Commodities Watch: The Commodities Flush on Crude; Rare Earths Stumble; Russian Wheat Exports to Resume; Sugar Demand to Rise (MCP, REE, AVL, REMX, NOBGY, RDS-A, CZZ)

Today’s commodities news centers on the more than -4% drop in WTI crude oil prices which has led to a broad sell-off in most other commodities.  This was a day where if it traded at a commodity exchange it sounded just like a flushing toilet.  Wheat prices got no help from a prospective resumption in Russian wheat exports, and a leading ag products trading house had a lot to say about sugar demand.

By mid-afternoon, WTI crude was trading at around $99.50/barrel, down nearly -$4.50/barrel from yesterday’s close. Part of the decline followed the weekly report from the US Energy Information Administration, which stated that commercial crude inventories grew by 3.8 million barrels for the week ending May 6th. Crude stocks are now well above the upper limit of the five-year range average range.

Stocks of motor gasoline also increased by 1.3 million barrels and are also above the upper limit of their average range. Refinery utilization fell slightly from the previous week, from 82.8% to 81.7%.

Following last week’s nosedive in crude, it’s not unreasonable to wonder what’s going on, especially after crude regained some ground in the first two trading days of this week. First, the rise in inventories could well indicate that US drivers are simply not willing to pay more than $4/gallon for gasoline. Auto sales in April were strongly skewed toward smaller, more fuel-efficient cars which reinforces that story. Oil companies and refiners have to start worrying about demand destruction.

As for the speculators, last week’s dive could well have been due partly to high-frequency and algorithmic trading. An analyst at Credit Suisse noted that these trades make up about half of all oil market volume. As the price for Brent stayed reasonably stable at around $127/barrel, stop-loss levels were rising and once the first level was broken, the floodgates opened. Something similar could have happened today, with the EIA report reinforcing a price decline that likely started with the International Energy Agency reduced its 2011 oil demand forecast by more than 100,000 barrels/day.

Rare earths miner Molycorp, Inc. (NYSE: MCP) reported first quarter results after markets closed yesterday, and it was not a pretty sight. The company missed both EPS and revenue estimates, which shouldn’t have been a surprise given that the company hasn’t really begun anything near full operation yet, and won’t for another six months or so.

Molycorp’s shares opened lower this morning and are down even more since, to $63.14, off about -5%, in a 52-week range of $12.10-$79.16. Rare Element Resources Ltd. (AMEX: REE) and Avalon Rare Metals, Inc. (AMEX: AVL), which are even further from producing anything are down even more. Rare Element shares are down nearly -7%, to $12.31, within a 52-week range of $1.15-$17.92. Avalon’s shares are down nearly -9%, to $7.50, within a 52-week range of $1.09-$10.11. The Market Vectors Rare Earth/Strategic Metals ETF (NYSE: REMX) is down more than -2.6%, at $26.31, in a 52-week range of $19.25-$28.91.

Russia and other former Soviet Union countries are expected to resume wheat exports for the 2011-2012 crop season, and that is putting pressure on US wheat prices. The US Department of Agriculture anticipates a -18% drop in US wheat exports, about 1.05 billion bushels) in the 2011-2012 year as Russia gets back into the export game. Exports from Russia, Kazakhstan, and Ukraine are expected to reach 26.3 million metric tons (about 965 million bushels) in 2011-2012, up from 13.1 million metric tons this year.

Commodities trader Noble Group Ltd. (OTC: NOBGY) is spending $950 million to buy two Brazilian sugar mills on the prospects that demand for the country’s sugar will reach 220-230 million metric tons by 2030. To meet Brazil’s domestic demand for both sugar and cane-based ethanol, Noble believes the country needs to more than double its mill capacity at a cost the company estimates to be $170 billion.

Last year Royal Dutch Shell plc (NYSE: RDS-A) and Brazil’s Cosan Ltd. (NYSE: CZZ) kicked in $12 billion to a joint venture that would distribute and sell cane-based ethanol in Brazil. Poor weather has hampered the cane crop in Brazil for the past couple of years, so Cosan shares have pulled back from highs. The shares are trading late today at about $11.48, down -2%, within a 52-week range of $7.34-$14.74.

Paul Ausick