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  • Markets calm
  • Some light at the end of a dark tunnel
  • Gold and silver love liquidity
  • The market waits for a production cut in oil, but it’s all about demand- Spring bounce in natural gas
  • April WASDE on Thursday, April 9

 

The weekly spreadsheet is attached below.

As we head into the second quarter, markets across all asset classes are nervous. Coronavirus has swept across Europe and is bearing down on the United States. Continue to expect the unexpected in all markets as we work through the most challenging period of our lifetimes. The markets improved over the past week, which is a positive sign. Keep stops tight and take profits when they are on the table.

 

Summary and highlights:

 

On Thursday, March 26, jobless claims jumped by a record 3.283 million, and that is only the start of ugly economic data the markets will face over the coming weeks and months. The level of new claims for unemployment insurance was over five times the previous record. Markets expected the massive jump in unemployment and concentrated on the stimulus package before Congress. All of the leading stock indices posted significant gains for the third consecutive session. The DJIA rose 6.38%, the S&P 500 was 6.24% higher, and the NASDAQ gained 5.60%. The Russell 2000 appreciated by 6.30%. The June US 30-Year Bond futures contract fell 0-05 to the 177-19 level. The June dollar index futures contract plunged 1.544 to 99.453, it is possible that there is some government intervention in the foreign exchange arena. In the grain arena, corn and soybean prices edged marginally higher, while wheat corrected after recent gains. Crude oil and heating oil prices fell, but gasoline only posted a marginal loss. Natural gas posted a 2.5 cents per MMBtu loss after the EIA reported a withdrawal of 29 bcf for the week ending on March 20. Ethanol moved 6.2 cents higher to 97 cents on the April futures contract. Gold moved higher, but silver along with platinum, palladium, and copper prices posted declines. Live and feeder cattle prices, and lean hogs fell around three cents per pound on the session. FCOJ, cocoa and lumber posted small gains, while cotton, coffee, and sugar fell. Bitcoin was $35 higher to $6695 per token.

On Friday, the House of Representatives passed the $2 trillion stimulus bill. The Fed’s balance sheet was at the $5 trillion level and rising, and the Coronavirus data from around the world remained grim. Even though Congress passed the legislation and the President signed it into law, stocks fell on the final session of the week as the number of cases of Coronavirus, and the death toll rose. All of the leading stock indices were down between 3%-4%. The June US 30-Year Treasury Bond futures were 2-21 higher to 180-25. The June dollar index futures contract fell sharply and closed at 98.537. All of the grain futures posted marginal gains. Crude oil fell, but gasoline and heating oil prices moved higher on the session. Natural gas declined away from the $1.70 per MMBtu level on the new active month May futures contract. Platinum posted a small gain, but gold, silver, and palladium prices fell. Copper edged lower to the $2.17o5 level. Meat futures were all down the limit on the session with cattle and hogs falling 4.5 cents per pound. Cocoa was up only $2 per ton, but cotton, FCOJ, coffee, sugar, and lumber prices all moved to the downside. Coffee fell the most as the May futures contract dropped 8.80 cents per pound. Bitcoin was $15 lower at $6680 per token at the end of the week.

On Monday, after President Trump extended the social distancing guidelines until April 30, stocks posted marginal gains. June US 30-Year Treasury Bond futures fell 1-18. The June dollar index was 0.744 higher to 99.281. Silver and platinum posted losses, while fell around $10 and palladium was marginally higher. Copper futures fell 1.65 cents to $2.1555 per pound. Grains were on either side of unchanged with a small gain in the soybeans, while corn and wheat prices slipped. Crude oil fell, while the price traded to a new low at $19.27 on the May futures contract, it settled at over $20 per barrel as Presidents Trump and Putin spoke about stabilizing the price of the energy commodity. Always the chess player on the geopolitical landscape, Putin may have viewed the US outreach as a sign of weakness. However, a deal between the US, Russia, and the Saudis could provide some stability to the oil market, with some analysts looking for the price to drop to $10 per barrel or lower. Heating oil was lower, while gasoline posted a marginal gain. Natural gas was a touch higher, but the price of May futures remained just below the $1.70 per MMBtu level. Ethanol was at 94 cents per gallon, up only one tick on the session. Cattle and hog futures prices fell, along with cotton, which traded below the 50 cents per pound level for the first time since 2009. Sugar fell, and lumber closed below $300 per 1,000 board feet. FCOJ, coffee, and cocoa futures all posted gains on the session. Bitcoin was $240 lower to $6380 per token.

On Tuesday, President Trump tweeted that an infrastructure package should be the next move to address the economy in the aftermath of the pandemic. The concept lifted the prices of some infrastructure stocks. However, the leading indices all posted declines on the final day of the first quarter of 2020. Q1 will go down as one of the worst periods in market history across all asset classes. The DJIA index fell 1.84%, and the S&P 500 dropped 1.60%. The NASDAQ posted a 0.95% loss, and the Russell 2000 was 0.45% lower on the final day of March 2020. Soybean futures moved 3.75 cents per bushel higher, but corn and wheat posted marginal declines. Crude oil edged a touch higher, but gasoline and heating oil futures moved to the downside. Gasoline closed Q1 below 60 cents per gallon with heating oil just over the $1 level. Natural gas fell five cents per MMBtu to $1.64 on the May futures contract. Ethanol was lower to just over 91 cents per gallon. Gold fell sharply to just over $1583, but silver was a touch higher after losses on Monday. Platinum was marginally higher, and palladium was up over $100 per ounce. Copper moved higher on the prospects of an infrastructure package and closed the quarter at just below the $2.23 per pound level. Cattle were higher, but lean hog futures moved to the downside. Lumber and sugar fell to new lows, and cocoa futures slipped lower. Cotton, FCOJ, and coffee moved slightly higher. Bitcoin was $95 higher to $6475 per token. We should expect lots of volatility in Q2 in markets across all asset classes, given the events of the recent weeks.

On Wednesday, April 1, the second quarter began as markets reacted to the projections that the next two weeks in the US will be a difficult period with mounting cases and fatalities caused by Coronavirus. The three leading stock indices fell by between 4.4% and 4.5%, with the biggest loss coming in the Russell 2000, which declined by 7.03%. The June US 30-Year Treasury Bond Futures contract was 2-08 higher to 181-10. The June dollar index futures contract moved higher to settle at 99.753. Grain prices fell as soybeans and wheat were appreciably lower, with corn falling six cents per bushel on the May futures contract. Crude oil remained below the $21 per barrel level on the nearby NYMEX futures contract, while gasoline and distillate futures declined. Natural gas fell below $1.60 per MMBtu, and ethanol fell to a new low at just below the 80 cents per gallon level on the back of weakness in grains and gasoline prices. Precious metals prices were lower with losses in the gold, silver, platinum and palladium markets on their respective settlement prices. Copper fell by almost six cents per pound to settle at $2.1745. Cattle and hog prices were down the daily limit. All of the soft commodities and lumber moved lower on the first session of Q2. Cotton closed below the 50 cents per pound level after trading to a new low of 48.35 cents. Sugar was at just over the 10 cents per pound level, and lumber fell below $260 per 1,000 board feet, over $200 lower than the price on February 21. Bitcoin fell $265 per token to $6210 as the price action in all markets reflected the challenging times on April 1.

On Thursday, unemployment filings doubled from last week to 6.65 million bringing the two-week total to an astonishing ten million. Stocks posted gains with the DJIA, S&P 500, and NASDAQ up 2.24%, 2.28%, and 1.72%, respectively. The Russell 2000 gained 1.29% US 30-Year Treasury Bond futures were 0-28 higher to the 182 level. The June dollar index rose by around 0.500 to settle at 100.271. Grains edged lower with the most significant loss in wheat futures. Soybeans and corn posted lower percentage losses on the session. Crude oil moved significantly higher as the US, Russia, and KSA appear to be discussing production cuts. President Trump mentioned the potential for a ten million barrel per day reduction in global output which caused nearby May NYMEX futures to rally just over $5 per barrel. Brent futures settled $5.20 higher. Gasoline prices exploded to the upside with over an 11.6 cents per gallon gain. Heating oil futures were over six cents higher. Natural gas fell after the EIA reported a decline of 19 bcf from storage for the week ending on March 27. The price of May futures fell to a low of $1.521 and settled at $1.552 per MMBtu. Gold and silver moved appreciably higher with respective gains of $47.50 and 67 cents per ounce. Platinum was $13.70 higher, while palladium fell $19.10 on the session. Cattle and hog futures continued to tank as live cattle and lean hogs dropped the 4.50 cents per pound limit. Nearby feeder cattle declined by 6.75 cents on Thursday. FCOJ fell, but cotton, coffee, sugar, cocoa, and lumber prices all moved higher. Bitcoin rallied $655 per token to $6865.

On Friday, stocks slipped as the leading indices were all between 1.5% and 1.70% lower. The small-cap Russell 2000 fell 3.11%. The June 30-Year US Treasury Bond futures contract rose 0-24 to 182-09, and the June dollar index was 0.406 higher to 100.677. Wheat futures moved 7.5 cents per bushel higher, but corn and beans posted small losses. Crude oil continued to move higher on hopes that the US, Russia, and KSA will cut production. Comments by Russian President Vladimir Putin lifted the price of the energy commodity. Brent crude oil outperformed WTI on the session. Product prices and natural gas posted gains, but ethanol was marginally lower. Gold moved a bit higher, but silver, platinum, and palladium prices slipped. Copper was down 2.6 cents and closed the week at just below the $2.20 per pound level. Cattle and hog futures prices continued to decline, reaching new multiyear lows. Cotton was higher, sugar moved only two ticks to the upside, but FCOJ, coffee, cocoa, and lumber fell. Bitcoin was $65 lower to $6800 per token. The markets remained nervous, going into the weekend, with a large percentage of the world remains homebound.

On Monday, April 6, stocks exploded higher on the back of some projections that Coronavirus could be peaking in Europe and New York. News that British Prime Minister Boris Johnson was put in the intensive care unit did not slow the ascent of the stock market. The DJIA was 7.73% higher, the S&P 500 rose 7.03%, and the NASDAQ moved 7.33% to the upside. The Russell 2000 gained 7.84% higher on the first session of the week. The June 30-Year US Treasury Bond moved 1-27 lower to 180-23, and the June dollar index futures were a touch higher to settle at 100.755. Corn futures fell to a new low below the $3.30 per bushel level; soybeans were marginally higher along with wheat futures on April 6. Crude oil fell as the Russians and Saudis still disagree over a path of any production cut. The only acceptable road to lower output appears to be a cut by all producers around the world.  Gasoline futures edged higher, but heating oil fell with the price of crude oil, which settled $2.26 per barrel lower. Natural gas staged another recovery as the price was 11 cents higher to $1.731 per MMBtu on the May futures contract after reaching a high of $1.755 in the aftermarket. Gold exploded higher to a new peak at $1715.80 on the now active month June contract on COMEX. May silver was back above the $15.00 level and settled at $15.169 per ounce. Platinum posted a marginal gain, but palladium moved lower. May copper moved above $2.20 to settle at $2.2175 per pound. Live cattle prices moved lower, while lean hogs moved higher on the session. Feeder cattle futures in May were a bit higher. FCOJ fell the 3 cents per pound limit, but cotton, coffee, sugar, cocoa, and lumber futures all posted gains. Bitcoin was $530 higher to $7330 per token.

On Tuesday, the closing level in the stock market was a welcome breather from the volatility over the past weeks. The three leading indices fell from 0.12% to 0.33%, while the Russell 2000 posted a marginal 0.03% gain. June 30-Year Treasury bonds were at the 179-07 level, 1-11 lower, and the June dollar index fell 0.841 to 99.914. Corn edged 3.75 cents per bushel higher, while May soybeans fell 0.75 cents, and CBOT May wheat moved 6.5 cents per bushel lower. Crude oil fell $2.45 per barrel on the nearby May NYMEX futures contract as the market became impatient with the prospects for a global production cut. The problem with crude oil remains on the demand rather than the supply side. Gasoline fell sharply while heating oil posted a smaller decline. The spring rally in natural gas continued and lifted the price of May futures by 12.1 cents to $1.852 after probing above the $1.90 level. Ethanol was only $0.003 lower to the 86.6 cents per gallon level. Gold traded in an over $70 per ounce range, hit a new high of $1742.60 on the June COMEX futures contract, and settled down just over $10 per ounce in volatile trading. Silver settled with a 31.1 cents per ounce gain at $15.48 on May futures. Platinum and palladium prices edged higher. Copper moved 5.5 cents higher to $2.2725 per pound on the May contract. Cattle and hog futures moved up the limit after recent losses that took the prices of the meats to multiyear lows. Coffee, cocoa, and lumber prices moved higher, but cotton, sugar, and FCOJ posted losses on the session. Bitcoin was unchanged at $7,330 per token.

On Wednesday, stocks continued to gain as some optimism has returned to markets. The DJIA was 3.44% higher, and the S&P 500 was up 3.41%. The NASDAQ gained 2.58%, and the Russell 2000 moved 4.61% higher. The US 30-Year Treasury Bond fell 1-05 to 178-02. The June dollar index futures contract settled at the 100.17 level. With the USDA’s April WASDE report due out tomorrow, corn, soybean, and wheat futures all edged marginally lower. Crude oil rallied to settle at $25.09 per barrel on the May NYMEX futures contract as the market was hopeful that OPEC and other producers around the world would agree on a ten million barrel per day production cut on April 9. Oil products were higher, led by gasoline futures. Natural gas was 6.9 cents lower to the $1.783 level on the May contract after reaching a new short-term high at $1.918 per MMBtu. Gold was marginally higher, but silver edged lower. Platinum was lower, but palladium edged higher at their respective settlement prices on Wednesday. Live cattle and feeder cattle prices moved higher, but lean hogs moved lower. Cotton posted a gain on the session, but FCOJ, sugar, coffee, cocoa, and lumber prices all moved lower. Bitcoin futures were up only $5 to $7335 per token.

 

Weekly Spreadsheet:

Copy of Spreadsheets for the The Hecht Commodity Report April 8, 2020

Stocks and Bonds

Massive amounts of liquidity from central banks and unprecedented fiscal stimulus programs from the US government have provided some stability to the stock market. The percentage changes of the leading indices since March 25 were significant. The VIX fell, while the bond market posted a marginal gain, reflecting the enormous levels of quantitative easing. When looking at the changes in the stock and bond markets since March 25, compared to the preceding weeks, one might think that calm returned to the markets. However, fear and uncertainty continued to grow as the number of cases of Coronavirus rise, and the death toll is too frightening to watch each day. We should continue to expect volatility in the stock market. On Wednesday, Bernie Sanders dropped out of the Presidential race, so former VP Joe Biden will face President Trump in November. The stock market may have added to gains on Wednesday as the prospects for Democratic Socialism in the US declined.

 

The S&P 500 bounced 11.09% last week. The NASDAQ was 9.57% higher, and the DJIA posted a 10.53% gain. All quiet in the stock market? Not quite. The market remains shell-shocked as the US and world face the greatest disaster in our lifetime, and only scientists hold the key to a solution. Two-way volatility will likely continue.

The economic carnage in markets is only a symptom of the underlying problem. Over the past two weeks, over ten million Americans applied for first-time unemployment benefits, and that number is heading a lot higher. GDP growth of the previous years will turn into a massive period of contraction. Corporate earnings will shift to corporate losses. Instead of reporting EPS, LPS, or loss per share, will become the quarterly news. Bankruptcies will replace IPOs. 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. Health comes first, and I am not criticizing the Fed or US government for their actions, they are necessary to prevent economic Armageddon.  However, we need to keep our eyes wide open and realize that the price of COVID-19 will be massive, and it will be the event that keeps on taking when it comes to markets. However, keep in mind that the stock market signaled the problem at the start and now it could be flashing that there is some light at the end of the dark tunnel. I prefer to be an optimist than a pessimist in the current environment. Unprecedented liquidity from the US government has ramifications, and while it is propping up the stock market, we are in for a bumpy road. The most important news on Wednesday was that Coronavirus could be peaking in New York City.

According to the Chinese government, if we can believe them, China is on the backend of the disaster. People are back to work in the world’s most populous nation. It is either ironic or by design that the event that could propel the Chinese economy into the leadership position in the world will be a virus that started within its borders. Chinese stocks rose over the past week, but they underperformed the US markets. I watch them with a grain of salt as government intervention in China is the norm rather than the exception.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $38.12 level on Wednesday, gain in the previous report. The FXI will continue to move lower or higher, depending on developments on the spread of the virus in the current environment as all equities are under siege. However, 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. Josef Stalin once said, “One death is a tragedy; one million is a statistic.” The quote sums up an authoritarian and Communist state.

US 30-Year bonds continued to rise over the past week as volatility and dislocations have become the norm in the debt market. On Wednesday, April 8, the June long bond futures contract was at the 178-03 level, up 0.41% after a more than 4% gain in the last report. Bonds have traded in a wide range. The volatility in the bond market is unprecedented. June bonds traded to a new high at 191-22 on March 9. The continuous contract traded to a peak of 200-00. Given the situation in the world and government and central bank responses, do not expect calm to return to markets anytime soon.

Open interest in the E-Mini S&P 500 futures contracts rose by 3.69% since March 24 after a decline of 37.17% in the previous report. Open interest in the long bond futures fell by 8.00% over the past week after declining over 8% in the March 25 report. The VIX fell as the falling knife in the stock market took a rest and was at the 43.07 level on April 8, 32.65% 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 43.07 level, the VIX has 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.

The bull market in stocks was born in 2009 and died of COVID-19 in Q1 2020, RIP. We should expect bear market trading conditions for the foreseeable future. The longer the virus remains a clear and present danger, the deeper the economic hole will become. Digging out will keep interest rates at low levels and bonds high over the coming months, and perhaps years. Corporate earnings and economic data will not be pretty over the coming weeks and months. Be cautious with stocks in this environment as we could see a continuation of the most volatile conditions of our lifetime.

 

The dollar and digital currencies

Volatility in currency markets remained high over the past two weeks in a trend we should expect to continue. Monetary and fiscal stimulus amounts to running the printing presses and increasing the money supply of the world. The trend started in 2008 after the global financial crisis and is accelerating during the global pandemic. The value of all fiat currencies is declining. However, since we measure foreign exchange values against each other, the devaluation is not always evident to the naked eye.

The dollar index traded in its widest range since 2008 in March the low was at 94.61 to a high of 103.96, the highest level since way back in 2002.

Technical support and resistance are now at the March low and high.  The dollar index was at 100.170 on April 8 down 0.82% from the level on March 25. Open interest in the dollar index futures contract moved 1.26% higher over the past two weeks.

The euro currency was 0.23% lower against the dollar in volatile conditions since March 25 on the June futures contract. I expect continued volatility in the dollar versus the euro currency pair. The pound was 4.28% higher against the dollar after weeks of wild volatility. Countries around the world are battling Coronavirus, which created dislocations in a host of markets, and currencies are no exception.

 

Bitcoin and the digital currency asset class moved higher over the past two weeks. Bitcoin was trading at the $7,286.70 level as of April 8, as it moved 9.75% higher after a period of significant price volatility in March. Ethereum posted a 24.5% gain since March 25. Ethereum was at $170.15 per token on Wednesday. The market cap of the entire asset class moved 13.01% higher over the past two weeks. Bitcoin underperformed the entire asset class since March 25. The number of tokens increased by 46 to 5302 tokens since March 25. 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 $208.201 billion up 13.01% since the prior report. Open interest in the CME Bitcoin futures rose by 28.25% since last week. All logic and traditional relationship tend to go out the window during periods of turmoil in markets. We should be prepared for futures periods of turmoil the longer Coronavirus cases continue to mount.

The Canadian dollar moved 1.16% higher since March 25. Open interest in C$ futures fell by 5.40% over the period as Canada closed its borders. The metric fell by over 32% in the last report. 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. Weakness in commodities prices accounted for the decline in the C$ over recent weeks. Risk-off conditions caused a decrease in open interest. 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 4.54% higher since two weeks ago. 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 British pound rose 4.28% after a wild rise to the downside in mid-March. As of Wednesday, Prime Minister Boris Johnson was in ICU with Coronavirus.

The global pandemic continues to hit emerging markets hard. The Brazilian real fell 3.20% over the last week as the real has been a falling knife in the foreign exchange market. The June Brazilian currency was trading at the $0.1936 level after falling to a new low at $0.18675. 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 has weighed on sugar and coffee prices.

 

Precious metals were volatile over the past week. Gold and silver posted gains, but platinum group metals all moved to the downside.

 

Precious Metals

Gold and silver moved higher by over 2% since the last report. Platinum was the best performing PGM as palladium and rhodium experienced significant percentage declines over the period. A continuation of stimulus that increases the size of government deficits and debt and decreases the value of currencies continues to provide support for gold. Central banks around the world hold the yellow metal as a reserve asset, and they had been net buyers over the past years, adding to reserves. According to the World Gold Council, net gold purchases by central banks increased in both January and February following the five-month low in December 2019. However, net purchases of 36 tons in February was 52% lower than during the same month in 2019. Russia announced it would stop purchasing gold starting April 1, 2020. Turkey was the leading buyer in February with an increase of 24.8 metric tons of the yellow metal.

Gold rose 2.58% over the past two weeks. Silver was 2.23% higher since March 25. April gold futures rolled to June and were at $1684.30 per ounce level on Wednesday, while May silver was $15.205 per ounce. Both metals should continue to experience elevated levels of volatility, but the tidal wave of liquidity should eventually be bullish for the prices of the metals that have long histories as a means of exchange.

June gold futures reached a new peak at $1742.60 on April 7. 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 May 18 before recovering to around $15.20 level on Wednesday. Gold marginally outperformed silver over the past two weeks. 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, but will use wide scales. I will only trade leveraged derivatives and mining stocks on a short-term basis with tight stops over the coming weeks.

April platinum rolled to July and posted a loss of 0.87% 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 $733.60 per ounce level on April 8. The level of technical resistance is now at $800 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 $4,250 per ounce on April 8, down $3,250 or 43.33% over the past two weeks. Rhodium’s price has been extremely volatile over the past weeks. Palladium fell 8.01% as wide price variance continued. The price traded to a new peak at $2815.50 on February 27 on the nearby futures contract. June palladium settled at the $2095.20 per ounce level on Wednesday.

Open interest in the gold futures market moved 12.29% lower over the past week. The metric moved 14.99% lower in platinum after significant declines in recent weeks as longs exited positions. The total number of open long and short positions fell 5.68% in the palladium futures market after substantial declines over the past two weeks. Silver open interest declined 7.78% over the period after significant decreases over the past weeks. Continued declines in open interest in all four metals reflect a continuation of risk-off conditions as investors and traders move to the sidelines.

The silver-gold ratio did not move much over the past two weeks.

Source: CQG

The daily chart of the price of June gold divided by May silver futures shows that the ratio was at 110.46 on Wednesday, down 1.05 from the level on March 25. 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 fell over the past week. June Palladium was trading at a premium over July platinum with the differential at the $1,361.60 per ounce level on Wednesday, which narrowed since the last report. July platinum was trading at a $950.70 discount to June gold at the settlement prices on April 8, which widened since the previous report.

The price of rhodium, which does not trade on the futures market, was at the $4,250 per ounce level on Wednesday, down $3,250 per ounce or 43.33% 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 and then snap back and moved down again. 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. The width of the spread was $250 above the bid side of the market. 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.

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. Over the past week, the physical deviance abated. 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 $733.60 per ounce, a contract on NYMEX has a value of $36,680, after falling to the lowest level just under two decades in March.

My advice is the same as in the previous report. 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.

 

Energy Commodities

Crude oil and gasoline prices recovered from new lows over the past two weeks. The rally came after President Trump signaled, he was working with Russian and Saudi leaders to address the flood of crude oil that followed the March 5-6 OPEC meeting.

Source: CQG

The daily chart of the price of June gold divided by May silver futures shows that the ratio was at 110.46 on Wednesday, down 1.05 from the level on March 25. 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 fell over the past week. June Palladium was trading at a premium over July platinum with the differential at the $1,361.60 per ounce level on Wednesday, which narrowed since the last report. July platinum was trading at a $950.70 discount to June gold at the settlement prices on April 8, which widened since the previous report.

The price of rhodium, which does not trade on the futures market, was at the $4,250 per ounce level on Wednesday, down $3,250 per ounce or 43.33% 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 and then snap back and moved down again. 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. The width of the spread was $250 above the bid side of the market. 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.

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. Over the past week, the physical deviance abated. 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 $733.60 per ounce, a contract on NYMEX has a value of $36,680, after falling to the lowest level just under two decades in March.

My advice is the same as in the previous report. 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.

 

Energy Commodities

Crude oil and gasoline prices recovered from new lows over the past two weeks. The rally came after President Trump signaled, he was working with Russian and Saudi leaders to address the flood of crude oil that followed the March 5-6 OPEC meeting.

Source: CQG

The same pattern on the monthly chart in January led to a significant price decline. However, an agreement between the US, Russia, and KSA to reduce output as demand destruction continues during the global pandemic could prevent the price of oil from falling to lower levels over the coming days and weeks. The longer the global economy remains idle, the higher the chance that we will see lower lows in the price of the energy commodity that powers the world. We will not have to wait long for news on a production cut as OPEC plus one meets tomorrow, and G-20 will discuss energy in the coming days.

May Brent futures rolled to June and underperformed NYMEX WTI futures and were 9.27% higher since March 25. May gasoline rose 11.99%, but the processing spread in May posted a 62.56% gain after significant declines in the gasoline futures price, and the crack spread over the past weeks. With 90% of Americans sheltered in place, the demand for gasoline has evaporated, leading the price to the lowest level in years. The low level of the gasoline crack spread at $3.17 per barrel makes refining a losing proposition for many capital-intensive processing companies. The crack spread fell into negative territory over the past weeks.

May heating oil futures moved 8.08% lower from the last report despite the recoveries in oil and gasoline prices. The heating oil crack spread was 19.20% lower since March 25. Heating oil had outperformed crude oil and gasoline over past weeks as the supply chain has been a demand vertical for distillates. Since they did not fall as far as the other members of the petroleum complex, heating oil and the related crack spread did not recover with oil and gasoline prices.

Technical resistance in the May NYMEX crude oil futures contract is at $36.70 per barrel level with support at the $19.27 level, the recent low. The continuous contract traded to a low of $19.27 per barrel on March 30. In 2001, the price of NYMEX futures fell to $16.70, which is the next technical level on the downside.  Crude oil open interest increased by 9.38% 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 price of crude oil fell by over 60% in Q1 2020. The oil-related stocks in the US turned out to be a harbinger of the price destruction in the energy commodity. Oil equities did not move higher with the price of crude oil or the stock market in 2019 and at the start of 2020, and they plunged with the price of petroleum and stocks over the past weeks. The potential for bankruptcies of debt-laden companies in the oil and oil-related sector continues to weigh on share prices. A government bailout of the sector may not 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 should not expect asset protection. When it comes to oil-related equities, 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.

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.

US politics and the Presidential election could play a role in the oil market later in the year, but we are now at a price level that creates an emergency for oil producers in the US. President Trump instructed the Energy Department to purchase crude oil for the Strategic Petroleum Reserve. At the same time, behind the scenes, discussion with the Saudis and Russians could lead to a coordinated production policy at this unprecedented time in history. We will find out tomorrow and over the coming days.

Crude oil has gone through significant price declines over the past years but has always found a way to rebound; this time, it could take a long time. The Saudis, Russians, and many other leaders around the world either did not realize or did not care that Coronavirus would be the most significant threat to the world since the Spanish flu that took over fifty million lives from 1918-1920. The move to flood the market with the energy commodity turned out to send the price to a disastrous level for all producers around the world.

The spread between Brent and WTI crude oil futures in June fell to the $2.60 per barrel level for Brent, which was $0.31 below the level on March 25. 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 17 cents per barrel premium for Brent but increased since then. 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.

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.

Over the past two weeks, the June 2021, minus June 2020, moved from a contango of $8.50 to $5.80, a decline of $2.70 per barrel. In early January, the spread traded to a backwardation of $6.03, $11.83 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. Expect the number of rigs operating in the US to fall significantly, and production to begin to drop precipitously in response to the lowest price levels in years over the coming weeks and months. The oil market is now hoping that the US, Russia, and KSA can agree on a plan to reduce output. Any disappointment over the failure to act could send the price of the energy commodity back below the $20 per barrel level and lower.

US daily production fell to 12.4 million barrels per day of output as of April 3, according to the Energy Information Administration. The level of production fell 600,000 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 March 27, the API reported an increase of 10.485 million barrels of crude oil stockpiles, while the EIA said they rose by 13.80 million barrels for the same week. The API reported a rise of 6.085 million barrels of gasoline stocks and said distillate inventories fell by 4.458 million barrels as of March 27. The EIA reported an increase in gasoline stocks of 7.50 million barrels and a decline in distillates of 2.20 million barrels. Rig counts, as published by Baker Hughes, fell by 40 for the week ending on March 27. They dropped by 62 the following week to a total of 562 rigs in operations as of April 3, which is 269 below the level operating last year at this time. Expect the rig count to continue to drop. The inventory data from both the API and EIA continues to take a back seat to risk-off conditions and the geopolitical deal-making over the past week. The demand for energy will decline as the economy continues to falter.

OIH and VLO shares recovered since March 25, OIH rose by 12.18%, while VLO moved 30.20% to the upside over the past two weeks. OIH was trading at $4.88 per share level on Wednesday. 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 $51.60 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 $1.7830 on April 8, which was 4.03% higher than on March 25. 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.

Natural gas followed through on the downside after putting in a bearish reversal trading pattern on the weekly chart during the week of January 13. Every attempt at a recovery ran out of buying throughout the winter season. The injection season will begin soon after last week’s small withdrawal.

Source: EIA

The EIA reported a withdrawal of 19 bcf, bringing the total inventories to 1.986 tcf as of March 27. Stocks were 76.8% above last year’s level and 17.2% 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 week the consensus expectations are that the EIA will report a 26 bcf injection into storage for the week ending on April 3. 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. 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 fell by 1.33% 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 above neutral conditions as of Wednesday. The price bounced sharply from the most recent April 2 low.

May ethanol prices moved 5.58% lower over the past week. Open interest in the thinly traded ethanol futures market moved 18.46% higher over the past week. With only 539 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product rose by 7.24% compared to its price on March 25. The price of May coal futures in Rotterdam moved 13.71% lower over the past week.

On Tuesday, April 7, the API reported an 11.938-million-barrel rise in crude oil inventories for the week ending on April 3. Gasoline stocks rose by 9.445 million barrels, while distillate stockpiles fell 177,000 barrels over the period. On April 8, the EIA said crude oil stocks rose 15.20 million barrels for the previous week. Gasoline inventories were 10.50 million barrels higher, while distillate stocks rose 476,000 barrels. The API and EIA inventory reports were 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. An agreement with Russia and KSA on production could alter the dynamics of the oil market for a time. However, demand is the critical issue facing the oil market.

In natural gas, the price fell to the lowest level since 1995 at $1.519 per MMBtu on March 23. On April 2, May futures fell to a level that was a new contract low and only two ticks over the March 23 bottom before recovering.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the price at $1.783 in May on the settlement price on April 8, was 6.9 cents per MMBtu higher than on March 25.

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 $1.07 per MMBtu or 60% higher than the nearby price, reflecting both seasonality and substantial inventory levels.

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 $6.81 per share, PBR was 17.41% higher than on March 25. 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.

Energy demand will continue to experience unprecedented destruction in the current environment. I expect volatility in all of the members of the sector that powers the world to continue for the foreseeable future. The market expects a move by oil-producing nations to address supplies. Expects lots of two-way price action over the coming days.

 

Grains                                                             

Over the past two weeks, the prices of soybeans, corn, and wheat futures posted losses as the deflationary spiral on the back of Coronavirus continues to weigh on markets across all asset classes. On Thursday, April 9, the US Department of Agriculture will release its monthly World Agricultural Supply and Demand Estimates report, which is the gold standard when it comes to the fundamentals of many of the products that feed the world. At the start of April, we are coming into the period of peak uncertainty in agricultural markets in the US and northern hemisphere. We should expect lots of volatility in grain prices as the eighth consecutive year of bumper crops is not a guaranty in 2020. The weather and other factors could create an environment where shortages occur. In 2012, drought conditions caused corn and soybean futures prices to rise to new all-time highs, and wheat rose above $9 per bushel.

 

 

May soybean futures fell by 3.06% over the past two weeks and was at $8.5450 per bushel on April 8. Open interest in the soybean futures market rose by 6.82% since last week. Price momentum and relative strength indicators were below neutral readings on Wednesday when it comes to the daily chart.

The May synthetic soybean crush spread fell sharply over the past two weeks and was at the $88.75 cents per bushel level on April 8, down 30.50 cents since March 25, which was a bearish signal for 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.

May corn was trading at $3.3000 per bushel on April 8, which was 5.31% lower on the week. Open interest in the corn futures market rose by 3.44% since March 25. Technical metrics fell to oversold readings in the corn futures market on the daily chart as of Wednesday. The price of May ethanol futures fell by 5.58% since the previous report on the back of demand destruction in the energy sector. May ethanol futures were at 89.7 cents per gallon on April 8. The spread between May gasoline and May ethanol futures rebounded to 21.90 cents per gallon on April 8 with ethanol at a premium to gasoline. The spread was 12.56 cents higher since last week as gasoline outperformed the biofuel.

May CBOT wheat futures were 5.47% lower since last week. The May futures were trading $5.4825 level on April 8. Open interest rose by 2.97% over the past two weeks in CBOT wheat futures. As I wrote in the last report, “We typically see open interest rise in all of the grain markets at this time of the year as farmers hedge the 2020 crops. However, this is far from a typical time in the world. As Coronavirus rages, it is likely to impact production.” The rise in open interest is beans, corn, and wheat are signs of some hedging activity. Technical metrics in CBOT wheat were below neutral territory on Wednesday. March wheat traded to a high of $5.925 on January 22, just one-half cent below the technical resistance on the longer-term charts, but the price failed, leading to the correction over the past weeks. The first level of support is now at the $4.9175 per bushel level, the recent low. Wheat has been correcting from a lower high of $5.87 on March 27 over recent sessions.

As of Wednesday, the KCBT-CBOT spread in May was trading at a 70.25 cents per bushel discount with KCBT lower than CBOT wheat futures in the May contracts. The spread narrowed by 8.75 cents since March 25. 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 marginally towards the long-term average over the past 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 making final decisions on how best to utilize their acreage during the upcoming 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 2.4803:1 level on April 8, up 0.0921 since last week. The ratio is above the long-term norm. On April 8, 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. I expect volatility in the spread to continue over the coming weeks until farmers plant 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. The prices moved lower from the previous report, but the message remains the same.

 

Copper, Metals, and Minerals

Base metals and industrial commodities posted a mixed bag of results over the past week. The sector of the commodities market that are the building blocks of infrastructure around the world posted more gains than losses. The global pandemic and deflationary spiral in markets across all asset classes impacted the nonferrous metals and industrial commodities as they fell by over 17% in Q1 2020.

Copper rose 2.54% on COMEX over the past two weeks. The red metal posted a 6.00% gain as of April 7 on the LME since the last report. Open interest in the COMEX futures market moved 0.92% higher since March 24. May copper was trading at $2.2600 per pound level on Wednesday after hitting a low of $1.9725 on March 19. Copper is a leading barometer for the overall health and wellbeing of the Chinese and global economies. Over the past two weeks, LME stockpiles declined after increases in recent weeks.

Just as in the crude oil market, copper put in a bearish reversal on the monthly chart in January and on the quarterly chart in Q12020. A target on the downside in the copper market is now at the early 2016 low of $1.9355 per pound. 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 LME lead price moved higher by 4.28% since March 24. 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 2.21% 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 10.35% since the previous report. Aluminum was 4.85% lower since the last report. The price of zinc rose by 5.66% since March 24. Zinc was at the $1940 level on April 7. The rising number of cases of Coronavirus in the UK could also impact the operations of the London Metals Exchange over the coming days and weeks. 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 $304.10 level, down 2.41% 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 bounced 13.75% higher at $28.95 per pound. The volatile Baltic Dry Index fell 1.16% since March 25 to the 596 level after significant losses throughout the winter months. June iron ore futures were 3.02% lower compared to the price on March 25. Open interest in the thinly traded lumber futures market rose 1.93% after significant consecutive losses over the past four weeks. Risk-off conditions continued to weigh on the price of lumber futures.

LME copper inventories moved 4.29% lower to 216,500 since the last report. COMEX copper stocks rose by 21.58% from March 24 to 35,364 tons. Lead stockpiles on the LME were up 0.32%, while aluminum stocks were 10.27% higher. Aluminum stocks rose to the 1,213,750-ton level. Zinc stocks rose by 1.21% since the last report. Zinc stockpiles experienced a significant rise in inventories in recent weeks. Tin inventories rose 18.4% since March 24 to 7,400 tons. Nickel inventories were 0.70% lower compared to the level on March 24. As Coronavirus impacts the UK, we could see an absence of stock data over the coming weeks. The LME went electronic and stopped ring dealing over the past weeks.

The volatility in the US dollar created dislocations in base metals prices over the past week, but risk-off over Coronavirus continued to be the most significant factor for the sector.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 17 cents on March 25, up two 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 $6.76 per share and moved 15.16% higher since last week.

FXC was trading at $8.03 on Wednesday, $0.78 higher 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.

 

Animal Proteins

Cattle and lead hog futures prices fell to their lowest level in many years over the past week as the deflationary impact of Coronavirus weighed on the animal protein sector of the commodities market. Live cattle fell to the lowest price since 2009, feeder cattle to its nadir since 2010, and lean hogs to the lowest level since way back in 2002 on the continuous futures contract over the past two weeks.

June live cattle futures were at 86.675 cents per pound level down 10.02% from March 25. Technical resistance is now at 99.775 cents per pound. Technical support stands at around 76.60 cents per pound level. Price momentum and relative strength indicators were rising from oversold readings on Wednesday. Open interest in the live cattle futures market moved 3.70% lower since the last report after steady declines over the recent weeks.

May feeder cattle futures marginally outperformed live cattle as they fell by 7.53% since last week as the period of extreme selling pressure continued. May feeder cattle futures were trading at the $1.19375 per pound level with support at $1.03625 and resistance at $1.17225 per pound level. Open interest in feeder cattle futures fell by 7.30% since last week. While live cattle futures have a delivery mechanism, feeder cattle are a cash-settled futures contract. Sometimes live cattle prices lead feeder cattle prices, while at others, the opposite occurs.

Lean hog futures tanked since the previous report. The active month June lean hogs were at 51.45 cents on April 8, which was 25.48% lower from the level on March 25. Price momentum and the relative strength index were rising from deeply oversold readings on Wednesday. Support is at 43.825 cents with technical resistance on the June futures contract at 74.00 cents per pound level.

The forward curve in live cattle is in backwardation from April 2020 until June 2020, and the market shifts to mostly contango from June 2020 through April 2021. Backwardation returns until August 2021. After a small backwardation from April 2020 through May 2020, the Feeder cattle forward curve is in contango from May through November 2020 before it tightens slightly until January 2021 and then shifts back to contango out to March 2021. The forward curves did not experience any significant changes over the past week in the cattle futures market.

In the lean hog futures arena, there is contango from April 2020 until August 2020. From August 2020 through December 2020, the curve is in backwardation, but contango returns from December 2020 through June 2021 when it shifts back to backwardation to July 2021. The price carnage in lean hog futures shifted the forward curve to reflect a glut condition when it comes to supplies.

The long-term average for the spread between live cattle and lean hogs is around 1.4 pounds of pork for each pound of beef. Over the past week, the spread between the two in the June futures contracts moved higher as the price of live cattle significantly outperformed lean hogs on a percentage basis.

Source: CQG

Based on settlement prices, the spread was at 1.68460:1 compared to 1. 34250:1 in the previous report. The spread increased by 34.21 cents as live cattle fell, but lean hog futures dropped a lot more over the past two weeks. The spread moved away from the historical norm on the June futures contracts. Beef is more expensive than pork from a historical perspective as of April 8.

On Thursday, April 9, the USDA will release its April World Agricultural Supply and Demand Estimates report, which will provide some fundamental insight into the beef and pork markets. The start of the 2020 grilling season in the US is now a little under two months away at the end of May. However, 2020 is anything but an ordinary year, and social distancing is likely to limit demand for meats as barbecues are likely to be small immediate family affairs over the coming months. Meanwhile, the price levels have moved to the lowest level in years, meaning risk-reward favors recovery rallies. 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.

 

Soft Commodities

Over the past two weeks, the price of cocoa futures on ICE rebounded, cotton posted a marginal gain, but all of the other members of the soft commodities sector went the other way with losses in sugar, coffee, and FCOJ futures. The soft commodities have not been immune to the deflationary spiral that has worked its way through markets across all asset classes.

May sugar futures fell 9.12% since March 25, adding to losses over the past weeks, as the price of the sweet commodity was around the 10.37 cents per pound level on the active month futures contract. Technical resistance is at 11.68 cents with support at the recent low of 10.02 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 two weeks and was at the $0.1936 level against the US dollar on the March contract, 3.20% lower over the period. The Brazilian currency continued to make lower lows as Coronavirus has 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 were in oversold territory as of April 8. 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 before the recent correction. Risk-off conditions stopped the rally. Open interest in sugar futures was 0.50% 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.

May coffee futures moved 7.81% lower since March 25 after a 19.55% gain in the previous report. May futures were trading at the $1.1980 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 now 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 $37.86 on Wednesday. Open interest in the coffee futures market was 2.18% 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 risk-off conditions likely caused the recent correction. The ultimate upside target is the November 2016, high at $1.76 per pound. Price momentum and relative strength were at or below 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.

The price of cocoa futures recovered over the past two weeks. On Wednesday, May cocoa futures were at the $2379 per ton level, 5.83% higher than on March 25. Open interest fell by 3.08%. Relative strength and price momentum were rising above neutral territory on April 8. 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. We are long the NIB ETN product. NIB closed at $27.95 on Wednesday, April 8. I will increase stops on this position as 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.

May cotton futures rose 0.75% over the past week after recent declines on the back of continued concerns about the Chinese and global economies. May cotton was trading at 53.84 cents on April 8, 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 3.67% since March 24. Price momentum and relative strength metrics were rising from oversold territory on Wednesday.

The spread of the virus continues to weigh on the price of the fiber. However, at the lowest price in eleven years, cotton could be near the bottom. I am bullish on the prospects for the price of cotton at just over 50 cents per pound but would use tight stops on any long positions.

May FCOJ futures corrected lower since the last report. On Wednesday, the price of May futures was trading around $1.0430 per pound, 13.87% lower than on March 25, after a 24.59% gain in the previous report. Support is at 92.15 cents level. Technical resistance is at $1.2255 per pound, the most recent high. Open interest fell 17.71% since March 24. The Brazilian currency was weighing on the FCOJ futures, but bottlenecks at the ports worked in the opposite direction. $1 per pound had been a critical point for the OJ futures, and the price rose substantially above that level over the past weeks but corrected since March 25.

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

We are all crossing our fingers, hoping we are now seeing the impact of Coronavirus peak in the US and Europe. The effect of the virus is far-reaching. The legacy for markets will remain after scientists uncover effective treatments and a vaccine. In all markets, we must use a risk-reward approach that reflects increased volatility; profits must be a function of the risk we are willing to undertake.

I continue to believe that the necessary central bank and government programs that are providing stability to the global economy during this challenging period weighs on the value of all fiat currencies. Governments can increase the money supply to their heart’s content, but they cannot increase the stock of gold without extracting more from the crust of the earth. Since central banks hold gold as an integral part of their foreign exchange reserves, it validates the yellow metal’s position in the world financial system. I expect gold to move to new and higher highs in the coming months and years. Any price weakness is likely to be a buying opportunity.

When it comes to other commodities, falling prices should lead to output declines. When prices reach levels where inventories begin to decline, we could see significant rallied. The last example was in 2008-2011, when many commodities fell sharply and then rallied to record levels in 2011.

Keep a positive attitude, stay healthy, and reserve some cash for the coming months. We will come through this period, but there will be significant changes in behavior and government policies in the aftermath of Coronavirus.

 

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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