- Precious metals correct as gravity hits the sector- Copper and base metals were steady
- Crude oil and products drift mostly higher, natural gas and coal move to the downside, but ethanol posts a double-digit percentage gain
- Grains were steady at lower levels following the August WASDE report
- Meat prices recover- Coffee and cotton fall, but sugar moves a bit higher
- Stocks post gains as the bullish train keeps on chugging fueled by stimulus, the dollar index edges higher-Bitcoin slips
On Thursday, August 6, the Russell 2000 posted a marginal loss, but the S&P 500 and DJIA were 0.64% and 0.68% higher on the session. The NASDAQ bullish beast powered 1% higher and closed at over 11,100 in record territory. US 30-Year Treasury bonds were just over the 182 level, and little changed on the session. The dollar index fell to a marginal new low at 92.475 and closed at 92.768. Grain prices remained near the recent lows, and crude oil edged lower. Gasoline was a touch higher, but heating oil fell. Natural gas made a new high at $2.284 per MMBtu. The EIA reported an injection of 33 bcf into storage, and the price backed off and closed at $2.165 on September futures, less than one penny above the low for the day. Gold and silver continue to power higher. The yellow metal settled at $2069.40 on the December futures contract and was higher in the aftermarket after trading to a new high of $2081.80. Silver was even more impressive as the price settled at $28.40 on September futures and was over $29 per ounce at the end of the day. Platinum finally made a significant move as the price blew through the $1000 per ounce level. Palladium gained over $40 per ounce to settle at $2259.40 on September futures. Copper was steady at $2.9105 per pound on the nearby COMEX contract. The meats were quiet with a slight decline in live and feeder cattle and a small increase in hog futures, which remained below the 50 cents per pound level. Sugar rallied to just below 13 cents, coffee corrected lower, cocoa continued to rally as the price moved over $2500 per ton, and cotton put in a new short-term high at 65.05 cents per pound. FCOJ futures bounced a bit to over the $1.16 level. Bitcoin continued to move higher and was at just over $12,000 per token at the end of the session.
On Friday, the employment report for July told markets that the US added a better than expected 1.8 million jobs pushing the unemployment rate to 10.2%. Democrats and Republicans in Washington could not agree on another stimulus package, but the stock market was stable with small gains in the S&P 500 and DJIA. The NASDAQ slipped, but remained over the 11,000 level, while the Russell 2000 posted a 1.59% gain on the final session of the week. The dollar index was 0.644 higher to 93.412, while the long bond futures fell -0-22 to 181-18. Grain prices continued to move lower, with losses in soybeans, corn, and wheat. The September wheat futures settled below the $5 per bushel level. Precious metals corrected lower, but not before silver put in a new high at $29.915. Silver settled at $27.54, with gold at $2028, Platinum fell below the $1000 level, and palladium posted an over $80 per ounce loss. Copper sank below $2.80 per pound and settled at $2.7925. Oil and oil products were marginally lower, but September natural gas was 7.3 cents higher to settle at $2.238 per MMBtu. Cattle prices moved a touch lower, but lean hogs rallied and settled at over 50 cents per pound. Sugar, coffee, cotton, and FCOJ prices declined, but cocoa was higher on Friday. Lumber futures rose to a new all-time high at $659.40 and settled at $648 per 1,0000 board feet on the September futures contract. Bitcoin moved away from the $12,000 level, with the futures settling at $11.645.
On Monday, the S&P 500 posted a marginal 0.27% gain, while the DJIA was up 1.30% on the first session of the week. The Russell 2000 gained 0.99%, but the NASDAQ fell 0.39%. The technology index had been leading the stock market on the upside, but it took a rest on August 10. The US 30-Year bond futures in September were at the 181-09 level, lower than at the close on Friday. The dollar index moved 0.157 higher to the 93.569 level. Corn and soybeans drifted slightly higher, but wheat declined. September crude oil futures rose 72 cents per barrel to settle at $42.05. Gasoline and heating oil posted gains, and both crack spreads edged higher. September natural gas fell 8.5 cents to $2.153 per MMBtu. Gold moved $11.70 higher to settle at just below $2040 on December futures. Silver rose to $29.261 per ounce. Platinum rallied back over the $1000 level to settle at $1002.70 while palladium was $93.80 higher to $2270.40. Copper also moved to the upside, with the September contract at $2.8615. Live and feeder cattle futures posted small gains, but lean hogs moved significantly higher and probed above the 54 cents per pound level for the first time since June 12 on the October contract. Sugar moved slightly lower, and coffee continued to decline. Cocoa put in a bearish reversal on the daily chart as the price moved to a new short-term high at $2535 and closed below the previous session’s low. Cotton was a bit higher, but FCOJ futures continued to decline. Bitcoin was at the $12,025 level after rising to a new short-term high at $12,220 per token.
On Tuesday, stocks slipped with the S&P 500 down 0.80%, the DJIA losing 0.38%, and the NASDAQ falling 1.69%. The Russell 2000 fell by 0.75%. Interest rates were higher with the September long bond futures contract down 1-09 to the 180-00 level. The September dollar index was at the 93.60 level, up slightly on the session. Grain prices remained under pressure; crude oil edged lower. Gasoline fell, while heating oil recovered, sending crack spreads in opposite directions. Gold fell by over $100 per ounce, silver declined by $4, platinum was over $50 lower, and palladium declined by around $140 per ounce. The declines were overdue after the recent rallies that took gold to a new record high. Copper was around the $2.85 level. Live and feeder cattle prices moved higher, but lean hogs fell. Sugar was higher, but coffee fell. Cocoa dropped, but cotton rallied. FCOJ futures moved to the upside. Bitcoin was trading at $11,375 per token, down on the day after probing above the $12,000 level.
On Wednesday, stocks moved higher with gains in all of the leading indices. US 30-Year bonds fell below the 179 level. The dollar index had a quiet day, settling at 93.408. the USDA released its August WASDE report, which was mostly bearish for agricultural commodities. However, soybeans put in a bullish reversal on the daily chart, and corn was higher. Wheat futures moved lower on the session. Crude oil was higher along with products on bullish inventory data from the API and EIA, Crack spreads were on either side of unchanged. Natural gas slipped to the $2.152 per MMBtu level, but ethanol futures moved higher. Gold edged higher after Tuesday’s correction in the precious metals sector. Silver slipped; platinum was lower along with palladium. Copper moved back towards the $2.90 level, settling at $2.8910 per pound. Cattle futures were mostly higher, but lean hogs posted a marginal loss. Sugar was a few ticks higher along with coffee futures. Cocoa posted a small gain, but cotton was lower after the WASDE report. FCOJ futures drifted a bit higher on the session. Bitcoin was higher to the $11,640 level on the nearby futures contract.
Stocks and Bonds
Stocks continued to post gains over the past week. Even though the coronavirus remains a clear and present danger to businesses across the US, the contentious US election is coming closer, and the government has yet to agree on another stimulus package, share prices edged higher. Low interest rates, the tidal wave of central bank liquidity, and some optimism about the future continue to drive the stock market higher. The NASDAQ reached a record peak at over the 11,000 level, and the other indices were all close to all-time highs. Bonds slipped since August 5.
The S&P 500 moved 1.58% higher since August 5. The NASDAQ was 0.13% higher, and the DJIA posted a 2.85% gain. The Fed’s monetary policy approach continues to create a bullish environment for stocks, but we should be prepared for sudden downdrafts that can occur at any time.
Chinese stocks moved a touch higher since August 5 as they mostly underperformed US equities for the third consecutive week. Tensions between the US and China are weighing on Chinese share prices.
The China Large-Cap ETF product (FXI) settled at the $42.89 level on Wednesday, as it rose by only 0.16% since the previous report. Short-term technical support on the Chinese large-cap ETF product stands at $41.09. Resistance is at the July 9 high at $45.93 per share. The Chinese government could be supporting the level of Chinese stocks. Chinese share prices could become highly volatile as the tensions between the US and China continue to rise.
September US 30-Year bonds fell since August 5. Interest rates in the US are not moving appreciably higher any time soon. Economic uncertainty and the high level of unemployment will keep a significant bid under the bond market. On Wednesday, August 12, the September long bond futures contract was at the 178-28 level, 1.67% lower than on August 5. Short-term support for the long bond is at 177-06, with resistance at 183-06, the high from the past week. The bond market action reflects Fed policy, which has made dips in bonds a buying opportunity. The pattern of trading is likely to continue, given the Fed’s approach to monetary policy. The Fed policy continues to amount to a put option on the bond market.
Open interest in the E-Mini S&P 500 futures contracts rose by 0.66% since August 4. Open interest in the long bond futures rose by 2.27% over the period. The VIX traded to a high of 85.47 on March 18, the highest level since 2008. I have been writing, “I continue to believe that risk-reward favors buying the VIX and VIX-related products with tight stops and reestablishing positions after the market triggers stops is the optimal approach in the current environment. Nothing has altered my approach to the VIX over the past week.” The volatility index was at 22.16 on August 12, down 3.44% since August 5. I continue to believe that related short-term products like VIXX, and VIXY are in the buy zone. At just over 22.00, risk-reward continues to favor the upside for the volatility index. I have been taking small losses on long positions in volatility-related products over the past week.
Low interest rates are bullish fuel for the stock market, but the election, rising number of coronavirus cases, and tensions with China combine to make for a potentially rocky path for the stock market. The trend is your friend in stocks, and it remains higher. However, the odds of another downdraft are rising with the level of the leading indices. When it comes to bonds, any dip remains a buying opportunity based on central bank policy.
The dollar and digital currencies
The dollar index bounced a bit higher since August 5. The September dollar index future contract was at 93.408 on August 12, up 0.60% from the level on August 5. The index fell to a low of 92.475 on August 6, the lowest level since May 2018. The index was not far off the recent low on Wednesday. Open interest in the dollar index futures contract fell by 2.92% since August 4 after moving significantly higher over the past week. Rising open interest and falling price is a technical validation of the bearish trend in the index. The move below the 93.395 level ended the long-term uptrend in the dollar index. Daily historical volatility in the dollar index was 5.98% on Wednesday, a few ticks higher than on August 5. The metric that measures price variance on the September contract rose to a high of 22.70% in late March. The next target on the downside below the most recent low is at the February 2018 low at 88.15, which could act as a magnet for the dollar index.
The September euro currency was 0.66% lower against the dollar. The interest rate differential between the dollar and the euro has narrowed, which provides support for the euro. Open interest in the euro futures rose by 0.23%. The September pound moved 0.69% lower against the dollar since the previous report, and open interest rose by 1.33%. The dollar index could be heading significantly lower as currency markets tend to trend for long periods. However, the markets tend to drift rather than spike during moves. Governments often manage the volatility in currency markets to provide stability. The weak dollar is a significant and bullish factor for commodity prices, and the path of least resistance for the US currency continues to be lower.
Bitcoin and the digital currency asset class pulled back since August 5. Bitcoin was trading at the $11,558.44 level as of August 12. Bitcoin probed above the $12,000 level over the past week, reaching a high of $12,220. The leading digital currency fell by 1.08% since August 5. Ethereum posted a 3.35% loss over the period. Ethereum was at $386.30 per token on Wednesday. The market cap of the entire asset class moved 0.26% higher. Bitcoin underperformed the asset class since the previous report. The number of tokens increased by 333 to 6432 tokens since August 5. In late 2017 the overall market cap was at over $800 billion with a fraction of the number of tokens available today. More new digital currencies are coming to the market each week.
On Wednesday, the market cap was around $355.142 billion. Open interest in the CME Bitcoin futures rose by 2.96% since last week. Open interest had been increasing when Bitcoin moved higher and lower during downside moves, which was a bullish sign for the cryptocurrency. The pattern did not continue over the past two weeks. The next target on the upside above the recent high at $12,220 stands at $13,915 per token, the June 2019 high. The trend is your friend in Bitcoin, and it remains higher. Support is at $10,780 and $8,220.
The Canadian dollar moved 0.21% higher since August 5. Open interest in C$ futures fell by 0.16% since the previous report. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that 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 0.42% lower since last week. Open interest in the A$ futures was 1.61% higher. The geographical proximity to China makes the Australian dollar sensitive to events in China. The A$ is a proxy for both China and raw material prices. Economic strength or weakness in China will determine the path of the Australian economy. Any retribution over the spread of coronavirus could cause retaliatory measures by both sides, which would weigh on Australia’s economy. In the long-term, the stimulus is bullish for commodities prices and both the Australian and Canadian currencies. The brewing tensions with China are a reason to be cautious with the Australian currency. Over the coming months and years, we could see significant gains in the C$ and A$ as commodity prices rise because of inflationary pressures caused by the increase in the global money supply. I believe the price action in 2020 in all markets is similar to 2008. In the years that followed, commodity prices soared because of the stimulus, taking the Australian and Canadian currencies appreciably higher against the US dollar because of their sensitivity to raw material prices. Over the long-term, buying the A$ and C$ during periods of weakness could prove to be the optimal strategy. I am bullish on the two currencies that I view as proxies for commodities prices. Rising open interest in the two commodity-sensitive currencies is a bullish sign. I believe that any price weakness is a buying opportunity for the A$ and C$ over the coming weeks and months.
Over the past week, the volatile Brazilian real moved 2.92% lower against the US dollar on the September futures contract. The real moved to a high of $0.2053 level against the US dollar on June 10 on the September contract before turning lower. The September Brazilian currency was trading at the $0.183050 level after falling to a new and lower low at $0.16780 on May 13. The real is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets are sensitive to changes in the direction of the Brazilian real. The falling real had been a factor that weighed on sugar and coffee prices as Brazil is the world’s leading producer and exporter of the soft commodities and output costs are in local currency terms over the past weeks along with crude oil. However, as we have seen in other markets, low prices may not stop shortages of supplies as the virus impacts parts of the supply chain when it comes to processing or transporting the commodities. The weather conditions in critical growing regions and the spread of the virus could also cause price volatility in the agricultural products. Brazil has seen a significant increase in the number of infections and fatalities because of coronavirus, which could harm its currency value. The South American nation is second behind the US in cases and deaths. I am bullish for the real because of Brazil’s commodity production. The nation is a supermarket to the world for many products. In the aftermath of the global pandemic, the price tag for liquidity and stimulus could cause inflationary conditions that would provide support for the A$, C$, and even the Brazilian real. A rise in commodity prices could help to bolster the value of the real. I am a buyer of the real on any weakness against the US dollar. Technical resistance is at $0.2053, which could become a critical target and launch pad for the real over the coming weeks and months. The dollar rose a bit against most currencies over the past week, but the bearish trend is firmly in place.
Gravity hit the precious metals since last week with gold, silver, platinum, and palladium posting declines. I had been warning that the risk was rising with the prices of the lustrous metals. Rhodium was the best-performing precious metal since August 5 as it rallied by over 20%.
Gold made a new high at $2089.20 over the past week, but the price corrected to just below the $1950 level on Wednesday. Silver came within ten cents of $30 per ounce, but the price pulled back to just under the $26.00 per ounce level. Platinum was lower, and palladium declined. Rhodium moved substantially higher since August 5. Gold and platinum put in bearish reversals on the daily charts on Friday, August 7, which was a warning sign for the precious metals.
December gold was 4.89% lower over the past week. The yellow metal made a higher high at $2089.20 on August 7 before reversing lower. Silver fell 3.39% after gaining over 10% and 20% in the two previous reports. December gold futures settled at $1949.00 per ounce level on Wednesday. September silver settled at $25.979 per ounce, after breaking through technical resistance at $21.095, the July 2016 peak las week. I maintain a bullish opinion on the gold and silver markets as the odds favor that the price action that followed the 2008 global financial crisis is a blueprint for the coming months and years. Stimulus is bullish fuel for gold and silver as increases in the money supply weigh on the value of fiat currencies. Price corrections continue to be buying opportunities in the silver and gold markets. However, we could see wide price variance given the price levels. I continue to hold a long core position in gold and silver. I am also running short-term long positions looking to buy on dips with the hope of taking profits on rallies. On the short-term risk positions, I am using both the metals and the diversified gold and silver mining ETF products. Nothing has changed since the previous report. The bearish reversal on August 7 was a reason for caution in gold. Silver more than doubled since the March low at under $12 per ounce. Silver moved from the lowest price since 2009 to the highest since 2013 in four short months. However, silver could be a wild bucking bronco, and the risk of a significant corrections rises with the price of the precious metal.
As I wrote last week, “While I am bullish on the gold and silver markets, they rarely move in a straight line. Using corrections as buying opportunities is likely to be the optimal approach to trading and investing.”
Technical resistance for December gold stands at the $2089.20 per ounce. Short-term support is at $1819.30. In September silver, support is at $22.460 and $19.795, with resistance at $29.915 on the active month contract. Above there, the next level could be $35.445, the high from 2012. If the price action from 2008 through 2011 is a guide, gold will head for much higher prices over the coming months, and silver should continue to make gains on the upside. However, the road higher could be very bumpy, as we learned on Tuesday, August 11.
Gold mining shares moved lower since August 5, which was another warning sign for the yellow metal in the short term. The GDX fell 11.90%, and the GDXJ declined by 12.83%. The mining shares tend to outperform the yellow metal on the upside and underperform on the downside. Over the past week, they underperformed the yellow metal. The SIL and SILJ silver mining ETF products that hold portfolios of producing companies moved 11.22% and 12.58% lower since August 5. The price action continued to underperform the silver futures market over the past week. Mining shares often perform like leveraged products compared to the metals.
Gold underperformed silver since the previous report, which has been the trend over the recent 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. The ratio had been moving steadily lower over the past weeks. I will continue to add to long physical positions in gold, silver, and platinum, during periods of price weakness. I will continue to trade leveraged derivatives and mining stocks on a short-term basis with tight stops. While gold mining stocks and derivatives follow the price of gold, they are not the metal and could experience significant periods of price deviation if risk-off conditions return to the stock market. I hold long core positions but will employ tight stops on any new positions that increase exposure to the two leading precious metals.
October platinum fell 3.02% since August 5 after making a marginal new high for 2020. Platinum followed gold and put in a bearish reversal trading pattern on Friday, August 7, on the daily chart. October futures were at the $959.20 per ounce level on August 12. The level of technical resistance is at $1035.50 on the October futures contract, the August 7 high. Support in platinum is at $894.30 per ounce on the active month 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 $9,700 per ounce on August 12, up $1,650 or 20.50% over the past week. September Palladium fell by 2.14% since last week. Support is at $2079 on the September contract with resistance at $2419.10. September palladium settled at the $21768.20 per ounce level on Wednesday.
Open interest in the gold futures market moved 1.51% lower over the past week. The significant decline in open interest earlier in the year was because of problems with dealers when it comes to the EFP, or arbitrage positions between gold for delivery on COMEX and London. We have seen a short squeeze in gold as August futures rolled to October and December futures. With the price moving to over the $2000 level, we witnessed dislocations between COMEX and London prices around periods when the futures contracts are rolling. The metric moved 2.25% higher in platinum. The total number of open long and short positions decreased by 1.05% in the palladium futures market after rising over the past weeks. Silver open interest fell by 3.77% since August 4 after an over 10% gain last week. Rising open interest in all of the precious metals futures markets over the past weeks as the prices moved higher had been a bullish sign for the sector.
The silver-gold ratio continued to fall over the past week as silver continued to soar. and reached almost $30 per ounce.
The daily chart of the price of December gold divided by September silver futures shows that the ratio was at 75.23 on Wednesday, down 1.60 from the level on August 5. The ratio traded to the 124:56 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. The move lower since mid-March has been a supportive factor for the two metals. In 2008, the ratio peaked during the risk-off selling and then fell steadily until 2011. The ratio probed below the 70:1 level on August 10.
Central banks continued to purchase gold over the first half of 2020, and net buying by central banks is a supportive factor for the price of the yellow metal. All signs are the trend will continue in Q3.
Platinum was 3.02% lower, and palladium moved 2.14% to the downside over the past week. September Palladium was trading at a premium over October platinum with the differential at the $1209.00 per ounce level on Wednesday, which narrowed since the last report. October platinum was trading at a $989.80 discount to December gold at the settlement prices on July, which also narrowed since the previous report.
The price of rhodium, which does not trade on the futures market, rose $1,650 per ounce to the $9,700 level since last 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 remained at $2000 per ounce. The spread is at a level that makes any investment in the metal irrational. Rhodium is an untradeable commodity, but it can provide clues about the price path of the other PGMs.
I continue to favor buying physical platinum as well as gold and silver during corrective periods. 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 $959.20 per ounce, a contract on NYMEX has a value of $47,960, after falling to the lowest level just under two decades in March. Platinum continues to offer the most compelling value in the precious metals sector.
The GLTR ETF product holds a portfolio of physical gold, silver, platinum, and palladium, for those looking for diversified precious metals exposure. I continue to believe that gold is heading a lot higher, but the route will not be in a straight line. The stimulus in the US and Europe continues to be highly supportive of gold and silver prices. Platinum is inexpensive from a historical perspective compared to gold and palladium. Palladium and rhodium continue to trade in bullish patterns, but both are sensitive to global economic conditions. We should continue to see volatility in all of the precious metals with a bias to the upside. I continue to favor gold, silver, and platinum on price weakness. I hold a long core position and a trading position where I buy dips and take profits on rallies. Since mining shares tend to be more volatile, I have used the mining ETFs and ETNs in gold and silver shares for short-term trading purposes. The higher high in gold over the past week is another sign of technical and fundamental strength for the yellow metal as the Fed continues to add liquidity to markets. As I have written in the past, the ascent of gold marks the descent of fiat currencies that rely on the full faith and credit of the governments that print legal tender. Central banks and governments worldwide continue to hold and be net buyers of gold, which is the ultimate currency. While countries can print legal tender to their heart’s content, the gold stock can only increase by extracting more from the crust of the earth. If 2020 turns out to be anything like 2008, even higher highs in gold are on the horizon, and the precious metal has the potential to surprise and even shock market participants on the upside in the coming months and years. Gold moved to a record high in dollar terms, and it reached new highs in virtually all other currencies. Silver has broken a four-year resistance level. The price action in silver has been explosive since the metal created a blow-off low below $12 per ounce in March. The trend is always your best friend in markets, and it is higher in the precious metals. The odds of significant corrections rise with the prices, so be careful and remember to take some profits on the way up. I am a buyer on dips but would leave plenty of room as price swings could be wide. I have taken small profits but continue to hold long positions. I believe that prices will eventually shock analysts on the upside given the flood of liquidity from central banks, which is bearish for fiat currencies. Taking some profits on the recent rallies leaves room to add to positions during the current price weakness.
Energy commodities moved mostly higher since last week. WTI and Brent oil futures posted marginal gains along with gasoline, but heating oil futures were a bit lower. Crack spreads moved in opposite directions with a gain in the gasoline processing spread and a loss in the distillate refining margin. Natural gas drifted low, but ethanol prices moved higher. Coal for delivery in Rotterdam posted a decline.
September NYMEX crude oil futures rose by 1.14% since August 5. The September contract settled at $42.67 per barrel on August 12 after trading to a low of $21.99 on April 22 and a high of $43.52 on August 5. Crude oil inventories fell substantially for the week ending on July 24 and 31, according to both the API and EIA. Product stockpiles were marginally higher. The data was supportive of the price of crude oil. As of August 7, stockpiles moved lower for the third consecutive week.
Chinese demand for crude oil has been robust since its economy reopened. With parts of the economy up and running in Europe and the US, the demand side of the equation has improved. However, the rising number of coronavirus cases throughout the US poses a threat to the recovery in the energy commodity. Technical resistance on the September NYMEX futures is at $43.52 per barrel, the most recent high. Support stands at $38.72 per barrel.
October Brent futures underperformed September NYMEX WTI futures, as they rose by only 0.44% since August 5. September gasoline was 1.72% higher, and the processing spread in September moved 3.68% to the upside since last week. The September gasoline crack spread was at $9.58 per barrel. Wild swings in energy prices caused wide price ranges in the crack spreads the reflect refining margins. Gasoline crack spreads tend to exhibit strength during the summer driving season in the US, but 2020 is no ordinary year. As we move into the fall in the futures market, the gasoline crack strengthened a bit over the past week.
September heating oil futures fell 0.47% from the last report. The heating oil crack spread was 7.77% below the August 5 level. Heating oil is a proxy for other distillates such as jet and diesel fuels. The September distillate crack spread traded to a low of $9.43 in late May and closed on Wednesday at $10.09 per barrel. The price action in the processing spreads has been highly volatile, given the timing differences between moves in crude oil and products over the past months. The crack spreads are a real-time indicator of demand for crude oil as well as barometers for the earnings of refining companies that process raw crude oil into oil products. The crack spreads could be a significant indicator of demand over the coming days and weeks as the wheels of the US economy have begun moving. However, the energy market remains highly sensitive to new outbreaks and hotspots in the US and worldwide.
Technical resistance in the September NYMEX crude oil futures contract is at $43.52 and $54.50 per barrel level with short-term support at the $38.72 level. The measure of daily historical volatility was at 24.3% on August 5, just above the 23.10% level on August 5. The price variance metric was at almost 172% in mid-March on September futures. Demand remains the overwhelming critical factor when it comes to the price direction of the energy commodity. As I wrote over the past weeks, “falling production should eventually balance the market and could create a deficit at some point in the future. The course of the pandemic is crucial for the oil market over the coming weeks and months. If we have seen the peak, we could see prices rise. However, further outbreaks that prompt a return to closing parts of the economy again would be a highly bearish factor for energy demand.” The September NYMEX crude oil futures contract has made higher lows and higher highs. The price needs to remain above the $38.72 and $34.36 levels to keep that pattern intact. The market had stalled at the $40 level, which became a pivot point. The lack of a decline after the tapering of production cuts was a bullish sign for the oil market. The trend has been bullish since late April, but crude oil has moved into a consolidation pattern since June.
The Middle East remains a potential flashpoint for the crude oil market. Relations between the US and Iran and Saudi Arabia and Iran have not improved over the past months. While the leadership in Teheran has had their hands full with coronavirus, we could see them lash out at US interests in the region over the coming weeks or months. Any hostilities that cause supply concerns could send the price of crude oil for nearby delivery appreciably higher in the blink of an eye. At over $45 per barrel for the Brent benchmark, any actions that impact production, refining, or logistical routes could cause a far greater percentage move in the price of oil than we witnessed at the beginning of 2020. The Middle East could provide surprises to the oil market, but global demand remains the primary factor for the price over the coming weeks. The oil market finally began to make a move on Wednesday.
Crude oil open interest increased by 1.38% over the period. NYMEX crude oil rose by 1.14%, and the energy shares outperformed the energy commodity since August 5. The XLE rose by 3.07% since August 5. We are starting to see consolidation in the oil business, which should continue over the coming months.
I continue to be cautious when it comes to any investments in debt-laden oil companies. I would only consider those with the most robust balance sheets like XOM and CVX in the US. Exxon and Chevron could stand to pick up lots of production assets at bargain-basement prices over the coming months as the number of bankruptcies rises in the oil and gas sectors. I would only purchase these companies during corrective periods. Nothing has changed since the prior report when it comes to opportunities for oil-related equities.
The spread between Brent and WTI crude oil futures in October rose to the $2.47 per barrel level for Brent, which was down 32.0 cents from the level on August 5. The October spread moved to a high of $5.28 on March 18. The continuous contract peak was at $11.52 on April 20 as all hell broke loose in the crude oil futures market. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. However, this time, it was the carnage in the price of WTI futures that drove the spread to higher levels. Brent crude can travel by ocean vessel to consumers around the globe, while WTI is a landlocked crude oil. The lack of storage capacity was responsible for the price action in the spread and outright prices in late April.
A continuation of the decline in US production could cause significant volatility in the Brent-WTI spread. Before 2010, WTI often traded at a $2 to $4 premium to Brent. The WTI grade has a lower sulfur content making it the preferable crude oil for processing into gasoline, the world’s most ubiquitous fuel. If US output continues to decline significantly and demand returns to the market, we could see it impact the Brent-WTI differential and cause periods where WTI returns to a premium to the Brent, which is better suited for refining into distillate products. The spread also reflects the political risk in the Middle East as the region uses the Brent price for its output. The USO and BNO ETF products replicate the short-term price action in WTI and Brent futures, respectively. While both do an adequate job tracking the futures in the short-term, neither are particularly effective for medium or long-term positions because of the volatility of the forward curves in both crude oil benchmarks. The path of least resistance of the oil market will be a function of the ups and downs of the global pandemic over the coming weeks and months.
Term structure in the oil market experienced a significant shift as the price of crude oil tanked in March and April. The flip from backwardation to contango in the spread reflected the flood of supplies in the crude oil market. Oil traders filled 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 became one of the only profitable areas of the market as demand evaporated back in February through April. The cash and carry trade put upward pressure on freight and storage rates. The forward curve had moved to the widest contango in years. The contango caused the price of May futures to plunge to an incredible low of negative $40.32 per barrel. As prices moved higher since late April, contango declined.
Since August 5, September 2021, minus September 2020, moved from a contango of $2.38 to $2.46, which was only 8.0 cents higher over the period. The $0.46 level in late June was the recent low in the spread. In early January, the spread traded to a backwardation of $5.06. The spread hit a high of $8.39 per barrel on March 9. September futures traded to a low of $21.99 on April 22. Rising contango was a sign of a glut in the oil market while falling contango signifies tighter supplies. The capacity for crude oil storage around the globe fell dramatically as well-capitalized traders purchased nearby crude oil, put it in storage, and sold it for futures delivery. The decline in the spread could have triggered some profit-taking, which opened up more capacity on the storage front. Falling production also caused the spread to tighten. We have likely seen a least a partial unwind of some spreads as they gravitated back towards flat. Production declines and declining inventories over the coming months would result in significant profits for well-capitalized crude oil traders who continue to store crude oil against deferred short positions. The decline in contango since late April is a supportive sign for the price of oil. The number of rigs operating in the US continued to decline. According to Baker Hughes, on August 7, the number of rigs in operation was at 176, down four from the previous week, and 588 below the level last year.
US daily production stood at 10.70 million barrels per day of output as of August 7, according to the Energy Information Administration. The level of production was down 300,000 barrels from the previous week, as the price remained over the $40 per barrel level on nearby NYMEX futures. As of July 31, the API reported a decline of 8.587 million barrels of crude oil stockpiles, and the EIA said they fell by 7.40 million barrels for the same week. The API reported a decline of 1.748 million barrels of gasoline stocks and said distillate inventories increased by 3.824 million barrels as of July 31. The EIA reported an increase in gasoline stocks of 419,000 barrels and a rise in distillates of 1.60 million barrels. The inventory data from both the API and EIA was bullish for the price of crude oil. As of August 7, US production dropped by 2.4 million barrels per day or over 18.3% since March.
OIH and VLO shares moved higher since July 29. OIH rose by 3.50%, while VLO moved 6.78% to the upside over the period. As I wrote over the past weeks, “the level of crack spreads is a reason for short-term caution for VLO.” OIH was trading at $141.91 per share level on Wednesday. I am holding a small position in OIH. We are long three units of VLO at an average of $63.81 per share. VLO was trading at $55.12 per share on Wednesday. I continue to believe VLO is too low at the current price level. We added another unit of VLO on August 6 on the opening at $51.36 per share to lower our average on the long position.
The September natural gas contract settled at $2.152 on August 12, which was 1.78% lower than on August 5 after an over 13% gain last week. The September futures contract recovered from a low of $1.646 on July 20 and reached a high of $2.284 on August 6. Support in September stands at the July 31 low of $1.781 per MMBtu. The continuous contract made a new twenty-five-year low at $1.432 per MMBtu in late June. Technical resistance is at $2.284 and the early May high at $2.499 per MMBtu.
The EIA reported another small injection into storage over the past week.
The EIA reported an injection of 33 bcf, bringing the total inventories to 3.274 tcf as of July 31. Stocks were 22.5% above last year’s level and 15.1% above the five-year average for this time of the year. The previous week, the injection was 26 bcf. 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 40 bcf injection into storage for the week ending on August 7. The EIA will release its next report on Thursday, August 13, 2020. Over the past nineteen weeks, the percentage above last year’s level has been declining when it comes to natural gas stockpiles. The steady decline from 79.5% above the one-year level as of March 20 to 22.5% last week could be providing some fundamental support for the energy commodity. The trend could reflect higher demand or lower production. Given the events since March, it is likely that output is causing a slower rate of injections into storage. Baker Hughes reported that a total of 69 natural gas rigs were operating in the US as of July 31, unchanged since last week, and 100 under last year’s level of 169. Meanwhile, the price reached my target at over $2.10 per MMBtu, where I took profits on long positions. Warren Buffett’s purchase of the transmission and pipeline assets of Dominion Energy in July could be providing some psychological support for the price of natural gas futures. However, selling has appeared in the futures arena each time natural gas rose above the $2 level over the past months, and sellers could be looking for an opportunity to try to push natural gas lower after the recent rally.
Open interest fell by 3.67% in natural gas over the past week. Price momentum and relative strength on the daily chart rose to overbought readings and were leaning lower as of Wednesday.
September ethanol prices moved higher over the past week, with the price at $1.2300 per gallon wholesale, up 11.31$ since last week. Open interest in the thinly traded ethanol futures market moved 17.9% lower over the past week. With only 69 contracts of long and short positions, the biofuel market is untradeable and looks like it could be delisted. The KOL ETF product rose 2.43% compared to its price on August 5. The price of October coal futures in Rotterdam fell by 6.41% since last week’s report.
On Tuesday, August 11, the API told the crude oil market that US inventories fell by 4.401 million barrels for the week ending on August 7. Gasoline stocks dropped by 1.301 million barrels, while distillates decreased 2.949 million barrels. On August 12, the EIA reported a decline in US crude oil stockpiles of 4.50 million barrels. The EIA said gasoline fell by 700,000 and distillates declined by 2.30 million barrels as of August 7. The latest data was extremely bullish for the crude oil market as crude oil and product stocks all posted declines.
I expect volatility to return to the crude oil market as it will move higher or lower on optimism or pessimism on the back of the progress of the virus and progress on treatments and a vaccine. The latest reports of new outbreaks were bearish for the energy sector. Production is falling, but demand remains the most significant factor when it comes to the price direction. The price path remains higher.
In natural gas, the forward curve continues to be wide, with January 2021 futures trading at a significant premium over natural gas for September 2020 delivery. Nearby September futures settled at $2.152 on August 12 with natural gas for delivery in January 2021 at $3.101 per MMBtu., a 44.1% premium or contango. The spread widened slightly over the past week as the price of nearby natural gas futures moved lower.
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 started 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 lead-up to the winter of 2020/2021. However, production is likely grinding lower because of the low level of prices that make output uneconomic. The trend in stocks since March 20 compared to last year is a sign of declining output. The debt-laden oil and gas businesses in the US could receive support from the government to keep energy output flowing, but demand destruction is a critical factor.
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, I have been using the BOIL and KOLD products, which offer double leverage on the long and short sides.
We are holding a long position in PBR, Petroleo Brasileiro SA. At $8.79 per share, PBR was 1.57% lower than on August 5. I have a small position that I will hold as a long-term investment. PBR had been weak on the back of the falling value of the Brazilian currency.
Demand continues to be the primary factor that will drive energy prices over the coming days and weeks. The recovery ran into a roadblock as the number of cases of the virus is climbing in the US. Tight stops are key when approaching energy commodities in the futures or ETF arena. When it comes to share prices, I believe that the leading companies will eventually rebound, but it could take some time. Energy powers the world, and demand is critical throughout the rest of 2020. In 2021, US energy policy could change, which would impact the dynamics of the fundamental equation for fossil fuels. The upcoming November election could significantly impact the oil and gas markets in the US as it is the world’s leading producer of both energy commodities. The trends in energy commodities are mostly higher, but I would be cautious and use tight stops. A sudden drop in the US stock market could weigh on crude oil prices, but the trend in both was higher as of August 12. I am flat to short natural gas as I believe that short sellers could return to the market after the recovery to over the $2.20 per MMBtu level on the nearby futures contract. I am using very tight stops on risk positions. August can be a sleepy month in commodity markets but watch for surprises as 2020 is like no other year.
The USDA released its August WASDE report, highlighting crop progress and supply and demand fundamentals, on Wednesday, August 12, at noon EST. The monthly report is the gold standard for many producers and consumers. Grain prices moved were mixed over the past week. Soybeans and corn rallied a bit after the monthly report, but wheat slipped lower. The full text of the August WASDE report is available via this link.
New crop November soybean futures rose 0.48% since August 5 and was at $8.8300 per bushel on August 5. The price of November soybeans moved back towards the $9 per bushel pivot point. Support is now at $8.6525, with technical resistance at $8.9975 per bushel on November futures. The USDA told the soybean market:
“U.S. soybean supply and use changes for 2020/21 include lower beginning stocks and higher production, crush, exports, and ending stocks. Beginning stocks are reduced on a small increase in 2019/20 soybean crush. Soybean production is forecast at 4.425 billion bushels, up 290 million on higher yields. Harvested area is forecast at 83.0 million acres, unchanged from the July projection. The first survey-based soybean yield forecast of 53.3 bushels per acre is raised 3.5 bushels from last month and is 5.9 bushels above last year’s level. Soybean supplies for 2020/21 are projected at a record 5.1 billion bushels, up 13 percent from last year. U.S. soybean exports are raised 75 million bushels to 2.13 billion on increased global import demand, increased supplies, and lower prices. Soybean crush is also raised, mainly reflecting increased soybean meal exports. Soybean ending stocks are projected at 610 million bushels, up 185 million from last month. The U.S. season-average soybean price for 2020/21 is forecast at $8.35 per bushel, down 15 cents from last month. The soybean meal price is forecast at $290 per short ton, down 10 dollars. The soybean oil price is forecast at 30.0 cents per pound, up 1 cent. The 2020/21 global oilseed supply and demand forecasts include higher production, higher use, and lower ending stocks. Partly offsetting higher U.S. production, foreign oilseed production is reduced 1.7 million tons to 479.6 million, mainly on lower rapeseed and sunflowerseed crops. Rapeseed production is lowered for Ukraine and Kazakhstan while sunflowerseed production is lowered for Russia, Kazakhstan, and Moldova. Global 2020/21 soybean trade is raised 3.9 million tons, with higher exports for Brazil, Argentina, and the United States. This is parallel to higher imports for China, Thailand, Argentina, Egypt, and India. Soybean crush for China is raised 3.0 million tons to 98.0 million in 2020/21, but soybean meal equivalent (SME) protein growth is unchanged from last month at 5 percent due to oilseed meal consumption changes in the prior year. With higher global soybean production mostly offset by higher use, mainly in China, global ending stocks are increased 0.3 million tons to 95.4 million. Other notable changes include higher 2020/21 peanut production for India on the rapid planting pace and higher 2019/20 Malaysian palm oil production on recent monthly output strength.”
Source: USDA August WASDE report
The report was not bullish for the soybean futures market as US production and ending stocks were higher along with global inventories. However, soybean futures rallied in the aftermath of the report and put in a bullish reversal on the daily chart on Wednesday.
Tensions between the US and China continue to weigh on soybean prices. The weather conditions are becoming less of a factor now that the growing season has progressed. Open interest in the soybean futures market moved 0.23% lower since August 4. Price momentum and relative strength indicators were moving towards neutral territory on Wednesday. November beans reached a high of $9.1250 on July 6 but retraced back to below the $8.70 level.
The December synthetic soybean crush spread was 0.50 cents lower from the level on August 5 at 101.50 cents. The processing spread in December for new crop beans had been trending lower since reaching a peak at $1.1550 in early April. It hit a low of 81.25 cents on July 13 and reversed course, climbing back to above the $1 level for the first time since early June, but it has not provided support for the price of new crop beans.
I am flat in the soybean market with no positions as the growing season is ending.
December corn was trading at $3.2725 per bushel on August 12, which was 1.24% higher since August 5. Open interest in the corn futures market fell by 3.04% since August 4. The USDA told the corn market:
“This month’s 2020/21 U.S. corn outlook is for larger supplies, greater feed and residual use, increased exports, and higher ending stocks. Corn production is forecast at 15.3 billion bushels, up 278 million from the July projection. The season’s first survey-based corn yield forecast, at a record 181.8 bushels per acre, is 3.3 bushels higher than last month’s trend-based projection. Today’s Crop Production report indicates that Illinois, Indiana, Iowa, Missouri, Nebraska, and Ohio are forecast to have yields above a year ago, with record-high yields expected for Minnesota and South Dakota. Feed and residual use is raised based mostly on a larger crop and lower expected prices. Exports are higher reflecting U.S. export competitiveness and relatively low world market prices. With supply rising more than use, ending stocks are raised 108 million bushels to 2.8 billion. The season-average corn price received by producers is lowered 25 cents to $3.10 per bushel. Sorghum production is forecast 44 million bushels higher with the yield 9.1 bushels per acre above last month’s historical median yield. Sorghum exports are raised reflecting an increase in the expected amount of shipments to China. This month’s 2020/21 foreign coarse grain outlook is for lower production, slightly higher trade, and reduced stocks relative to last month. EU corn production is lowered, mostly reflecting reductions for Romania and France that are partially offset by increases for several countries including Poland, Italy, and Hungary. Ukraine corn production is forecast higher, largely reflecting higher expected area. Other notable corn production changes include projected increases for Mozambique and Malawi, with reductions for Canada and Thailand. Barley production is lowered for the EU, Kazakhstan, Argentina, and Ukraine. Major global coarse grain trade changes for 2020/21 include corn export increases for the United States, Ukraine, and Burma. Corn imports are raised for the EU, Canada, and Thailand, but reduced for India. Sorghum exports are raised for the United States and Argentina, with higher imports forecast for China. Foreign corn ending stocks are slightly lower relative to last month, reflecting an increase for Indonesia that is more than offset by declines for Canada and India.”
Source: USDA August WASDE report
The report was neutral for the corn futures market. Crop yields in the US are higher than last year. While US inventory projections were higher, global stocks were slightly lower. The price of December corn futures moved higher in the wake of the WASDE report.
Technical metrics were at oversold readings in the corn futures market on the daily chart as of Wednesday, but they were turning higher. Support on December corn futures is at the $3.20 level, on the December futures, $3 per bushel is a line in the sand on the downside. I have no risk positions in corn.
Corn will continue to be highly sensitive to the price path of gasoline. Ethanol production in the US accounts for approximately 30% of the annual corn crop. The price of September ethanol futures moved higher since the previous report. September ethanol futures were at $1.2300 per gallon on August 5, down from the recent high at $1.3850 per gallon, but 12.50 cents higher on the week. The spread between September gasoline and September ethanol futures was at 1.38 cents per gallon on August 12, with gasoline at a premium to ethanol. The spread moved 10.40 cents lower since August 5 as gasoline underperformed the biofuel in September futures. The prospects for corn prices are a function of gasoline and crude oil prices as we move towards the 2020 harvest period.
September CBOT wheat futures fell 3.82% since August 5. The September futures were trading $4.9125 level on August 12. Open interest increased by 2.40% over the past week in CBOT wheat futures.
The support and resistance levels in September CBOT wheat futures now stand at $4.8775 and $5.3525 per bushel, as they moved lower on the week. Price momentum and relative strength were below neutral conditions and heading for oversold territory on Wednesday on the daily chart.
The USDA told the wheat market:
“The outlook for 2020/21 U.S. wheat this month is for increased production offset by lower imports, higher exports, and lower ending stocks. U.S. wheat production is raised 14 million bushels to 1,838 million as increased Hard Red Spring (HRS) and Durum production more than offsets lower winter wheat production as indicated by the NASS August 12 Crop Production report. Imports are lowered 10 million bushels this month to 130 million on the larger HRS supplies. Estimated food use for 2019/20 is lowered fractionally to 962 million bushels, based on the latest NASS Flour Milling Products report. Food use for the 2020/21 market year is lowered 4 million bushels to 960 million as food consumed away from home is expected to remain lower than last year due to the impact of COVID-19. Projected 2020/21 exports are raised 25 million bushels to 975 million on lower production for several key competitors, most notably the EU. With offsetting supply changes and increased use, ending stocks are lowered 17 million bushels to 925 million. If realized, these will be the lowest wheat ending stocks in 6 years. However, the season-average farm price is decreased $0.10 per bushel to $4.50 on lower U.S. corn prices and reduced wheat price expectations for the remainder of the market year. Foreign 2020/21 wheat production is lowered 3.7 million tons led by a 4.0-million-ton reduction for the EU, and 1.0-million-ton reductions each for Kazakhstan and Turkey. These changes are partially offset by a 1.5-million-ton production increase for Russia and a 1.1-million-ton increase for Brazil. The production changes are based on updated harvest results and government estimates. Global beginning stocks are raised 3.8 million tons, reflecting several mostly offsetting changes as well as a 3.5 million ton increase for the EU, which is based on multi-year revisions to both use and stocks. Foreign consumption is lowered 1.3 million tons, led by a 1.0- million-ton reduction for EU feed and residual use based on the smaller crop. Global exports are lowered fractionally with several offsetting changes including a 1.5-million-ton cut for the EU, and a 0.8-million-ton reduction for Kazakhstan, both on reduced production. These are offset by a 1.5-million-ton export increase for Russia, based on increased supplies, and a 0.7-million-ton increase for the United States. With global use down more than supplies, world ending stocks are revised 2.0-million-tons higher to a record 316.8 million tons.”
Source: USDA August WASDE report
The USDA said that US wheat stocks edged a touch lower, but global inventories rose to a new record high. September wheat was stable to lower in the aftermath of the August WASDE report.
As of August 12, the KCBT-CBOT spread in September was trading at an 73.50 cents per bushel discount with KCBT lower than CBOT wheat futures in the September contracts. The spread narrowed by 10.75 cents since August 5. 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.” 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 historical norm over the past week.
I only have a small long position in the WEAT ETF product but have exited all other grain positions as the market now will move into the 2020 harvest season. I will look to begin to slowly build long positions on price weakness for the 2021 crop year. I continue to believe that grain prices are too low, given the upward trajectory of global demand. Eventually, a weather event will cause prices to move far higher because of the rising requirements for the products that feed people worldwide.
Copper, Metals, and Minerals
Base metals and industrial commodities turned in mixed results since the previous report. Copper on COMEX, and the LME declined. Meanwhile, aluminum, nickel, lead, and zinc prices were higher. Tin moved to the downside. Iron ore was higher. The Baltic Dry Index posted a gain, while uranium prices were a touch lower. Lumber continued to rally and put in a new all-time high at $710.50 per 1,000 board feet on September futures on August 12.
COMEX copper was 0.89% lower as the price fell below the $2.80 per pound level and recovered. LME copper declined by 1.15%. Open interest in the COMEX futures contracts moved 1.98% lower. Short-term technical support for the copper market is now at $2.7820 per pound. Resistance is at $2.9435, $2.9815, and $3.3220 per pound. Chinese demand and output from South American producers will continue to be the most significant factors when it comes to the path of the price of copper over the coming weeks and months. 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. By 2011, the copper price rose to a new all-time high at just under $4.65 per pound. A massive level of stimulus is supportive of the price of copper and other commodities. Any events that cause the economy to shut down again or take a significant step back in social distancing easing could cause selling to return to all markets, and industrial commodities could fall sharply after the recent gains. Therefore, caution is advisable in copper, which can become extremely volatile during risk-off periods. The $3 per pound level is a critical psychological level for the red metal. Over the past weeks, the market moved further away from that level, but came back to the $2.90 level. We could see volatility increase as tensions between the US and China rise. Copper fell to just below the $2.06 per pound level during the height of risk-off conditions in March, but the price came storming back. Falling output, Chinese demand, a weakening US dollar, and the record levels of stimulus have created a bullish trend in the red metal. The impact of coronavirus on South American producers supported price gains in the red metal, but the price stopped shy of $3 per pound.
The LME lead price moved higher by 3.46% since August 4. The rise in demand for electric automobiles around the world had been supportive of lead in the long term as the metal is a requirement for batteries, but coronavirus had weighed on the price of lead because of falling fuel prices. Since late April, the prices of crude oil, gasoline, and lead moved higher. The price of nickel moved 1.81% 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 as coronavirus has been a far more significant factor for all of the base metals, including nickel. Elon Musk recently encouraged nickel production as he issued a plea to “any mining company in the world to mine more nickel. The message could turn out to be a very bullish message for the volatile metal. Tin fell by 1.12% since the previous report. Aluminum was 2.15% higher since the last report. The price of zinc posted a 3.15% gain since August 4. Zinc was at the $2388.20 per ton level on August 11. Nonferrous metals remained within their respective trading ranges over the past week. Another increase in zinc inventories on the LME did not stop the price from moving higher.
September lumber futures moved higher and were at the $706.00 level, 13.40% higher since the previous report as the price of wood added to recent gains. Lumber rose to a new record high when it surpassed the 2018 peak at $659 per 1,000 board feet. The high in the September contract was at $710.50 on August 12. Interest rates in the US influence the price of lumber. Lumber can be a leading economic indicator, at times. Housing starts data for June in the US was bullish for the price of lumber, as is the potential for an infrastructure building project by the government in 2021. The price of uranium for August delivery fell 0.31% and was at $32.20 per pound. The world’s leading producer, Kazakhstan, had suspended production nationwide for three months to slow the spread of COVID-19 in March, which helped lift the price over the past months. However, uranium had been declining since its high in mid-April. The volatile Baltic Dry Index rose 3.21% since August 5 to the 1510 level. August iron ore futures were 1.64% higher compared to the price on August 5. Supply shortages of iron ore from Brazil have supported the price over the past year. Open interest in the thinly traded lumber futures market rose by 0.18% since the previous report after rising over the past weeks. The metric has been increasing with the price, typically a technical validation of a bullish trend in a futures market.
LME copper inventories moved 8.41% lower to 114,625 as of August 11. COMEX copper stocks fell by 0.87% from August 4 to 88,511 tons. Lead stockpiles on the LME fell by 0.19% after exploding higher in previous weeks. Aluminum stocks were 1.52% lower. Aluminum stocks fell to the 1,617,175-ton level on August 11. Zinc stocks increased by 5.34% after moving significantly higher over the past two weeks. Tin inventories rose 3.67% since August 4 to 4,095 tons. Nickel inventories were 0.26% higher compared to the level on August 4.
We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 17.0 cents on August 12, unchanged since the previous report. The details for the call option are here:
US Steel shares were at $7.93 per share and moved 8.33% higher since last week. US Steel shares remain very weak.
FXC was trading at $13.97 on Wednesday, unchanged since the previous report. I continue to maintain a long position in FCX shares. FCX tends to move higher and lower with the price of copper. I took profits on the lower priced long position on the open on July 21 at $13.51 per share for a profit of over 38.5%. I left a selling order to sell on the open. We had purchased those shares at $9.75 one year ago. I remain long the higher priced long position at $11.37 and will use a stop on close at that level to protect capital.
I remain cautious on the sector and have limited any activity to very short-term risk positions. Brewing tensions between the US and China could cause a return of risk-off conditions to the industrial metals and commodities as can any new outbreaks of Coronavirus over the coming weeks and months. Keep stops tight on all positions in this sector that is highly sensitive to macroeconomic trends. In the medium to longer-term, the stimulus is bullish for industrial commodities.
We are long PICK, the metals and mining ETF product. We bought PICK at the $23.38 per share level, and it was trading at $28.13 on August 12, up 13.0 cents, or 0.46% for the week. I continue to rate this metals and mining ETF that holds shares in the leading producing companies in the world a long-term hold. I would add to the long position on price weakness over the coming weeks and months if another risk-off period occurs. Base metals and industrial commodities prices should continue to follow crude oil and stocks over the coming week. Keep an eye on copper as it could impact the rest of the metals that trade on the LME and is always a sign for all industrial commodity prices.
Live and feeder cattle futures in October posted marginal losses over the past week, but lean hogs rebounded to over the 50 cents per pound level. The USDA released the August WASDE report on Wednesday, which told the meat markets:
“The 2020 forecast for total meat production is lowered slightly from last month as decreases in pork production more than offset higher beef and poultry production. Higher beef production largely reflects a faster pace of steer and heifer slaughter. The pork production forecast is reduced on a slower expected pace of slaughter in the third quarter and lighter carcass weights for the year
For 2021, the red meat and poultry production forecast is unchanged from the previous month on offsetting changes in beef and broiler production. The 2021 beef production forecast is reduced from the previous month as lower expected placements in the first half of the year will be reflected in lower forecast slaughter in the second half of 2021. Pork and turkey production forecasts are unchanged.
For 2020, beef imports are raised on recent trade data and firm demand for imported processing grade beef. The beef import forecast for 2021 is also raised. The 2020 beef export forecast is decreased slightly on recent trade data. The 2020 pork trade forecast is adjusted to reflect June trade data; no changes are made to the 2021 forecasts.
Fed cattle prices for 2020 are raised from last month on current price strength. The first-quarter 2021 fed cattle price forecast is raised, but the annual forecast is unchanged from last month. The 2020 hog price forecast is lowered on recent price pressure, but the 2021 price forecast is unchanged.”
Source: USDA August WASDE report
The report was slightly bullish for cattle and hog prices. Cattle moved higher in the aftermath of the report. Hogs slipped but remained above the 50 cents per pound level. The report was more positive for beef than pork.
October live cattle futures were at $1.095750 per pound level up 1.98% from August 5. Technical resistance is now at $1.14575 per pound. Technical support stands at $1.03650 per pound level. Price momentum and relative strength indicators were above neutral readings on Wednesday and heading for overbought territory. Open interest in the live cattle futures market moved 0.57% higher since the last report. The disconnect between cattle prices in the futures market and consumer prices at the supermarket continues to create dislocations in the market. Beef and pork prices will be moving into the offseason over the coming weeks, but 2020 is anything but an ordinary year. Price have been depressed throughout the year, so they are going into the offseason at low levels.
October feeder cattle futures underperformed live cattle as they rose by 1.22% since August 5. October feeder cattle futures were trading at the $1.49100 per pound level with support at $1.45075 and resistance at $1.54075 per pound level on August 12. Open interest in feeder cattle futures rose by 4.02% since last week, after recent increases in the metric. 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. Price momentum and relative strength metrics were also above neutral readings on Wednesday and were in overbought territory. Live and feeder cattle futures markets continue to make higher lows and higher highs.
Lean hog futures moved higher and back above the 50 cents per pound level since the previous report. The October lean hogs were at 51.600 cents on August 12, which was 4.67% higher than the level in the previous report. Price momentum and the relative strength index were above neutral readings on August 12 on the October contract. Support remained at 47.875 cents with technical resistance on the October futures contract moving higher at the 54.150 cents per pound level. The continuous contact low from April at 37 cents is critical technical support. The same issues impacting beef are present in the hog market with low prices at origination points and bottlenecks at processing plants causing consumer prices to rise and shortages to limit availability for customers. Hog futures could have more upside. Reports of severe pork shortages in China should support the demand side of the fundamental equation, but trade friction between the US and Chinese may exacerbate shortages in China and a continuation of the glut conditions in the United States.
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.
Based on settlement prices, the spread was at 2.12350:1 compared to 2.17950:1 in the previous report. The spread fell by 5.60 cents as live cattle underperformed lean hog futures since August 5. The spread fell to a low of 1.4638 in mid-March, which was still above the long-term average, making beef more expensive than pork. The spread narrowed over the past week but remained at a level that is substantially above the long-term average for the price relationship. It hit a new high at 2.227:1 on August 3.
In the previous reports, I wrote, “The current low prices could give way to far higher levels in 2021 as producers adjust to the new price environment. After processing plants resume regular schedules in the eventual aftermath of the virus, shortages could develop. I believe that today’s low price levels will cause prices to rise next year, and consumers will face even higher levels at the supermarket. I am a buyer of cattle and hogs on price weakness and would only trade the beef and pork futures market from the long side over the coming weeks.” I continue to believe that prices will head higher, with the most significant moves to the upside developing in 2021. I will be a buyer of cattle and hog futures on price weakness. Cattle’s trading pattern has been bullish since early April, but hog futures remain in a downtrend that has been in place since May 2019. The action over the past week was constructive in the animal protein sector.
Three of the five soft commodities posted losses over the past week, but sugar and FCOJ prices gains. Sugar led the way on the upside, with FCOJ moving just under 0.30% higher. Coffee, cotton, and cocoa prices all fell since August 5.
October sugar futures rose by 2.39% since last week, with the price settling at 12.84 cents on August 12. The price of the sweet commodity fell to a new multiyear low at 9.05 cents per pound on the May contract on April 28. Technical resistance on October futures is now at 13.00 cents, the recent high from over the past week. Support is at the mid-July low of 11.27 cents on active month futures. Nearby sugar futures 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 in April weighed on sugar as the primary ingredient in ethanol in Brazil is sugarcane. The recovery in the oil market provided support for the price of sugar. Weakness in the Brazilian currency reduces production costs and had been a bearish factor for the sugar market. However, the Brazilian currency has rallied from its low.
The value of the September Brazilian real against the US dollar was at the $0.183050 against the US dollar on Wednesday, 2.92% lower over the period. The September real traded to a new low of $0.16780 on May 13. The Brazilian currency had 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.
Meanwhile, Brazil became a hotspot of the global pandemic, which could lead to supply chain problems for sugar, coffee, and oranges, as well as the other commodities produced by South America’s most populous nation and leading economy. Over the past week, sugar and FCOJ moved higher, but coffee declined.
Price momentum and relative strength on the daily sugar chart were nearing overbought readings as of August 12. The metrics on the monthly chart were below a neutral reading but were crossing higher. The quarterly chart displays an oversold condition, but it is also shifting higher. Sugar made a new high above its 2019 peak in February before correcting to the downside. The low at 9.05 was the lowest price for sugar since way back in 2007. In 2007, the price of sugar fell to a low of 8.36 cents before the price exploded to over 36 cents per pound in 2011. At that time, a secular rally in commodity prices helped push the sweet commodity to the highest price since 1980. If the central bank and government stimulus result in inflationary pressures, we could see a repeat performance in the price action in the commodities asset class that followed the 2008 financial crisis. Sugar could become a lot sweeter when it comes to the price of the soft commodity in a secular bull market caused by a decrease in the purchasing power of currencies around the world. The price action in sugar over the past weeks reflects the recovery in crude oil and gasoline prices as ethanol rebounded. Sugar is the primary ingredient in ethanol in Brazil. The bounce in the Brazilian real provided some support for the sweet commodity. Meanwhile, the lockdowns have weighed on demand, which could eventually cause production to decline. The break above 13.00 per pound could lead to additional gains. Sugar rallied to a new short-term high on August 7.
In February, risk-off conditions stopped the rally dead in its tracks on the upside. Sugar found at least a temporary bottom at a lower low of 9.05 cents per pound. Open interest in sugar futures was 1.28% 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 in late 2019 and early 2020. 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 now at 9.05 and 8.36 cents per pound. Without any specific fundamental input, sugar is likely to follow moves in the energy sector as well as the currency market when it comes to the exchange rate between the US dollar and the Brazilian real. Over the longer term, the cure for low prices in a commodity market is low prices as production declines, inventories fall, demand rises, and prices recover. We may have seen the start of a significant recovery in the sugar market after the most recent low. Over the past weeks, the price traded on either side of the 12 cents per pound level, but it moved higher and tested the 13.0 cents level over the past week.
September coffee futures moved 7.82% lower since August 5 after recent gains. September futures were trading at the $1.12050 per pound level. The technical level on the downside is at $1.0970 on the September futures contract. Below there, support is at around 92.70 and 86.35 cents on the continuous futures contract, the bottom from 2019. Short-term resistance moved higher to $1.2725 on the active month contract, the most recent peak. 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. JO was trading at $34.39 on Wednesday. Open interest in the coffee futures market fell 1.13% since last week. I continue to hold a long position after increasing it when the price fell below the $1 per pound level. I took some profits on a scale-up basis above $1.20 but will continue to hold a core long position.
The ultimate upside target is the November 2016, high at $1.76 per pound. Price momentum and relative strength tuned lower from overbought territory and were below neutral readings on Wednesday. On the monthly chart, the price action was on either side of neutral readings. The quarterly picture higher and was heading towards neutral territory. 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 long side. Any new positions should have tight stops and defined profit objectives.
The price of cocoa futures edged lower since August 5. On Wednesday, September cocoa futures were at the $2479 per ton level, 0.08% lower than in the previous report. Open interest fell by 7.18% over the past week. Relative strength and price momentum were falling from overbought readings on August 12. 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, but they bounced after reaching a low that was $7 above the technical support level on the weekly chart. Cocoa had been falling since early June, but it reached a low in early July and began to recover. The soft commodity put in a bullish reversal on July 20 and followed through on the upside. We are long the NIB ETN product. NIB closed at $29.65 on Wednesday, August 12. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their cocoa exports, it should provide support to the cocoa market. The levels to watch on the upside is now at $2,535, $2,559, and at the 2020 high of $2998 per ton on the continuous futures contract. On the downside, technical support is at $2427 per ton on the September contract. Below there, the level to watch is at $2137. The medium-term target on the upside is at $3000 per ton.
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 continue to view the recent price action in the cocoa futures market as bullish for the price of the primary ingredient in chocolate confectionery products.
December cotton futures moved 3.51% lower since August 5. December cotton futures had been making higher lows and higher highs since reaching a low of 50.18 cents in early April. On August 7, the price corrected lower on higher than average volume, which is a bearish sign for the fiber. December cotton was trading at 62.20 cents on Wednesday. On the downside, support is at 59.51, 52.15 cents, and then at 48.35 cents per pound. Resistance now stands at the 65.05 cents per pound level, the August 6 high. Open interest in the cotton futures market rose by 5.50% since August 4. Daily price momentum and relative strength metrics turned lower in overbought territory and were on either side of neutral readings on Wednesday. I have been optimistic about the prospects for the price of cotton since the 50 cents per pound level, but the risk increased with the price. Cotton needs to hold above the 57.75 cents level to keep the bullish pattern of higher lows and higher highs intact. I would continue to use tight stops on any long positions and a reward-risk ratio of at least 2:1. Cotton remains at an attractive price level, but the fundamentals remain problematic. The China-US issues are not a bullish factor for the price of the fiber. The move above 60 cents for the first time since March was constructive for the fiber futures, and it followed through on the upside. Cotton fell to a higher low at 59.51 cents on July 24. Optimism in the economy could lead to more garment purchases, which supports the demand for cotton. Remember that cotton suffered selling pressure in 2008 that pushed the price to below 40 cents per pound. A decline in production and stimulative policies by central banks took cotton from the bottom end of its pricing cycle twelve years ago to an all-time high of $2.27 per pound in 2011. On Wednesday, the USDA told the cotton market:
“This month’s 2020/21 U.S. cotton outlook includes higher beginning stocks, production, and ending stocks, and a decline in consumption. Production for the 2020 crop is raised 3 percent to 18.1 million bales, on NASS’s first survey-based production forecast. The survey indicates lower harvested area and higher yield compared with last month’s expectations. Abandonment is expected to rise to 24 percent—compared with 16 percent in 2019. With reduced harvested area in the Southwest, U.S. yield is projected at a record 938 pounds/acre, 14 percent higher than in 2019. Beginning stocks are raised 100,000 bales as lower than expected 2019/20 U.S. mill use offsets an upward revision in exports. Expected 2020/21 mill use is reduced 100,000 bales, while ending stocks are 800,000 bales higher. The season-average price for upland cotton is forecast at 59 cents per pound, unchanged from the previous month. This month’s 2020/21 world cotton outlook includes higher production, and ending stocks, but lower beginning stocks, consumption and trade. World production is 1.3 million bales higher as lower production in Mali and Greece is more than offset by increases for India, the United States, and Australia. Expected 2020/21 world consumption is 1.2 million bales lower this month, with declines in India, China, Pakistan, Brazil, and Indonesia offsetting gains for Bangladesh and Turkey. Imports are projected lower in Pakistan, Indonesia, and India, and higher in Bangladesh, Turkey, and Malaysia. This month, 2020/21 world ending stocks are projected 2.1 million bales higher than the previous month and 4.4 million bales higher than in 2019/20.”
Source: USDA August WASDE report
The August WASDE was bearish for cotton futures prices as US beginning and ending stocks rose. Ending global stockpiles of cotton also moved higher. The price of cotton put in a bearish reversal on the daily chart on Wednesday.
September FCOJ futures posted a marginal gain since August 5. On Wednesday, the price of September futures was trading around $1.1545 per pound, 0.26% above the price last week. Support is at the $1.1110 level. Technical resistance is at $1.2415 per pound. Open interest fell by 1.66% since August 4. The Brazilian currency could eventually turn out to be bullish for the FCOJ futures, and bottlenecks at the ports could create volatility. FCOJ broke out to the upside in May and June, but the price stopped short of challenging the technical resistance at $1.32 per pound.
Soft commodities tend to be highly volatile. Coffee stopped short of the $1.30 level on its recent rally and corrected lower. Sugar put in a new high at 13 cents over the past week. Cocoa is recovering after losses in June and early July. Cotton remains above 60 cents, but the price action at the end of last week and Wednesday’s WASDE report are signs that a test of that level could be on the horizon. FCOJ remained in a bearish trend that began in mid-July. A falling dollar could support all of the soft commodities over the coming weeks.
A final note
I am bullish on the prospects for most members of the commodities asset class for the coming months and years. The stimulus from central banks and a falling dollar create a potent bullish cocktail for raw material prices. I view the period from 2008 through 2012 as a model for 2020 and the coming years. I would look to buy on dips in most commodity futures markets and their ETF and ETN products. I would take profits on rallies while maintaining small long core positions in case prices become explosive. The price action in gold and silver on August 11 is a reminder to take profits when they are on the table. I remain very bullish on the metals, but they could experience wide price variance over the coming weeks and months.
Approach the markets with a logical plan for risk and reward. Look for developing trends as the trend is always your best friend in markets. Expect lots of volatility in all markets over the coming weeks and months. The current environment is likely to cause high price variance.
As I wrote over the past weeks, I plan to increase the price of the report in the coming months. 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,
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.