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  • Massive injections of stimulus continue to calm markets, but Coronavirus continues to take a toll on the world
  • Precious metals post gains- Gold rises to a new high during the week
  • A 9.7 million barrel per day production cut in oil does not provide support- Nearby NYMEX crude oil settled below $20 per barrel on Wednesday
  • Natural gas fells below the $1.60 level
  • Strength in industrial commodity prices- Weakness in agricultural products

 

Summary and highlights:

 

On Thursday, April 9, stocks ended the week with marginal gains as the S&P 500, DJIA, and NASDAQ posted gains of 1.45%, 1.22%, and 0.77%, respectively. The Russell 2000 was 4.62% higher on the session. June 30-Year Treasury bond futures gained 0-05 to 178-14, and the June dollar index slipped below the 100 level to settle at 99.504. The USDA released its April WASDE report on Thursday, which sent grain prices mostly higher. Corn was only 1.75 cents per bushel higher on lower demand for ethanol in the report. Soybeans gained 9 cents per bushel, and CBOT wheat futures were 8.25 cents higher. The KCBT-CBOT spread moved slightly towards the long-term average, which was a bullish sign for the wheat market. In the petroleum patch, NYMEX crude oil traded in a wide range from $22.57 to $28.36 on the nearby May futures contract and settled near the low at $22.76 as OPEC, Russia, and other producers around the world argued about the size and scope of a production cut. The price action is another sign that it is the demand instead of the supply side of the fundamental equation that is causing the price weakness. Global producers need a massive reduction in output to balance the market under the current conditions. Gasoline prices were virtually unchanged on the session, and heating oil futures fell. Natural gas declined after the EIA posted its first injection of the season for the week ending on April 3. Stockpiles rose by 38 bcf. Ethanol was around 3.5 cents higher to 92.8 on the May futures contract. Volatility continued in the precious metals sector with an almost $70 per ounce gain in gold that rose to a new high of $1754.50 per ounce. Silver settled at over $16 for the first time since March 12. Platinum and palladium prices both edged higher, and rhodium recovered from the recent low. June live cattle prices fell along with May feeder cattle futures. Lean hogs were 2.775 cents lower on the June futures to below 49 cents per pound. Coffee and cocoa futures moved to the downside, but cotton, FCOJ, sugar, and lumber posted gains. Bitcoin was $45 low to $7290 per token as the markets headed into the holiday weekend.

On Friday, the markets were closed for the Good Friday Holiday.

On Monday, April 13, the tech-heavy NASDAQ led the way in the stock market with a 0.48% gain. However, the DJIA and S&P 500 posted 1.39% and 1.01% respective declines. The Russell 2000 small-cap index fell 2.78% in the first session of the week. The June US 30-Year Treasury Bond futures fell 0-31 to 177-28, while the June dollar index futures contract was 0.168 lower to 99.336. Grain prices edged lower in the wake of Thursday’s WASDE report with corn down only 0.25 cents, soybean off 9.25. cents, and wheat losing 1.50 cents per bushel. Crude oil fell to $22.41 on the May futures contract, down 35 cents per barrel with Brent just below the $32 level on the June contract. The world oil producers cut output by 9.7 million barrels per day over the weekend, but the problem with the energy commodity remains the demand instead of the supply side of the fundamental equation. Gasoline posted a marginal gain pushing the crack spread higher, while heating oil futures fell. The distillate crack rose as the heating oil futures fell less than the price of crude oil on the session. Natural gas edged lower, and ethanol posted a marginal gain. Gold rose to another new high in a volatile session that took the yellow metal to a peak of $1772.80 on the June contract. Gold in Swiss franc terms rose to a new record high leaving the dollar as the only leading currency that has yet to fall to a new low against the precious metal. Silver was lower, while platinum and palladium posted gains. Copper rose to over the $2.30 level, reaching a high of $2.3525 on the May contract. Selling continued to grip the animal protein markets as live, and feeder cattle and lean hog futures were all down the daily limit. News that Smithfield Foods was closing a major pork processing plant in Sioux Falls, South Dakota caused fears that inventories of beef and pork will continue to rise. Coffee and lumber prices posted gains, but cotton, FCOJ, sugar, and cocoa prices all moved to the downside. Bitcoin fell $480 to $6810 per token.

On Tuesday, the stock market moved higher as the central bank, and government stimulus continues to provide the necessary treatment for an economy that is in a self-induced coma. The DJIA rose 2.39%, the S&P 500 was up 3.09%, and the NASDAQ rose 3.95%. The small-cap Russell 2000 was 2.09% higher. The 30-Year US Treasury Bond futures contract fell 0-09 to 188-27. The dollar index continued to decline and was below the 99 level at 98.885 on the June contract. Grain prices moved lower, with a 5.5 cents per bushel decline in corn, a 7.25 cents loss in soybeans, and a 6.25 cents drop in the price of May CBOT wheat futures. Crude oil fell on the session and probed below the $20 per barrel level before settling at $20.11 on the active month May futures contract. Gasoline moved higher, pushing the May crack spread to the $10 per barrel level, but heating oil futures declined. Natural gas settled at $1.65 per MMBtu as the price fell back below the $1.70 level. Ethanol, futures remained just below the 95 cents per gallon level on May futures. Gold traded to another new high at $1788.80 per ounce before settling at $1768.90. Silver moved back over $16 per ounce. Platinum was moved to over $800 per ounce as the precious metal was almost $70 higher on the session, and palladium posted a small gain on Tuesday. Copper gained and settled at $2.3295 on reports of mine closures in Peru and New Mexico. June live cattle futures were 2.425 cents per pound higher, and May feeder cattle gained 0.400 cents. Lean hogs in June were 0.975 cents per pound lower to just under 44 cents. Smithfield Foods, the leading US pork processing, company closed its South Dakota plant. While inventories of pork are rising, Coronavirus is impacting processing, which could lead to shortages. FCOJ and cocoa prices moved higher on the session, but cotton, coffee, sugar, and lumber prices slipped. Sugar traded to a new low of 9.99 cents per pound, which was the lowest price since 2018. Bitcoin was $140 higher to $6950 per token.

On Wednesday, the stock market moved lower as Q1 earnings reminded the market that the data over the coming months will reflect an economy in a coma. The DJIA fell 1.86%, the S&P 500 was 2.20% lower, and NASDAQ fell 1.44%. The Russell 2000 dropped by 4.31% on the session. The June US 30-Year Treasury bond futures contract rose 2-29 to 180-19. The June dollar index moved 0.601 higher to 99.486. Grain prices posted losses across the board with corn 6.75 cents lower, soybeans down 5 cents, and CBOT wheat 8.5 cents per bushel lower. Crude oil settled below the $20 per barrel level at $19.87 on the June NYMEX futures contract. Gasoline was a touch higher, but heating oil declined. Gasoline cracks moved higher to just over $10 per barrel, while heating oil cracks edged lower. Natural gas fell by 5.2 cents to settle at just below the $1.60 level. Ethanol was unchanged on the session at 94.7 cents per gallon. Gold dropped by $28.70, and silver fell by 62.5 cents per ounce on the session. Platinum and palladium also posted losses after Tuesday’s gains. May copper futures fell to just below the $2.30 per pound level. Live cattle were about a penny per pound higher on the June contract, feeder cattle in May were up 0.725 cents, and lean hogs in June gained only 0.675 cents. Cocoa and lumber prices moved lower, but cotton, FCOJ, coffee, and sugar were higher on the session. Bitcoin fell $210 to $6740 per token.

Weekly Spreadsheet:

Copy of Spreadsheets for the The Hecht Commodity Report April 15, 2020

Stocks and Bonds

Even though the US nonessential parts of the US economy remain closed and the number of cases of Coronavirus and fatalities continued to rise over the past week, the three leading stock market indices posted gains. Stimulus from the Fed and the US government has propped up the indices while scientists work towards treatments for the virus. Over the past week, the three-week total for new applications for unemployment benefits rose by 17 million. The VIX edged lower, while the bond market posted a marginal gain. While the market will continue to watch the progress of the virus, the next significant event will be a decision on the national social distancing guidelines that will expire on April 30. An extension could cause selling to return to the stock market as the economy would remain idle, but any move that causes the spread of Coronavirus to accelerate could also be bearish for the economy and the stock market.

 

The S&P 500 rose 1.21% since last week. The NASDAQ was 3.74% higher, and the DJIA posted a 0.30% gain.

Unemployment will continue to rise in the US, and GDP growth of the previous years will turn into a massive period of contraction. Corporate earnings will shift to corporate losses. As I wrote last week, “Science will find an answer to Coronavirus, but the economic results will last for years. Stopping the US and global economies on a dime and a deflationary spiral leaves a wake of financial fallout in the aftermath. Government and central bank actions come with a price tag. Explosive government debt and deficit level and debased currencies will take years to repair.” The aftermath of the pandemic will require years of innovative policies to pay for the current period and reinvigorate the US and global economies.

Chinese stocks underperformed the leading US indices over the past week as the FXI posted a loss.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $37.61 level on Wednesday, as it slipped by 1.34% since the previous report. China could be propping up the value of their companies in the stock market. China is likely under-reporting its number of cases and fatalities based on the numbers from Europe and the United States.

US 30-Year bonds rose over the past week. On Wednesday, April 15, the June long bond futures contract was at the 180-19 level, up 1.40% since April 8. Bonds have traded in a wide range over the past weeks. The volatility in the bond market is unprecedented. June bonds traded to a new high at 191-22 on March 9. Given the situation in the world and government and central bank responses, do not expect calm to return to debt markets anytime soon.

Open interest in the E-Mini S&P 500 futures contracts fell by 0.39% since April 7. Open interest in the long bond futures rose by 0.39% over the past week. The VIX edged lower to the 41.14 level on April 15, 4.48% lower over the period after the massive move to the upside over the recent weeks. The VIX traded to a high of 85.47 on March 18, the highest level since 2008. During the height of the 2008 crisis, the VIX reached 89.53. Option premiums remain elevated as price insurance rises during risk-off periods.

At the 41.14 level, the VIX has more than halved since the high. While it remains elevated, the potential for more downside volatility could make VIX related products like VIXX and VIXY attractive for short-term long positions with tight stops.

We could be months away from effective treatment and years away from a vaccine for Coronavirus. The global economy will continue to experience the impact of the pandemic over the coming months and years. Therefore, we should expect volatility in the stock and bond markets to continue. It is no time to become complacent about either the virus or its effect on markets.

The dollar and digital currencies

Currency markets calmed a bit over the past week, with a small decline in the dollar index and a rise in most currencies against the greenback. Cryptocurrency prices moved lower since April 8.

The dollar index slipped below the 100 level and was at 99.486 on April 15, down 0.68% from the level on April 8. Open interest in the dollar index futures contract moved 3.37% higher over the past week.

The euro currency was 0.52% higher against the dollar. The pound was 1.26% higher against the dollar. Prime Minister Boris Johnson left the hospital and is on the road to recovery from Coronavirus.

 

Bitcoin and the digital currency asset class moved lower over the past week. Bitcoin was trading at the $6,731.07 level as of April 15, as it moved 7.63% lower. Ethereum posted a 7.92% loss since April 8. Ethereum was at $156.67 per token on Wednesday. The market cap of the entire asset class moved 7.35% lower over the past week. Bitcoin marginally underperformed the entire asset class since the previous report. The number of tokens increased by 41 to 5343 tokens since April 8. In late 2017 the overall market cap was at over $800 billion with a fraction of the number of tokens available today. On Wednesday, the market cap stood at around $192.906 billion down 7.35% since the prior report. Open interest in the CME Bitcoin futures rose 1.63% since last week. I continue to believe that Bitcoin will attract buying during periods of price weakness but would only dip a toe into the market on the long side with a very tight stop.

The Canadian dollar moved 0.34% lower since April 8. Open interest in C$ futures rose by 1.94% over the period. The metric declined steadily over the past weeks. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that also produces significant quantities of energy and agricultural products. Keep an eye on the oil futures market for clues about the Canadian dollar as it often acts as a proxy for the price of the energy commodity.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ moved 1.49% higher since last week. The geographical proximity to China makes the Australian dollar sensitive to the Coronavirus and accounts for its decline. Australia has experienced an outbreak of the virus, but the government has sealed the nation and instituted some of the most severe social distancing regulations in the world. Moreover, Australia has told its citizens to expect the current conditions over the coming six months or longer. The A$ is a proxy for both China and raw material prices. I would be cautious with any positions on the long or short side of the A$ given the potential for volatility and selloffs in the current conditions.

The British pound rose 1.26% after a wild rise to the downside in mid-March. The global pandemic hit emerging markets hard. Over the past week, the Brazilian real fell 1.65%. The June Brazilian currency was trading at the $0.19040 level after falling to a new low at $0.18675 on April 3. The real is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets are likely to move higher or lower with any significant changes in the direction of the Brazilian real over the coming weeks. The falling real had been a factor that weighed on sugar and coffee prices. Expect volatility to continue in the foreign exchange arena. We may see the dollar index continue to trade around the 100 level as central banks and governments go to extra lengths to stabilize markets.

 

Precious metals moved higher across the board over the past week. Gold, the leader of the pack, rose to a new high.

 

Precious Metals

Gold, silver, platinum, palladium, and rhodium all moved higher over the past week. The stimulus that increases the size of government deficits and debt and decreases the value of currencies continues to provide support for gold, the leader of the sector. Gold is the world’s ultimate hard currency. While central banks can increase the money supply to stimulate the economies around the globe, they cannot increase the stock of gold without extracting more from the crust of the earth. As currencies lose value, gold is likely to gain. The decline in the value of currencies is not immediately observable to the naked eye, but when measured against gold, it is clear that foreign exchange instruments have all lost value against the yellow metal since the middle of 2019. Gold broke out to the upside in dollar terms last June when the price rose above the $1377.50 per ounce level. While gold has continued to post gains in US dollar terms, it has yet to make a new record high above the 2011 peak of $1920.70 per ounce. Gold had made new highs in almost all currency terms over the past months, except for in dollars and Swiss francs. The record high in Swiss franc terms was in 2012 at 1662.51 per ounce on the monthly chart.

Source: CQG

The daily chart shows that gold in Swiss francs surpassed that level over the past week as it traded to a high of over 1700 francs per ounce. Now, the US dollar stands as the only currency that has not moved to a new record low against the yellow metal, but it may only be a matter of time before gold rises above $1920.70 and the $2000 per ounce level in dollar terms.

Gold rose 3.32% over the past week. Silver was 1.97% higher since April 8. June gold futures were at $1740.20 per ounce level on Wednesday, just $180.50 below the record peak. May silver was $15.505 per ounce on Wednesday. Both metals should continue to experience elevated levels of volatility, but the tidal wave of liquidity is bullish for the prices of the metals that have long histories as a means of exchange.

June gold futures reached a new peak at $1788.80 on April 14. The yellow metal came storming back from a low of $1453 on March 16. May silver rose to $19.005 on February 24 before the price suffered a substantial correction sending it to a low of $11.64 per ounce on March 18 before recovering to the $16.30 level on April 14. Gold outperformed silver over the past week. The silver-gold ratio reached a new modern-day high as risk-off selling hit the silver market, taking the price below the $12 per ounce level. I will continue to add to long physical positions in gold, silver, and platinum, during periods of price weakness. I will only trade leveraged derivatives and mining stocks on a short-term basis with tight stops in the current environment.

July platinum posted a gain of 9.68% since the previous report after falling to the lowest price since 2002 in March.  Platinum continues to be a laggard in the precious metals sector. July futures moved back to the $804.60 per ounce level on April 15. The level of technical resistance is now at $838.20 on the July futures contract. Support in platinum is currently at $556 per ounce, the March low in the nearby futures contract Rhodium is a byproduct of platinum, and the price of the metal had been in a bull market since early 2016. The price of rhodium was at a midpoint price of $6,500 per ounce on April 15, up $2,250, or 52.94% over the past two weeks. Rhodium’s price has been extremely volatile over the past weeks. Palladium rose 2.79% since last week. The price traded to a new peak at $2815.50 on February 27 on the nearby futures contract. June palladium settled at the $2153.60 per ounce level on Wednesday.

Open interest in the gold futures market moved 2.07% higher over the past week. The metric moved 1.67% lower in platinum after significant declines in recent weeks as longs exited positions. The total number of open long and short positions fell 0.15% in the palladium futures market after substantial declines over the past two weeks. Silver open interest increased by 3.24% over the period after significant decreases over the past weeks. The declines in open interest ended over the past week as the level of market participation stabilized.

The silver-gold ratio edged higher over the past week.

Source: CQG

The daily chart of the price of June gold divided by May silver futures shows that the ratio was at 111.41 on Wednesday, up 0.95 from the level on April 8. The ratio traded to over the 124:1 level on the high on March 18. The long-term average for the price relationship is around the 55:1 level. The ratio rose to the highest level since futures began trading in 1974 as the price of silver tanked recently.

Platinum and palladium prices edged higher over the past week. June Palladium was trading at a premium over July platinum with the differential at the $1349.00 per ounce level on Wednesday, which was narrowed slightly since the last report. July platinum was trading at a $935.60 discount to June gold at the settlement prices on April 8, which narrowed slightly since the previous report. The spread is $131 above the nominal price of platinum, which is incredible considering platinum traded at over an $1100 premium to gold in 2008.

The price of rhodium, which does not trade on the futures market, was at the $6,500 per ounce level on Wednesday, up $2,250 per ounce or 52.94% on the week. Rhodium is a byproduct of platinum production. The low price of platinum caused a decline in output in South African mines, creating a shortage in the rhodium market that lifted the price to the $13,000 level before risk-off conditions caused the price to evaporate to $2,000. Rhodium has been highly volatile over the past weeks after reaching its peak. The price moved higher from a low at $575 per ounce in 2016. The bid-offer spread in Rhodium was at $3000 per ounce, unchanged from the last report. Illiquid markets can become untradeable. The price action in rhodium is somewhat like what has been going on with some illiquid issues in the bond market these days. The Fed is providing a backstop to eliminate the lack of liquidity, but in rhodium, there is no backstop. Rhodium is an untradeable commodity.

I continue to favor buying physical platinum as well as gold and silver during periods of extreme weakness. Dealers are experiencing physical shortages as miners and refiners shut down. We had seen substantial dislocations in the price of gold in London versus the COMEX futures prices over the past weeks. In gold and silver, the GLD, IAU, BAR, and SLV ETF products hold physical bullion and are acceptable proxies for the coins and bars. In platinum, PPLT and PLTM are the proxies. Since a NYMEX platinum futures contract contains 50 ounces of metal, purchasing a nearby futures contract on NYMEX and standing for delivery is a way to avoid significant premiums for the metal. At $804.60 per ounce, a contract on NYMEX has a value of $40,230, after falling to the lowest level just under two decades in March.

My advice has not changed when it comes to precious metals Falling rates are bullish fuel for the gold and silver markets. Risk-off threatens to send the price of the precious metals significantly lower, as we witnessed in 2008. I will be using wide scales on bullion and coin purchases as well as unleveraged ETFs that hold bullion. I remain bullish on gold, silver, and platinum, but protecting capital during an unprecedented risk-off period is now the prudent approach. I would only buy the metals on price weakness and leave scales wide until the situation calms. Only trade leveraged products and mining shares on a short-term basis using tight stops. A choppy road continues to be on the horizon. Hold the physical and trade the derivatives in the current environment. Make sure each purchase has a clear plan for risk versus reward when it comes to precious metal derivatives and mining shares.

Energy Commodities

Crude oil fell hard since last week, but product prices outperformed the raw energy commodity. Natural gas tried to recover but posted a double-digit percentage loss on the week. Ethanol moved higher, but the price of Rotterdam coal fell.

OPEC, Russia, and other world producers collaborated to agree on a 9.7 barrel per day reduction in output. Mexico was a holdout in the negotiations as the world producers insisted that the Mexicans trim production by 400,000 barrels per day, 300,000 more than they were willing to contribute. US President Donald Trump stepped in to make up the difference with an agreement that Mexico would make it up to the US at a later date. The production cut will last for two months and then will scale back. However, the problem facing oil is demand, not supplies. The reduction in output did not stabilize the price and it fell back below the $20 per barrel level. The future path of least resistance for the energy commodity will be a function of the progress by scientists to find treatments and a vaccine for Coronavirus that would restart the global economy and return some demand to the energy commodity.

May NYMEX crude oil futures fell 20.81% since April 8, the price of oil drifted below the recent low at $19.27 per barrel and traded to a low of $19.20 on April 15.

June Brent futures outperformed NYMEX WTI futures and were 15.72% lower since April 8. May gasoline rose 6.25%, and the processing spread in May posted a 218% gain after significant declines in the gasoline futures price, and the crack spread over the past weeks since late February. The demand for gasoline evaporated, leading the price to the lowest level in years as many people sheltered in place in the US and around the world. After the gain over the past week, the gasoline crack spread was at $10.08 per barrel, which is some welcome news for refining companies that process crude oil into gasoline. The price path of gasoline depends on reopening the US economy so that people begin commuting to work and venture out in automobiles again.

May heating oil futures moved 9.59% lower from the last report. The heating oil crack spread was 7.13% higher since April 8. Heating oil is a proxy for other distillate fuels. While the demand for jet fuel fell off the side of a cliff, diesel fuel demand remained robust as the supply chain has worked overtime to bring essentials to market for consumers.

Technical resistance in the May NYMEX crude oil futures contract is at $29.13 per barrel level with support at the $19.20 level, the recent low. The continuous contract made a marginally lower low on April 15. In 2001, the price of NYMEX futures fell to $16.70, which is the next technical level on the downside. Crude oil fell after the most significant production cut in history. Demand is the only factor that could revive the price of the energy commodity, but we could see the production cut rise to 20 million barrels per day, according to comments by Us President Trump.

Crude oil open interest increased by 0.50% over the period. The bears have been in control since January 8. Iran continues to stand as a potential problem in the Middle East when it comes to supplies, but Coronavirus has trumped any impact on the oil market. Iran is dealing with a tragic outbreak of the virus as are nations across the globe. As risk-off conditions continue to grip markets across all asset classes, energy had been hit the hardest. The potential for bankruptcies of debt-laden companies in the oil and oil-related sector continues to weigh on share prices. Time will tell if the government bailouts of the sector do anything for equity holders in the current environment. The oil and gas businesses may be a matter of national security for the US, but equity holders may not receive asset protection. As I wrote last week, those companies that have the most substantial balance sheets and are closest to state oil companies like Exxon Mobile (XOM), British Petroleum (BP), and Royal Dutch Shell (RDS-B) have the best chances of surviving the meltdown in the energy sector. They may also wind up in a position to purchase assets of failed companies at bargain-basement prices. These companies could offer value during significant price dips.

Over half the world’s crude oil reserves are in the Middle East. Political instability in the region always has the potential to impact the price of the energy commodity. Since early January, there have been no events that have caused any supply concerns as the entire world fights a common enemy, the Coronavirus.

The spread between Brent and WTI crude oil futures in June fell to the $1.58 per barrel level for Brent, which was $1.02 below the level on April 8. The June spread moved to a high of $5.33 in early January as tensions between the US and Iran flared in the Middle East. The most recent peak was at $4.99 on March 18. On April 1, the spread moved briefly to a 78 cents per barrel premium for Brent. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. While Brent has traded at a premium to WTI since the Arab Spring in 2010, the low price that could lead to US production declines as the Saudis and Russians increase output could lead to a premium for WTI. Before 2010, WTI had traded at an average of a $2 to $4 premium to the Brent benchmark. The move in the Brent-WTI spread reflects the overall weakness in the crude oil market.

Term structure in the oil market experienced a significant shift as the price of crude oil tanked. The flip from backwardation to contango in the spread reflects the flood of supplies in the crude oil market. Oil traders will be filling tanks and storage all over the world to take advantage of the wide contango with financing rates at historic lows. Cash and carry trades in the oil market are now one of the only profitable areas of the market. The cash and carry trade will lift freight and storage rates. The forward curve in crude oil highlights the current state of contango. The US is filling its strategic petroleum reserve to the brim at the current low price levels.

Over the past week, the June 2021, minus June 2020, moved from a contango of $5.80 to $9.54, a rise of $3.74 per barrel. In early January, the spread traded to a backwardation of $6.03, $15.57 per barrel tighter than the level on April 8. With interest rates at almost zero, buying nearby oil, storing and insuring it, and selling forward will be the most popular oil trade. Expect storage around the world to fill up quickly in the current environment pushing freight and storage rates to skyrocket. If Coronavirus continues to weigh on demand, we are likely to see idle ships and tankers become storage facilities for oil. At the same time, contango can continue to move higher, as we witnessed in early 2016, so be cautious with synthetic trades to take advantage of the cash and carry trade. The plunge in the price of oil turned the fundamentals around. A flood of crude oil from Saudi Arabia, Russia, and other oil-producing nations at a time when demand is falling will continue to push contango in both WTI and Brent futures markets higher. Rising contango is a sign of a glut in the oil market. However, it is also a sign that the market expects production to fall significantly. The well-capitalized market participants that build cash and carry positions will receive a massive bonus if the market shifts back to backwardation during the life of their trades. A return of any tightness would allow them to sell their nearby oil in storage at a higher price than it costs to cover deferred short positions. With Iran lurking in the background as a hostile agitator in the Middle East, that scenario is possible. The number of rigs operating in the US has begun to fall significantly, and production should follow in response to the lowest price levels in years over the coming weeks and months. Time will tell if the 10 million barrel per day reduction over the next two months stabilizes the price of the energy commodity.

US daily production fell to 12.3 million barrels per day of output as of April 10, according to the Energy Information Administration. The level of production fell 100,000 barrels from the previous week. Meanwhile, inventory levels moved significantly higher, which reflects the demand destruction as many people continue to shelter in place. As of April 3, the API reported an increase of 11.938 million barrels of crude oil stockpiles, while the EIA said they rose by 15.20 million barrels for the same week. The API reported a rise of 9.445 million barrels of gasoline stocks and said distillate inventories fell by 177,000 barrels as of April 3. The EIA reported an increase in gasoline stocks of 10.50 million barrels and an increase in distillates of 476,000 barrels. Rig counts, as published by Baker Hughes, fell by 58 for the week ending on April 9, which is 329 below the level operating last year at this time. Expect the rig count to continue to drop. The number of rigs operating stood at 504 as of April 9. The inventory data from both the API and EIA has been very bearish for the price of crude oil and products. The demand for energy will decline for as long as the economy continues to falter.

OIH and VLO shares moved lower since April 8, OIH fell by 8.38%, while VLO moved 9.50% to the downside over the past week. VLO had recovered by over 30% in the previous report. OIH was trading at $89.42 per share level on Wednesday after a reverse split in the ETF. I am holding a small position in OIH. The price is too low at this point to liquidate the position. I will hold the ETF as a long-term position and will look to double it or more if the conditions warrant.

We are short the May $80 put option on VLO at $3.65 per share.

https://finance.yahoo.com/quote/VLO200515P00080000?p=VLO200515P00080000

 

If the shares are below the $80 level, we will assume a long position in VLO shares at $76.35.

We are short the May $70 put option for the same expiration at $6.28. A link to the option is below:

https://finance.yahoo.com/quote/VLO200515P00070000?p=VLO200515P00070000

 

If the price of VLO shares is below $70 on May 15, we will be long the stock at $63.72 per share on this position, and an average of $70.04 per share on the two positions. VLO was trading at $46.70 per share on Wednesday. As I wrote, “If you are not comfortable assuming this level of risk, please do not follow this recommendation.”

 

April natural gas futures fell to the lowest level since 1995 on March 23 when the price reached $1.519 per MMBtu. Nearby May futures recovered to $1.918 on April 8 before turning lower and settling at $1.5980 on April 15, which was 10.38% lower than on April 8. The May futures contract traded to a high of $2.411 on November 5 and 6 and has made lower highs and lower lows throughout the winter months. Support now stands at $1.521, the recent low. While technical and fundamental factors continue to favor lower prices, wild market conditions could cause significant price swings. A move above $1.918, $2.044, and $2.06 on May future is necessary to end the pattern of lower highs. However, the price looks set to test the $1.50 level based on the recent price action.

Over the past week, the 2020 injection season in the natural gas market started.

Source: EIA

The EIA reported an injection of 38 bcf, bringing the total inventories to 2.024 tcf as of April 3. Stocks were 76.3% above last year’s level and 19.1% above the five-year average for this time of the year. Natural gas stocks fell to a low of 1.107 tcf in March 2019, this year the low was at 1.986, 879 bcf higher. This week the consensus expectations are that the EIA will report a 45 bcf injection into storage for the week ending on April 10. The EIA will release its next report on Thursday, April 9, 2020.  Fundamentals say lower in natural gas, but we are at a time of the year when the energy commodity tends to make seasonal lows, which we may have seen at $1.519 on March 23, time will tell. As of Wednesday, the price looks set to challenge the level. Demand for all energy will continue to decline as the economy has ground to what is an unprecedented halt. Natural gas continues to face what is an almost perfect bearish storm after falling to the lowest prices since 1995.

Open interest rose by 1.84% in natural gas over the past two weeks. Technical resistance is now at $1.918 per MMBtu level on the May futures contract with support at $1.521 per MMBtu, the low from April 2, which stands as technical support on the May futures contract. The next level on the downside is at $1.335 when it comes to the continuous futures contract on a long-term basis. Price momentum and relative strength on the daily chart were below neutral conditions as of Wednesday. The price bounced sharply from the most recent April 2 low but failed with five consecutive daily losses as of Wednesday.

May ethanol prices moved 5.57% higher over the past week. Open interest in the thinly traded ethanol futures market moved 0.19% lower over the past week. With only 538 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product fell by 0.34% compared to its price on April 8 after a reverse split. The price of July coal futures in Rotterdam moved 3.93% lower over the past week.

On Tuesday, April 14, the API reported a 13.143-million-barrel rise in crude oil inventories for the week ending on April 3. Gasoline stocks rose by 2.226 million barrels, while distillate stockpiles increased 5.64 million barrels over the period. On April 15, the EIA said crude oil stocks rose 19.20 million barrels for the previous week. Gasoline inventories were 4.90 million barrels higher, while distillate stocks rose 6.30 million barrels. The API and EIA inventory reports were very bearish for the price of the energy commodities. The slowdown in the US and global economy could cause inventories to continue to rise, but lower US output in the face of falling prices should slow the flow of the energy commodity into storage. The production deal to cut output by 10 mbpd did not alter the dynamics of the oil market. Demand is the critical issue facing the oil market.

In natural gas, the forward curve remained steep on Wednesday.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the price at $1.598 in May on the settlement price on April 15, was 18.50 cents per MMBtu lower than on April 8.

The price is in contango where deferred prices are higher than levels for nearby delivery, reflecting the condition of oversupply and high level of inventories compared to past years as we are in the 2020 injection season. Natural gas stockpiles will start the 2020 injection season at a level where a build to over four trillion billion cubic feet and a new record high is possible in November, which could keep the price from running away on the upside in the leadup to the winter of 2020/2021. However, production could grind to a halt given the lack of workers during the shutdown period in many states and because of the low level of prices that make output uneconomic. The debt-laden oil and gas businesses in the US could receive support from the government to keep energy output flowing, but demand destruction will continue. The US government is likely to support the energy sector as a matter of national security.  Meanwhile, the differential between nearby May futures and natural gas for delivery in January was $1.282 per MMBtu or 80.2% higher than the nearby price, reflecting both seasonality and substantial inventory levels. The spread widened over the past week, by just under 24 cents per MMBtu as May futures fell back towards the low.

I have been taking profits quickly and stopping losses looking for a 1:2 risk-reward ratio on forays into the crude oil futures market. UCO and SCO products can be helpful for those who do not trade futures. In natural gas, UGAZ and DGAZ attract lots of volume and are excellent short-term proxies for natural gas futures. I will not take positions in leveraged products overnight and will only day trade, given the volatility in the markets.

We are holding a long position in PBR, Petroleo Brasileiro SA. PBR shares tanked with oil and the Brazilian real. At $6.32 per share, PBR was 7.2% lower than on April 8. The shares of the company are too low to sell at the current price. I have a small position that I will hold as a long-term investment and look to double up or more when the market conditions warrant.

Expects lots of two-way price action in the energy sector over the coming weeks and months. Demand is the critical factor when it comes to the path of least resistance of prices.

Grains                                                             

Grain prices moved lower since last week in the aftermath of the release of the USDA’s April World Agricultural Supply and Demand Estimates report.

The full text of the April WASDE report is available via this link:

 

https://www.usda.gov/oce/commodity/wasde/wasde0420.pdf

 

 

May soybean futures fell by 1.46% over the past week and was at $8.420 per bushel on April 15. Open interest in the soybean futures market rose by 1.86% since last week. Price momentum and relative strength indicators were at oversold readings on Wednesday on the daily chart.

The May synthetic soybean crush spread edged higher over the past week and was at the 93 cents per bushel level on April 15, up 4.25 cents since April 8. The crush spread fell to a low of 71.5 cents during the week which weighed on the oilseed futures. The crush spread rose to a high of $1.4275 on March 23 and is a real-time indicator of demand for soybean meal and oil. The crush moved higher on the back of demand for soybean meal. Bean futures peaked around that time. Price trends in the crush spreads can cause buying or selling in the raw oilseeds at times. Any significant moves in the crush spread are likely to translate into price movement in the soybean futures. The decline in the crush spread since late January was a confirmation of the recent bearish trend. The recent rise is supportive of higher price levels for the oilseed. As I have written in previous reports, I believe soybean futures are in the buy-zone at prices below $9 per bushel, but risk-off has pushed the price lower. The decline in the crush spread was a warning sign for bean prices. Coronavirus will not lower the demand for food as over 7.6 billion people all over the planet require daily nutrition. The USDA told the soybean market:

U.S. soybean supply and use changes for 2019/20 include lower exports, seed use, and residual use, higher crush, and higher ending stocks. Soybean exports are reduced mainly on strong competition from Brazil. Lower seed use reflects plantings for the 2020/21 crop indicated in the March 31 Prospective Plantings report. Residual use is reduced based on indications in the March 31 Grain Stocks report. Soybean crush is raised on higher soybean meal exports and increased domestic disappearance. Domestic soybean meal use is forecast higher with an expected reduction in available supplies of DDGs resulting from lower ethanol production. With higher crush only partly offsetting lower exports, seed, and residual use, ending stocks are projected at 480 million bushels, up 55 million. The season-average soybean price is forecast at $8.65 per bushel, down 5 cents. The soybean oil price is projected at 30.0 cents per pound, down 1.5 cents reflecting increased production and ending stocks. Soybean meal prices are unchanged at $305 per short ton. The 2019/20 global oilseed outlook includes lower production, exports, and stocks compared to last month. Global soybean production is reduced 3.7 million tons to 338.1 million on lower production for Argentina and Brazil. Argentina’s production is lowered 2 million tons to 52 million, reflecting dry conditions in the main growing regions during the latter part of February into early March. Soybean production for Brazil is lowered 1.5 million tons to 124.5 million due to dry conditions in Rio Grande do Sul while the crop was in pod-filling and maturation stages. Global soybean exports are lowered 0.4 million tons to 151.5 million. U.S. and Canadian exports are lowered while Brazil’s shipments are revised up due to a competitive exchange rate and ample exportable supplies. China’s imports are raised 1 million tons to 89 million, reflecting higher Brazilian shipments. Global soybean ending stocks are 2.0 million tons lower than last month as lower stocks in Brazil are partly offset with higher U.S. and Chinese stocks.

Source: USDA

The USDA reported a rise in US stockpiles, but a decline in global inventories because of falling Brazilian stocks.

May corn was trading at $3.1925 per bushel on April 15, which was 3.26% lower on the week. Open interest in the corn futures market rose by 0.68% since April 8. Technical metrics remained in oversold readings in the corn futures market on the daily chart as of Wednesday. The price of May ethanol futures rose by 5.57% since the previous report on the back of demand destruction in the energy sector. May ethanol futures were at 94.70 cents per gallon on April 15. The spread between May gasoline and May ethanol futures fell to 22.66 cents per gallon on April 15 with ethanol at a premium to gasoline. The spread was 0.76 cents lower since last week as gasoline marginally outperformed the biofuel.  The USDA told the corn market:

This month’s 2019/20 U.S. corn outlook is for reduced imports, greater feed and residual use, lower food, seed, and industrial use, and larger stocks. Feed and residual use is raised 150 million bushels to 5.675 billion. This is based on corn stocks reported as of March 1 which indicated disappearance during the December-February quarter rose about 4 percent relative to a year ago. Lower forecast corn used for ethanol also supports larger feed and residual use. Corn used to produce ethanol is lowered 375 million bushels to 5.050 billion based on the latest indications from Energy Information Administration data indicating an unprecedented decline in ethanol production and motor gasoline consumption as a result of COVID-19. Partly offsetting is a forecast increase in the amount of corn used for alcohol for beverages and manufacturing use. With supply down fractionally and use declining, ending stocks are raised 200 million bushels to 2.092 billion. The season-average marketing weighted corn price received by producers is lowered 20 cents to $3.60 per bushel. The global coarse grain production forecast for 2019/20 is up 1.0 million tons to 1,403.8 million. This month’s foreign coarse grain outlook is for larger production, lower trade, fractionally higher use, and larger stocks relative to last month. Corn production is raised for the EU and Belarus, with partly offsetting reductions for Indonesia and Laos. Major global trade changes for 2019/20 include higher projected corn exports for the EU, with a partially offsetting reduction for Russia. Corn imports are raised for South Korea, Turkey, Algeria, and Indonesia, with lower projections for Vietnam, Taiwan, Cuba, and Mexico. Foreign corn ending stocks are raised, mostly reflecting increases for Thailand, Taiwan, India, and Turkey that more than offset declines for Argentina and Mexico. Global corn ending stocks, at 303.2 million tons, are up 5.8 million from last month.

Source: USDA

 

The USDA projects falling demand and higher inventories in the US and around the world. The decline in crude oil and gasoline prices should cause the demand for corn-based ethanol to decline substantially.

May CBOT wheat futures were 1.46% lower since last week. The May futures were trading $5.4025 level on April 15. Open interest rose by 2.70% over the past week in CBOT wheat futures. The USDA told the wheat market:

The outlook for 2019/20 U.S. wheat is for lower exports, reduced domestic use, and increased ending stocks. The NASS Grain Stocks report, issued March 31, implied less feed and residual disappearance for both the second and third quarters than previously estimated. Total 2019/20 feed and residual use is trimmed 15 million bushels to 135 million. Wheat exports are also cut 15 million bushels to 985 million on a slowing pace and prices that have become uncompetitive in many international import markets. By class, Hard Red Winter and Soft Red Winter are reduced 10 million and 5 million bushels, respectively. The changes result in a 30 million bushel increase in estimated all wheat ending stocks to 970 million. Despite the larger ending stocks, the projected season-average farm price is raised $0.05 per bushel to $4.60 on updated NASS data as well as surging nearby cash and futures prices, partially resulting from the global COVID19 pandemic. The 2019/20 global outlook is for slightly higher supplies, but reduced trade and utilization. Global production is lowered fractionally with several small mostly offsetting changes. Global exports are lowered 0.9 million tons, led by a 1.5-million-ton reduction for Russia, which was directly offset by an equivalent increase for the EU. The Russia change is based primarily on newly imposed government export restrictions. The EU is raised on less competition from Russia as well as expectations of a continued strong pace of exports. Several smaller export reductions are made; notably a 0.4-million-ton reduction for the United States and a 0.3-million-ton reduction for Pakistan. Global imports are reduced 0.3 million tons each for Brazil, Japan, and Uzbekistan; a 0.3-millionton increase for Morocco is partially offsetting. Aggregate world consumption is lowered 5.1 million tons following updates to several countries. The largest reductions are 2.0 million tons for China, 1.9 million for India, and 1.0 million for the EU. With supplies higher and use down, projected 2019/20 global ending stocks are raised 5.6 million tons to a record high 292.8 million.

Source: USDA

Stocks rose in the US, and global inventories are at a record level. Meanwhile, the USDA increased the price projection for wheat and said that global production and consumption fell. The support and resistance levels in May CBOT wheat futures remained at $4.9175 and $5.87 since last week.

As of Wednesday, the KCBT-CBOT spread in May was trading at a 60.75 cents per bushel discount with KCBT lower than CBOT wheat futures in the May contracts. The spread narrowed by 9.50 cents since April 8. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.”  The spread continues to be at a level that is bearish for the wheat market. Any sudden problem in the wheat market that causes consumer hedging to increase could result in a dramatic change in the spread between the hard and soft winter wheat futures contracts. The spread moved towards the long-term average over the past week, which could lead to a rally in wheat futures over the coming week.

I will continue to build long core positions in futures and the CORN, WEAT, and SOYB ETF products over the coming weeks on price weakness. The trade deal resulting in a de-escalation of the trade war is supportive of the prices of grains. The outbreak of the Coronavirus had been a bearish factor for the grain markets, but less so than in other markets. Grain prices fell in Q1, but it was the best-performing sector in the commodities asset class.

The uncertainty of the 2020 crop year could add volatility to the market as the spring planting season gets underway. I had been a scale-down buyer of beans, corn, and wheat on price weakness, leaving plenty of room to average down by using wide scales in the current environment. I believe grains have the best upside potential over the coming weeks and months as the growing world demand for food limits the downside. I will take profits on rallies in the current environment and raise stop levels on long core positions to protect capital.

The long-term average for the corn-soybean spread is around the 2.4 bushels of corn value in each bushel of soybean value level. When the spread is higher, farmers tend to plant more beans than corn, and when it is lower than the 2.4:1 average, they tend to plant more corn than soybeans on their acreage.  Farmers are now planting crops for the 2020 planting season.

Source: CQG

The chart of the November 2020 soybean futures divided by December 2020 corn futures shows that the ratio moved lower over the past week and was at the 2.5062:1 level on April 8, up 0.0259 since last week. The ratio is above the long-term norm. On April 15, the spread was at a level where farmers will plant more soybeans than corn crops when it comes to the current planting season at over the 2.4:1 level. The seeds are now going into the ground across the fertile plains of the US and other growing areas in the northern hemisphere. Meanwhile, Coronavirus could slow production given social distancing guidelines and the growing number of infections. Time will tell if the virus impacts the 2020 crops.

The uncertainty of the 2020 crop year is likely to add price variance to the grain futures markets over the coming weeks. However, Coronavirus is the great unknown for all markets. At the same time, the uncertainty of the weather during the coming crop year could create the ideal conditions for sudden sharp rallies. Last week I wrote, “I believe that any weakness in grains could offer some of the most compelling buying opportunities in the commodities asset class over the coming weeks. Nothing has changed since last week when it comes to my view of the grain markets.”

Be careful in all markets but remember that the world depends on the US and other nations that produce the crops that fulfill nutritional requirements. Grains and oilseeds could have some degree of immunity from the deflationary spiral as governments around the globe must feed the people. I continue to believe that grain prices could outperform many other raw material sectors as they did in the first quarter of 2020.

Copper, Metals, and Minerals

Base metals and industrial commodities prices continued to trade nervously but most prices recovered over the past week. The Baltic Dry Index, lumber futures, iron ore, uranium, tin, copper, aluminum, nickel, and lead posted gains over the past week. Zinc moved to the downside since April 8.

Copper rose 1.59% on COMEX over the past week. The red metal posted a 1.27% gain as of April 14 on the LME since the last report. Open interest in the COMEX futures market moved 4.78% higher since April 7. May copper was trading at $2.2960 per pound level on Wednesday, after probing above the $2.30 level. Copper is a leading barometer for the overall health and wellbeing of the Chinese and global economies. Over the past week, LME stockpiles experienced a significant increase. Inventories in COMEX warehouses also moved substantially higher. Some mine closures in the US and South America are likely reasons for the strength in copper and other nonferrous metals.

The target on the downside in the copper market is now at the early 2016 low of $1.9355 per pound if selling returns to the COMEX futures market. Chinese demand will continue to be the most significant factor when it comes to the path of the price of copper and other base metals and industrial commodities over the coming weeks and months. Keep in mind that during the 2008 financial crisis, copper fell to a bottom of $1.2475 per pound. The decline came from over $4 per pound in early 2008.

The LME lead price moved higher by 0.03% since April 7. The rise in demand for electric automobiles around the world is supportive of lead in the long term as the metal is a requirement for batteries, but Coronavirus weighed on the price of lead. The price of nickel moved 3.45% higher over the past week. The export ban in Indonesia began on January 1, 2020 but has had little impact on the price of the nonferrous metal so far this year. Tin rose 3.95% since the previous report. Aluminum was 0.27% higher since the last report. The price of zinc fell by 1.01% since April 7. Zinc was at just above the $1920 level on April 14. The impact of Coronavirus on the global economy is the most significant of our lifetime, which is a concern for the prices of the nonferrous metals.

May lumber futures were at the $324.00 level, up 6.54% since the previous report. Interest rates in the US will eventually influence the price of lumber. The current environment does not support new home and infrastructure building as the US and world deal with the crisis. The price of uranium for May delivery moved 0.17% higher after a 13.75% gain in last week’s report and was at $29.00 per pound. The volatile Baltic Dry Index rose 13.93% since April 8 to the 679 level after significant losses throughout the winter months. June iron ore futures were 2.52% higher compared to the price on April 8. Open interest in the thinly traded lumber futures market fell by 1.89% since the previous report.

LME copper inventories moved 19.99% higher to 259,775 since the last report. COMEX copper stocks rose by 12.17% from April 7 to 39,667 tons. Lead stockpiles on the LME were up 0.59%, while aluminum stocks were 2.82% higher. Aluminum stocks rose to the 1,248,000-ton level. Zinc stocks exploded higher by 29.05% since the last report. Zinc stockpiles experienced a significant rise in inventories over recent weeks, which continued since the previous report and weighed on the price of the base metal. Tin inventories fell 4.12% since April 7 to 7,095 tons. Nickel inventories were 0.19% higher compared to the level on April 7.

The stock data reflects the overall lack of demand during the current global crisis caused by the pandemic.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 13 cents on March 25, down 4 cents since the previous report. The details for the call option are here:

https://finance.yahoo.com/quote/X210115C00015000?p=X210115C00015000

 

US Steel shares were at $6.55 per share and moved 3.11% lower since last week.

FXC was trading at $7.67 on Wednesday, $0.36 lower since the previous report. I continue to maintain a small long position in FCX shares. I will not sell the stock at this level, but I am on the sidelines when it comes to adding to the position.

The base metals and other industrial commodities reflect the halt of the global economy. I would avoid any new positions in the base metals or industrial commodities during this unprecedented period. The lower price of oil causes output costs to decline, which takes a toll on prices. Volatility in the currency markets could also impact prices. I am concerned that we could see a sudden move lower in copper, so I am sitting on the sidelines aside from some small positions and am only day trading with tight stops. I would continue to keep all risk positions at minimal levels in the current environment. Nothing has changed since last week.

Source: CQG

Based on settlement prices, the spread was at 1.90080:1 compared to 1.68460:1 in the previous report. The spread increased by 21.62 cents as live cattle fell, but lean hog futures dropped a lot more over the past week. The spread moved away from the historical norm on the June futures contracts. Beef is far more expensive than pork from a historical perspective as of April 15.

The April WASDE report was not supportive of animal protein prices, but we are now six weeks away from the beginning of the 2020 grilling season, the peak season of demand for cattle and hogs. I would only approach the meats from the long side in the current environment, but I would employ very tight stops on any risk positions. Prices remained at the lowest levels in years as of April 15.

Soft Commodities

Since April 8, sugar, cocoa, and cotton prices moved lower, while coffee and FCOJ futures posted gains. Sugar and cotton were not far above multiyear lows on April 15, which could be close to the bottom end of their respective pricing cycles. As with all of the members of the commodity asset class, the deflationary spiral on the back of the global pandemic has impacted prices over the past weeks.

May sugar futures fell 2.03% since April 8. The price of the sweet commodity remained not far above the multiyear low from 2018 at 9.83 cents per pound. Technical resistance is at 11.68 cents with support at the most recent low of 9.96 cents. Sugar made a new high at 15.90 cents on February 12 on the continuous contract, but the price collapsed on the back of risk-off conditions. The decline in the price of crude oil and ethanol weighed on sugar as the primary ingredient in ethanol in Brazil is sugarcane. The value of the January Brazilian real against the US dollar fell over the past week and was at the $0.19040 level against the US dollar on the June contract, 1.65% lower over the period. The Brazilian currency has been making lower lows as Coronavirus weighed heavily on all emerging markets. Anyone with a risk position in sugar should keep an eye on the price action in the Brazilian real. Price momentum and relative strength on the daily sugar chart remained in oversold territory as of April 15. The metrics on the monthly chart crossed lower, but the quarterly chart was still at an oversold condition. Sugar made a new high above its 2019 peak in February before correcting to the downside. Risk-off conditions stopped the rally. Open interest in sugar futures was 2.09% higher since last week. Sugar had rallied to new highs as drought conditions in Thailand created the supply concerns that lifted the price of sugar futures. The correction in sympathy with the risk-off conditions in markets across all asset classes chased any speculative longs from the market. The long-term support level for the sweet commodity is at the 2018 low of 9.83 cents per pound.  Energy prices are weighing on sugar as Brazil processes sugar into ethanol.

May coffee futures moved 0.33% higher since April 8. May futures were trading at the $1.2020 per pound level. The first level to watch on the downside is $1.1240. Below there, support is at around 97.40 cents on the continuous futures contract. Resistance is at $1.3065 on the nearby May contract. I continue to favor coffee on the long side, but coffee can be a highly volatile commodity in the futures market, as we have witnessed over the past weeks and months. Our stop on the long position in JO is at $27.99, but in the current conditions, I would increase the stop and exercise extreme caution. JO was trading at $37.75 on Wednesday. Open interest in the coffee futures market was 5.34% lower since last week. I continue to hold a small core long position in coffee after taking profits during the recent rally.

Supply concerns over Brazilian production in the off-year for crops had been supportive of the price of the soft commodity from mid-October through December. The ICO has warned that a deficit between supply and demand could be in the cards for the market because of the 2019/2020 crop year. However, those fears subsided, causing the price of the soft commodity to decline to a level where buying returned to the market. Coffee had made higher lows since reaching 86.35 cents in mid-April. The price of coffee has remained firm despite the risk-off conditions. The ultimate upside target is the November 2016, high at $1.76 per pound. Price momentum and relative strength were above neutral levels on Wednesday. On the monthly and quarterly charts, the price action was neutral. As I wrote in previous reports, “The risk rises with the price in the volatile coffee futures market. We should expect wide intraday trading ranges in the coffee futures market.”  Coffee can be a wild bucking bronco when it comes to the price volatility of the soft commodity. Bottlenecks on South American ports could prove highly supportive of coffee prices as they could create a shortage of the beans. I expect volatility in coffee to continue, and I will look to trade on a short-term basis with a bias to the upside. Nothing changed in the coffee market since last week.

The price of cocoa futures fell sharply over the past week. On Wednesday, May cocoa futures were at the $2205 per ton level, 7.31% lower than on April 8. Open interest fell by 2.74%. Relative strength and price momentum were heading for oversold territory on April 15. The price of cocoa futures rose to a new peak and the highest price since September 2016 at $2998 per ton on the March contract on February 13. Risk-off conditions pushed the price of cocoa beans lower. We are long the NIB ETN product. NIB closed at $26.23 on Wednesday, April 15. I will increase stops on this position if the price rises. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their exports of cocoa beans, it should provide support to the cocoa market. The level to watch on the upside is now at $2428 per ton. On the downside, short-term technical support now stands at $2183 per ton, the same as in the previous report. The potential for Coronavirus to disrupt production in West Africa is high, which could lead to shortages of beans over the coming months. The health systems in producing countries like the Ivory Coast, Ghana, Nigeria, and others are not sufficient to treat patients or prevent the spread of the virus. Africa could suffer tragic consequences over the coming weeks and months. The flow of cocoa beans to the world could suffer as bottlenecks at ports could reduce exports. I am a buyer of cocoa on the current dip but will leave room to add further if the price decline continues.

May cotton futures fell 2.03% over the past week after recent declines on the back of continued concerns about the Chinese and global economies. May cotton was trading at 52.75 cents on April 15, after falling to the lowest price since 2009. On the downside, support is at the recent low of 48.35 cents per pound. Resistance stands at 55.00 cents per pound. Open interest in the cotton futures market fell by 1.46% since April 7. Price momentum and relative strength metrics were on either side of neutral territory on Wednesday. In its April WASDE report, the USDA told the cotton market:

The 2019/20 U.S. cotton supply and demand forecasts show sharply lower exports, lower consumption, and higher ending stocks compared with last month. A developing global economic slowdown with little precedent is expected to significantly reduce global cotton demand and trade, resulting in one of the largest one-month reductions in projected U.S. cotton exports ever: down 1.5 million bales to 15.0 million. Consumption is 100,000 bales lower, and ending stocks are 1.6 million bales higher. Ending stocks are now expected to reach 6.7 million bales, equivalent to 37 percent of total disappearance, compared with March’s expected 26 percent. The projected marketing year average price received by upland producers of 59.0 cents per pound is down 1 cent from last month. Lower world consumption this month results in lower projected trade and higher projected 2019/20 ending stocks. Consumption is lower for every major country, with total world consumption down 7.6 million bales or 6.4 percent from March. At 110.6 million bales, world consumption in 2019/20 is now projected to be 8.1 percent lower than in 2018/19. This would be one of the largest annual declines on record. World trade in 2019/20 is down 3.0 million bales from the March estimate. With relatively small increases in beginning stocks and production this month, 2019/20 expected ending stocks are 7.9 million bales higher than estimated in March, and 11.0 million bales higher than the year before.

Source: USDA

US and global stocks are rising according to the USDA on the back of falling world consumption. Meanwhile, cotton may have reached a level on the downside that proved unsustainable when it fell to 48.35 cents per pound.

I am bullish on the prospects for the price of cotton at around the 50 cents per pound level but would use tight stops on any long positions.

May FCOJ futures moved higher since the last report. On Wednesday, the price of May futures was trading around $1.0830 per pound, 3.84% higher than on April 8. Support is at 92.15 cents level. Technical resistance is at $1.2255 per pound, the most recent high. Open interest fell 2.57% since April 7. The Brazilian currency is weighing on the FCOJ futures, but bottlenecks at the ports worked in the opposite direction. $1 per pound is the first level of minor support for the soft commodity.

Soft commodities are likely to continue to experience high levels of price volatility. Approach any of the members of this sector with a plan, that includes stops and profit targets that reflect logical risk-reward dynamics.

 

A final note

While the stock market bounced from the March low, and many other asset prices stabilized, the world remained shut down as of April 15. The price tag for a stagnant economy and the government and central bank stimulus programs will be substantial. I am concerned that the global economy could experience a period of stagflation where prices rise, and economic conditions continue to contract. The flood of liquidity will continue over the coming weeks and months, which will weigh on the value of all fiat currencies. Gold continues to make higher highs in a sign of the debasement of dollars, euros, yen, and all forms of legal tender that derive value from the full faith and credit of the countries that issue the banknotes and mint the coins. I view the new high in gold against the Swiss currency as another significant event. We could see an inflationary backlash in the future after unprecedented stimulus. Meanwhile, in many commodity markets, rising inventories and lower prices are likely to lead to lower production. We could be setting the stage for far higher prices in the months and years ahead. Raw materials could be setting up for a repeat of the price action from late 2008 through 2011. I would only trade from the long side but would use tight stops as we are far from out of the woods when it comes to the global pandemic or its effect on markets across all asset classes. Be cautious as we could see dislocations in markets like we are seeing in the animal protein sector where consumer supplies decline because of closing plants and logistical issues. The markets are experiencing an unprecedented period where we should continue to expect the unexpected.

 

As I wrote over the past weeks, I plan to increase the price of The Hecht Commodity Report soon. However, all of my current loyal subscribers will never experience an increase in their monthly or annual subscription rates. I will grandfather all subscribers at their current rates for as long as they maintain their subscriptions. Thank you for your support.

 

Please keep safe and healthy in this environment.

 

 

 

Until next week,

 

Andy Hecht

 

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.   

 

 

 

 

 

 

 

 

 

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