• Volatility in markets across all asset classes- Wild trading conditions
  • Interest rates continue to plunge sending bonds to record levels
  • Gold attracts buying while oil is a falling knife
  • WASDE next week- The world will continue to need agricultural products for nutrition
  • Be careful in markets- We are in the midst of the most significant correction since 2008

The story of this week:

Crude Oil- A Disagreement At OPEC Creates A Price Disaster

Last week, the oil market waited for OPEC to decide if the cartel would cut production further in the current risk-off environment caused by Coronavirus. The Fed took the threat seriously with a 50-basis point cut in the Fed Funds rate on March 3. Other central banks around the world also cut rates to address the potential for economic weakness caused by the virus.

The oil market had assumed that the international oil cartel would follow the central banks and reduce output. At its late 2019 meeting, OPEC, together with Russia, increased production cuts from 1.2 to 1.7 million barrels per day. Saudi Arabia kicked in an additional 400,000 barrels, bringing the total amount of the daily reduction to 2.1 million barrels. At the time, OPEC was concerned that the trade war between the US and China could cause a global recession. While the January 15 “phase one” trade deal provided brief optimism over the worldwide economy, the outbreak of Coronavirus in China and spread to other countries turned the demand for crude oil from bad to worse. The OPEC oil ministers agreed to meet on March 4 and 5 to access the impact of the late 2019 production reduction. The market had anticipated an additional one million barrel per day cut, and Saudi Arabia advocated for a 1.5 million barrel cut in quotas. The meeting ended on Friday, with a Russian refusal to participate in anything more than a 500,000 barrel per day reduction. Russian oil minister Alexander Novak, the mouthpiece for President Vladimir Putin, left the meeting with no agreement after a standoff with Saudi Arabia. The falling knife in the crude oil futures market, and oil-related shares, continued to fall to new lows at the end of last week.

Source: CQG

The monthly chart of NYMEX WTI crude oil futures shows that the price dropped from its 2020 high of $65.65 per barrel on January 8 to a low of $41.05 late last Friday. The decline to the lowest price since August 2016 took crude oil 37.5% lower.

Source: Barchart

The price of Brent futures, the benchmark for crude oil from the Middle East and Russia, fell from $71.99 in early January to a low of $45.16 on Friday or 37.3%.

Source: Barchart

The S&P 500 Energy Select SPDR (XLE) at $42.50 on March 6 was 29.2% lower in 2020 after lagging the price of oil throughout 2019. The XLE was at its lowest level since April 2009, in more than a decade.

The decline in the price of crude oil has a significant impact on inflation. As oil and other commodity prices fell under the weight of risk-off conditions caused by Coronavirus, the potential for more rate cuts and stimulative measures from the Fed and other central banks will rise. We are in the midst of the world financial crisis since 2008. With the US ten-year Treasury Bond at a historical low well below 1%, the Fed Funds rate is steaming its way back towards zero percent, and quantitative easing is likely to make a return sooner rather than later. Wash your hands often, stay out of crowded places, but just as the 2008 crisis passed, so with Coronavirus and the current risk-off action in markets. I view the current environment as an opportunity to pick up bargains in markets across all asset classes. However, widen those scales and be prepared to take some financial pain before markets find bottoms. It is virtually impossible to buy at the bottom or sell at the top of markets. Leave plenty of room when buying as when the knives continue to fall, today’s lows can be tomorrow’s higher, for a period. At the same time, anyone who is not prepared to take mark-to-market losses over the coming days, weeks, and perhaps months, should remain on the sidelines until the dust settles. Be careful out there!

Highlights in commodities:

  • April gold moved 6.75% higher on the week and settles at $1672.40 per ounce
  • May silver gained 4.90% as the precious metal settled at $17.263 per ounce on March 6
  • Platinum recovered 3.67% on the week. April platinum was at a $776 per ounce discount to April gold futures, which widened to a new record high since last week
  • June palladium falls 2.77% for the week and settled at $2439.20 per ounce
  • May copper edged 0.81% higher to the $2.5605 level since February 28
  • April iron ore futures moved 6.11% higher over the past week
  • The BDI rebounded rose 13.23% since February 28 to the 599 level on seasonal factors
  • April Rotterdam coal rose 2.12% since last week
  • May lumber fell 6.62% lower since February 28 as the price was at the $383.70 per 1,000 board feet level despite the rate cut
  • April NYMEX crude oil plunged another 7.77% on the week after last week’s 16.15% decline and closed the week at $41.28 per barrel
  • May Brent crude oil fell 8.81% after falling 14.41% last week. Brent underperformed NYMEX crude oil over the past week as OPEC could not agree on output cuts
  • The premium for Brent over WTI in May closed Friday at the $3.71 level as the spread moved 94 cents lower since last week
  • April gasoline fell 6.33% while April heating oil futures posted a 4.29% loss over the past week
  • The gasoline crack spread in April was 1.04% lower while the April heating oil crack moved 0.76% lower since February 28 on the back of lack of demand for fuels because of Coronavirus
  • Natural gas rose 1.43% on April futures closing the week at $1.708 per MMBtu after another failed attempt to recover. The EIA reported a withdrawal of 109 bcf from storage on Thursday for the week ending on February 28
  • April ethanol fell 2.60% on the week
  • May soybeans fell 0.17% since last week as the market shifts focus to the March WASDE report on Tuesday, March 10
  • May corn moved 2.10% higher on the week
  • CBOT May wheat was 1.76% lower since last week. May KCBT wheat trading at a 69.50 cents discount under May CBOT wheat as the discount moved by 2.25 cents towards the historical norm since last week
  • May sugar plunged 7.92% since February 28 and closed at just over 13 cents per pound
  • May coffee posted a 3.55% loss since last week
  • May cocoa declined 4.15% since February 28
  • May cotton recovered by 2.11% since last week as the fiber futures were at the 62.79 cents per pound level
  • May FCOJ futures rose 0.78% since the previous report to 96.70 cents per pound
  • April live cattle fell 1.70% since last week
  • April feeder cattle were 0.93% lower since February 28
  • April lean hog futures rose 5.86% over the past week
  • The March dollar index futures contract declined 2.19% on the week to just under the 96 level
  • June Long-Bond futures were trading at 178-06 up 8-19 for the week on the back of risk-off fears over Coronavirus
  • The Dow Jones Industrial Average closes at 25,865 on Friday, March 6, up 456 points from February 28 after a wild and volatile week. The S&P 500 rose 0.61% since last week. The VIX was trading at around 41.94 on Friday up 1.83 on the week after trading to a new high of 54.39, the highest level since January 2009
  • Bitcoin was trading at $9,111.03 on Friday up $481.64 or 5.58% since February 28
  • Ethereum was trading at $239.02 on Friday, up 6.29% since the last report

 

Price Changes for the week:

DBC closes at $13.36 per share, down 25 cents since February 28

Source: Barchart

DBC is the Invesco DB Commodity Tracking product which represents a diversified basket of commodities futures contracts, has net assets of $1.09 billion and trades an average daily volume of 1,403,657 shares. The fund summary for DBC states that it holds a diversified group of commodities futures but is weighted towards energy. The average volume rose over the past week and net assets fell as the price of the ETF posted a loss.

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal.  This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.