Crude Oil’s massive fall starting in 2014 preceded the pop of the most recent Sugar bubble in 2016. However, the fall of Sugar from 2011 may still be going on and the most recent rally may just be a bullish correction in the scheme of things.
Recent catastrophes resulting from Hurricanes Irma and Harvey are not necessarily being played out in the Sugar and Crude Oil markets when they have historically been opportunities for speculators to panic and spike prices on fear. These are different times and it may be more reflective of a mellower, more disciplined trader… a program written in Python or C++.