• Precious metals move higher across the board led by platinum
  • Copper moved higher and lumber climbs above $400 per 1,000 board feet
  • Crude oil moved higher while natural gas falls
  • Agricultural commodities turn in a mixed performance on the week
  • The market awaits the October 30 Fed meeting


The story of this week:

Natural Gas- Risk-Reward Favors The Upside

Next week is Halloween. For commodities traders, the end of October is always a flashing sign that one of the most volatile energy markets is moving into the peak season for demand. In its physical form, natural gas is combustible. The price action in the natural gas futures market has a long history of explosions and implosions.

Seasonality plays a significant role in the natural gas market.

Last year at this time, stockpiles of natural gas in the US were at the lowest level in years. A cold snap at the start of the winter season combined with low inventories caused the price of the energy commodity to rise to its highest price since 2014 in November 2018.

Source: CQG

The monthly chart shows that the price rose to a peak of $4.929 per MMBtu last November. The last time natural gas futures reached that level was in February 2014 when the high was at $6.493 per MMBtu.

In late 2018, stocks peaked at 3.247 trillion cubic feet going into the winter season when they decline as the demand for heating increases across the US. As of October 18, the amount of natural gas in storage was already at 3.606 trillion cubic feet with three weeks to go in the injection season.

The price of the energy commodity traded in a range between $3.001 and $3.368 in October 2018. As of Friday, October 25, at $2.308 per MMBtu, the price was around $1 lower. The higher level of stockpiles has weighed on the price of the nearby futures contract. Meanwhile, the monthly chart highlights that price momentum displays a deeply oversold condition going into the winter months. Open interest, the total number of open long and short positions in the natural gas futures market, was at the 1.213 million contract level. Last year at this time, the open interest metric was at 1.523 million contracts, 310,000 contracts higher. Falling price and declining open interest is typically not a bearish sign in a futures market. Meanwhile, at under 10%, monthly historical volatility is currently at the lowest level in many years.

Risk-reward could be telling us that the downside prospects for the price of natural gas are limited as we head into the cold winter months. If temperatures across the United States are below average, the demand for the energy commodity could cause stockpiles to decline. The peak season futures contract in January was trading below the $2.60 per MMBtu level as of the close of business on Friday, October 24. The odds favor at least one move to the upside over the coming weeks.

Seasonality, long-term technical indicators, and the nominal price level of natural gas are compelling at the $2.30 per MMBtu level on November futures and below $2.60 on peak season January futures. I favor the upside prospects for the energy commodity over the coming weeks.

Highlights in commodities: 

  • December gold moves 0.75% higher as the market still settles above $1500 per ounce
  • December silver rises by 1.98% on the week as silver flirts with $18 per ounce
  • Platinum posts a 4.17% gain on the week. January platinum was at a $572 per ounce discount to December gold futures, which narrowed since last week
  • Palladium moved 1.55% higher for the week as it rose to a new high at $1761 per ounce
  • December copper rose 1.50% as the price moves to the $2.6755 level
  • December iron ore futures moved 4.03% higher on the week
  • The BDI falls 4.08% since October 18 to the 1785 level
  • November Rotterdam coal moves 5.22% lower since last week
  • November lumber rises 5.89% since October 18 to above $400
  • December NYMEX crude oil moved 5.22% higher since October 18 as the energy commodity recovers
  • December Brent crude oil moved 4.52% higher since the previous report as Brent marginally underperformed NYMEX crude oil
  • The premium for Brent over WTI in November closes Friday at the $5.34 level down $0.11 from last week
  • December gasoline moved 3.79% higher while December heating oil futures gained 2.26% over the past week
  • The gasoline crack spread in December was 3.72% lower while the December heating oil crack moved 3.76% to the downside since October 18 as refining margins corrected lower
  • Natural gas fell 3.61% on December futures closing the week at $2.459 per MMBtu after reaching a low at $2.388 on October 11. The EIA reported an injection of 87 bcf into storage on Thursday for the week ending on October 18 as the withdrawal season approaches
  • December ethanol moves 2.78% higher on the week
  • November soybeans fell 1.47% since last week
  • December corn fell 1.09% on the week
  • CBOT December wheat declined 2.72% since last week. December KCBT wheat trading at a 95.00 cents discount under December CBOT wheat. The discount moved towards the historical norm by 3.50 cents since last week
  • March sugar rose just 0.24% since October 18
  • December coffee rose 3.92% on the week
  • December cocoa declined 2.05% since last week
  • December cotton fell 0.40 since October 18
  • November FCOJ futures declined 1.31% since last week’s report
  • December live cattle gained 2.16% since last week
  • November feeder cattle were 1.77% higher since October 18
  • December lean hog futures moved 4.45% lower over the past week
  • The December dollar index futures contract rose 0.61% on the week
  • December Long-Bond futures trading at 159-14 down 0-26 for the week as prospects for lower interest rates fall
  • The Dow Jones Industrial Average closes at 26,958 on Friday, October 25, up 188 points from October 18. The S&P 500 rose 1.22% since last week. The VIX fell 1.60 and was trading at around 12.65 on Friday as stocks approach new highs
  • Bitcoin was trading at $8,630.43 on Friday up $650.33 or 8.15% since October 18. Bitcoin jumped from a low at under $7,300 during the week
  • Ethereum was trading at $180.90 on Friday, up 3.35% since the last report

Price Changes for the week:

DBC closes at $15.61 per share, up 36 cents per share since October 18

Source: Barchart

DBC is the Invesco DB Commodity Tracking product which represents a diversified basket of commodities futures contracts, has net assets of $1.41 billion and trades an average daily volume of 1,023,921 shares. The fund summary for DBC states that it holds a diversified group of commodities futures but is weighted towards energy. The average volume and net assets were stable over the past week as the price of the ETF rose.

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.