How are Oil and Sugar Connected?

Andrew Hecht - Barchart - Wed Apr 19, 2023

Crude oil and sugar are highly volatile commodities. Crude oil continues to power the world despite decarbonization efforts. Meanwhile, sugar is a critical input in food and fuel. The trend towards clean energy has only increased sugar demand in Brazil, the leading South American economy and most populous country in the continent. The U.S. is the world’s leading corn producer and exporter, making corn the agricultural product of choice for ethanol production. Meanwhile, Brazil is the top sugarcane-producing and exporting country, making the sweet commodity the input in biofuel production. Rising oil prices tend to translate to higher sugar prices, and the nearby futures have risen to the highest price since March 2012 in April 2023.

In an early April 2023 Barchart article, I wrote, “Crude oil found a bottom.” In a late March 2023 Barchart article, I wrote, “Sugar has not exploded higher, but the soft commodity’s price action continues to sweeten on the upside in late March 2023.” Crude oil recovered in April, and sugar moved to a new multi-year high.

The sugar and oil rallies began in April 2020

Most commodities reached pandemic-inspired lows in early 2020, and sugar and crude oil futures were no exception.

The twenty-year chart shows nearby free-market ICE sugar futures fell to 9.05 cents per pound in April 2020, the lowest price since August 2007.

Meanwhile, lockdowns and other pandemic-inspired issues caused nearby NYMEX WTI crude oil futures to fall to a record low at negative $42.32 per barrel in April 2020. With nowhere to store the energy commodity, the price dropped to levels where futures contracts owners had to sell at any price.

Meanwhile, the declines reached bottoms, and prices turned higher, with crude oil exploding to over $130 per barrel in March 2022. At just below $80 per barrel on April 19, nearby NYMEX crude oil remains over $120 above the April 2020 low. Sugar futures at over 24 cents per pound have over doubled over the past two years.

Ethanol prices remain elevated

Aside from the connection as commodities, the crude oil and sugar correlation comes from sugar’s role as food and fuel as an input in ethanol production.

The chart of Chicago ethanol swaps shows the rise from 80.05 cents per gallon wholesale in April 2020 to $2.4200 per gallon in April 2022, over triple the price at the 2020 bottom.

Since sugarcane is the critical input in Brazilian ethanol production, the rise in biofuel prices supports sugar demand and prices.

Source: Statista

The chart shows the U.S. produces the most ethanol, which supports corn demand. However, Brazil is, by far, the second-leading ethanol-producing country, supporting sugarcane demand.

OPEC+ cuts production supporting oil and sugar prices

Nearby NYMEX WTI crude oil prices fell to $64.12 per barrel in March 2022. In early April, OPEC+ surprised the oil market with an over one-million-barrel-per-day production cut, causing the energy commodity to begin the second quarter by gapping higher.

The chart shows NYMEX crude oil futures had been moving higher from the March 20 low through March 31. However, the April 2 OPEC+ production cut caused the price to gap higher to over $80 per barrel.

The ten-year world sugar #11 futures chart shows the October 2016 23.90 cents high stood as technical resistance for the sweet commodity. In April 2023, the price eclipsed the resistance, rising to 24.85 cents, the highest price since 2012.

Levels to watch in oil and sugar

NYMEX crude oil’s decline from $130.50 to $64.12 per barrel took one year and created significant resistance levels as the price made lower highs and lower lows. The first technical upside target is $93.74 per barrel, the November 2022 high. Above there, $100 is a crucial psychological level.

In sugar, 23.90 was the first upside milestone that gave way. The next technical resistance is 26.78, the February 2012 high, with the ultimate target at the February 2011 36.08 cents per pound high.

Goldman Sachs calls for a “commodities supercycle”

While bull markets rarely move in straight lines, buying dips is always the optimal approach in a secular bull commodities environment.

In March 2023, Goldman Sachs analysts called for a “commodities supercycle,” driven by China and the capital flight from energy markets and investment after concerns triggered by the banking sector. If correct, crude oil and sugar prices could continue to rally, making higher lows and higher highs.

Sugar and crude oil are connected as ethanol demand continues to rise. If oil continues towards a challenge of the $100 per barrel level, sugar could be heading for 30 cents per pound or higher.

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On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.