June 14, 2019

  • New high in gold, but a pullback late Friday while palladium soars
  • Little movement in copper compared to last week, but lumber soars on the prospects for lower interest rates
  • Economic and politics pull crude oil in opposite directions- Natural gas remains below $2.40 per MMBtu
  • Grains explode higher in the wake of the June WASDE report on weather and late planting- Coffee moves lower during the July-September roll
  • Stocks stable on the week, the dollar rallies, and digital currencies post gains

The story of this week:

Crude Oil- Economics, and Geopolitics Pull the Energy Commodity in Opposite Directions

The crude oil market is in a precarious position these days. The escalation in the trade dispute between the US and China has weighed on the global economy, causing demand for the energy commodity to decline. The price of active month NYMEX crude oil futures fell from a high at $66.60 per barrel at the end of April to a low at $50.60 during the first week of June.

Source: CQG

As the weekly chart highlights, the bulk of the drop of 24% came as the trade negotiations between Washington and Beijing broke down. The nearby July NYMEX futures contract settled at $52.51 per barrel on Friday, June 14, not far above the recent low.

At the same time, the tension in the Middle East reached a new high this week as the US accused Iran of the sabotage of two oil tankers in the Gulf of Oman on June 13. The incident was not the first, back in May four ships were damaged near the Strait of Hormuz. Nor was it the first incident during the week as a missile from Yemen hit a Saudi international airport. The price of oil moved higher on June 13 and 14 as supply concerns increased.

The US is now the world’s leading producer of oil with daily output at 12.3 million barrels according to the latest reports from the Energy Information Administration. However, the EIA also highlighted the decline in demand because of global economic conditions this week. Inventories in the US rose according to both the EIA and API who reported stockpile data that was more bearish than most analysts had expected. The API said stocks rose by 4.852 million, and the EIA reported an increase of 2.2 million barrels of crude oil for the week ending June 7 earlier in the week. The inventory data put pressure on the price of crude oil until the actions in the Gulf of Oman.

The Middle East is the home of more than half the world’s oil reserves, so geopolitical events in the region contrast the trade issues that are weighing on the economy. At the end of this month, the oil ministers from OPEC will gather in Vienna to decide on production policy for the second half of 2019. With the price of the energy commodity near the recent lows, it is likely that, together with Russia, they will leave the 1.2 million barrel per day output cut in place for the rest of this year. If the price of oil falls below $50 on WTI and $60 on Brent, they could decide to increase the cuts.

While the economy could send the price of oil lower, the potential for a price spike to the upside based on a continuation of hostilities in the Middle East and around the Persian Gulf, Strait of Hormuz, and the Gulf of Oman is rising. The Brent-WTI spread is a barometer of both production levels from the US and OPEC as well as for the political risk in the Middle East.

Source: CQG

As the chart illustrates, the Brent premium has increased from $5.87 in early April to the low at $9.35 level as of Friday, June 14. The lower in the August spread was at $9.75 per barrel in late May. A continuation of incidents or increased violence that threatens production, refining, or logistical routes in the Middle East over the coming days and week would likely push the Brent premium higher as would additional output cuts at the OPEC meeting. Crude oil is likely to remain volatile for the rest of June as politics and economics continue to pull the energy commodity in opposite directions.

Highlights in commodities:

  • Gold posts marginal 0.12% loss on the week, but rises to another new high for 2019 on June 14
  • Silver moves 1.48% lower and closes at the $14.80 per ounce level as the silver-gold ratio approaches the all-time peak
  • Platinum edges 0.17% lower since last week. Platinum was at a $539.80 per ounce discount to August gold futures which was close to unchanged for the week
  • Palladium explodes 7.78% higher for the week as the metal rallies by more than $100 per ounce on the September futures contract
  • July copper rose only 0.08% as trade issues keep the red metal near its recent low
  • July iron ore futures rose 8.50% since last week on supply issues in Brazil
  • The BDI corrects 6.92% to the downside since June 7 on the back of concerns over the global economy
  • Rotterdam coal falls 5.44% as on weakness in crude oil
  • July lumber explodes 23.2% higher on prospects for lower interest rates and more demand for new homes
  • July NYMEX crude oil declines 2.74% since June 7. Inventory data from the API and EIA were bearish, but attacks on tankers in the Gulf of Oman keep the price of WTI above the $50 level
  • August Brent crude oil declines 1.79% since the previous report. August Brent was at $62.11 per barrel on Friday and was supported by rising tensions between the US and Iran
  • The premium for Brent over WTI in August closes Friday at the $9.34 level up 26 cents since June 7 as the spread is a barometer for political risk in the Middle East as well as OPEC versus Us production
  • July gasoline moves 0.37% lower while July heating oil futures gain 0.25% over the past week as products outperform crude oil
  • The gasoline crack spread in July was 6.89% higher while the July heating oil crack rose 8.33% since June 7 on less bearish product inventory data from the API and EIA during the week
  • Natural gas recovered by 2.14% on July futures closing the week at $2.387 per MMBtu. The EIA reported an injection of 102 bcf into storage on Thursday for the week ending on June 7
  • July ethanol explodes 8.61% higher on strength in corn
  • July soybeans gain 4.73% since last week in post WASDE trading
  • July corn rallies 8.96% adding to recent gains on late planting and the weather conditions in the corn belt
  • CBOT July wheat moves 6.74% higher since last week. July KCBT wheat trading at a 62.25 cents discount under CBOT wheat. The discount widened by 6.75 cents which continues to be a warning sign for the price of the grain
  • July sugar gains 2% since June 7 and closes at 12.75 cents per pound
  • July coffee falls 4.9% as July futures roll to September
  • July cocoa moves 0.97% higher and trades at a new peak at $2583 per ton before settling around the $2500 level. The price moved lower in the aftermarket which could set the tone for next week
  • July cotton moves just 0.53% higher in post-WASDE trading
  • July FCOJ futures moved 1.51% lower, as the price closes at $1.0450 per pound
  • August live cattle edges 0.94% higher since last week
  • August feeder cattle fall by 1.26% since June 7
  • August lean hog futures fall 3.27% over the past week
  • The June dollar index futures contract recovers by 1.12% on the week on issues in the Middle East and despite expectations for rate cuts by the US Fed
  • September Long-Bond futures trading at 154-15 down 0-03 on the rising prospects for lower short-term rates from the Fed
  • The Dow Jones Industrial Average closes at 26,090 on Friday, June 14, up 106 points from June 7 and adding to last week’s gains. The S&P 500 rises by 0.47% since last week. The VIX falls 0.97 was trading at around 15.33 on Friday.
  • Bitcoin was trading at $8,426.75 on Friday up $436.70 or 5.47% since June 7. Technical resistance at around $9125 in Bitcoin with support at $5000
  • Ethereum was trading at $257.56 on Friday, up 3.13% since the last report

 

Price Changes for the week:

DBC closes at $15.27 per share, up ten cents per share since June 7 on strength in grains

Source: Barchart

 DBC is the Invesco DB Commodity Tracking product which represents a diversified basket of commodities futures contracts, has net assets of $1.61 billion and trades an average daily volume of 900,723 shares. The fund summary for DBC states that it holds a diversified group of commodities futures but is weighted towards energy. The average daily volume increased in DBC over the past week as the prospects for lower interest rates attracted more capital to the commodities asset class.

Have a great weekend!

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