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  • Ugly price action in markets across all asset classes
  • Risk-off over Coronavirus
  • The potential for Democratic Socialism in the US could be weighing on markets
  • New lows in crude oil- New highs in gold
  • Watch all risk levels, if you are uncomfortable in any way, move to the sidelines and wait for the dust to settle

The summary of trade recommendations for the coming week are as follows:

A more detailed picture is available on the spreadsheet that is linked below.

 

Summary and highlights:

 

On Thursday, February 20, stocks hit another speed bump as all of the leading indices closed lower on the session. Concerns over the Coronavirus continue to cause periods of risk-off action in markets. March US 30-Year bonds rose by 1-01 to 164-00. The VIX was at over the 15 level after rising to a high of 17.21 on the session. The dollar index rose to another new high as it works its way to the 100 level, the index was trading at just below the 99.800 level after reaching a peak of 99.815 on Thursday. Corn, soybean, and wheat futures all posted small losses, while crude oil and oil products moved higher. After a larger than expected withdrawal from inventories of 151 bcf, natural gas probed above the $2 level, reaching a high of $2.025 before selling returned and pushed the price back to just over the $1.90 per MMBtu level. Gold rose to a new high as the April contract traded to $1626.50 and settled over the $1620 per ounce level. Silver edged a bit higher, while platinum fell, and palladium rose to the $2600 level. Live cattle and lean hogs declined, but feeder cattle posted a marginal gain. Cotton, cocoa, and lumber moved higher on the session, but FCOJ, coffee, and sugar prices moved to the downside. Bitcoin declined $615 per token to the $9,610 level.

On Friday, stocks fell as fears over the Coronavirus returned to markets. At the same time, PMI data was weak. The March 30-Year Treasury bond futures rose 1-03 to 165-01. The dollar index corrected lower and fell by 0.588 points to 99.188 after making a new high on Thursday. Grain prices were lower across the board. Oil, oil products, natural gas, and ethanol prices all fell in the last session of the week. Gold exploded to a new high at the $1650 level. Silver moved higher above $18.50, and palladium rallied to above $2600 per ounce. Platinum posted a marginal decline on the session while rhodium moved to another new peak. Copper was quiet at just above the $2.60 per pound level. Lean hogs posted a marginal gain, but cattle fell. Cocoa and lumber prices moved lower, but cotton, FCOJ, coffee, and sugar all posted gains with coffee futures leading the way on the upside. The price of Bitcoin remained below the $10,000 level finishing the week at $9720 up $105 per token.

On Monday, the stock market came down with a severe case of Coronavirus on February 24 as all of the major indices plunged, and markets across all asset classes experienced risk-off conditions. The DJIA fell 1,031.61 points on the session or 3.56%, while the S&P 500 declined 111.86 points or 3.35%. The tech-heavy NASDAQ dropped 355.31 points, leading to the most significant percentage loss of the day of 3.71%. Stocks posted the most substantial decline in years. The VIX rose to a high of 26.35 and was at just over the 25 level at the end of the day, near the high of the session. In a flight to quality, the 30-Year Us Treasury bond gained 1-31 to 166-30 and traded to a peak of 167-11 on the session. The dollar index was little changed at 99.284. Grains were lower across the board with soybeans and wheat leading the way on the downside. Crude oil plunged towards the $50 level on nearby NYMEX futures. The active month April futures contract settled at $51.43 per barrel. Gasoline and heating oil futures underperformed crude oil leading to lower prices for crack spreads. Natural gas fell as the price moved towards the $1.80 per MMBtu, and ethanol dropped. Gold rose to a new high, and silver posted a gain. Platinum and palladium prices moved lower on Monday with the most substantial loss in the high-flying palladium futures market. Cattle and hog prices experienced sharp selloffs with live cattle down the three cents limit; feeder cattle lost 4.175 cents per pound, and lean hogs dropped 2.4 cents. All of the soft commodities and lumber moved lower in sympathy with the risk-off selling as the only markets that experienced buying were gold, silver, and bonds. Bitcoin fell $140 to $9745 per token. While the market reacted to the spread of Coronavirus to Italy and South Korea, Bernie Sander’s victory in Nevada over the weekend added to selling in stocks. The rising potential of a “Socialist Democrat” in the White House likely spooked markets.

On Tuesday, as the CDC told the world that it expects a continuation of the spread of Coronavirus around the globe, stocks slumped, and risk-off conditions continued to grip markets across all asset classes. The DJIA fell just under 880 points or 3.15%. The S&P 500 was 3.03% lower, and NASDAQ declined by 2.77%. The Russell 2000 suffered the most significant decline of 3.45%. US 30-Year Treasury Bond futures rose 0-29 to 167-19 after trading to a new peak at 168-05. The dollar index fell below the 99 level and settled at 98.901 on the March contract. Grain prices edged higher with small gains in corn, soybeans, and wheat. Crude oil moved below the $50 per barrel level on the April contract oil products following on the downside. Products fell more than crude oil, sending crack spreads lower. Natural gas moved marginally higher, but ethanol fell. Gold and silver were sharply lower as risk-off conditions did not support the prices of the metals. Platinum tanked while palladium was up over $100 per ounce in a wild trading session. Lean hogs posted a marginal gain but live and feeder cattle both fell by over two and three cents per pound, respectively. FCOJ, coffee, and cocoa prices edged higher. Cotton, sugar, and lumber moved to the downside, but there were no substantial gains or losses in the soft commodities sector. Bitcoin fell $310 per token to $9435. The VIX index was at 27.85 after trading to a high of 30.25 at the highest level of 2020 and since late 2018.

On Wednesday, stocks attempted to rally, but by the end of the day, the leading indices were mostly lower. Coronavirus continues to trigger risk-off conditions in markets across all asset classes. The front-runner in the nomination process for the Democrats in the US is a Democratic Socialist, which is not providing any held to markets during the current selloff. US 30-Year bonds moved 0-05 lower to 167-17 after making a new high on the session at 168-09. The dollar index did not move that much as it remained below the 99 level at 98.938. Grain priced edged higher but remained near the recent low. Crude oil fell to a lower low, taking gasoline and heating oil prices lower. Inventory data from the API and EIA were not all that bearish, but risk-off conditions have trumped all other input into the energy sector. Natural gas posted a small loss, but the price of April futures remained above the $1.80 per MMBtu level. Gold and silver moved to the downside, with silver falling below $18 per ounce. Gold was above the $1640 level. Platinum continued to plunge with the price homing in on the $900 level. Palladium went the other way, with the price settling just below $2700 per ounce. Coffee was higher, but all of the other members of the soft commodities sector declined along with the price of lumber futures. Bitcoin fell $550 to $8885 per token.

 

Weekly Spreadsheet:

Copy of Spreadsheets for the The Hecht Commodity Report February 26, 2020

Stocks and Bonds

Over the past week, the stock market plunged on the back of fears over continued economic weakness in China because of Coronavirus. The spread of the virus to South Korea, Iran, Italy, and some other nations threaten a pandemic. At the same time, as the US primary season is now underway, the current leader for the nomination is Vermont Senator Bernie Sanders, who advocates for Democratic Socialism. While the moderate candidates have together collected more votes than Sanders, the division of support has allowed him to retain a leadership position going into the South Carolina primary and super Tuesday. The stock market has begun to react to the 2020 Presidential election, which could get a lot more volatile if Senator Sanders captures his party’s nomination. Significant changes in tax and other policies could weigh in the stock market if the potential for a Sanders presidency increases. While many market analysts are citing Coronavirus as the leading factor that weighed on stocks over the past week, the potential for higher corporate and individual taxes is likely causing investors and traders to approach the equity arena with caution. The tax and regulatory policies of the Trump administration fueled the rise of the stock market over the past years. A significant change in direction could have the opposite impact. Stocks fell, and bonds rose over the past week as the market shifted to a risk-off posture.

 

The S&P 500 fell 7.97% since the previous report, while the NASDAQ declined by 8.52%. The DJIA posted an 8.15% loss since the last report. Surprisingly, Chinese stocks outperformed US indices even though China is ground zero for Coronavirus.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $40.72 level on Wednesday, which was 4.12% lower than the closing level on February 19. Technical support is at $37.66 per share from August 14. FXI traded to a new high of $45.29 on January 13, which stands as technical resistance. Above the most recent peak, the next level of resistance is at the early April high of $45.96 per share. The FXI will continue to move lower or higher, depending on developments on the spread of the virus. China is likely understating the number of cases of Coronavirus based on the leadership’s desire to avoid severe economic ramifications. The world is keeping its fingers crossed that the threat from the virus recedes, and the Chinese economy stabilizes over the coming weeks. However, the price action in FXI was surprising, and it could move lower over the coming week given the price action in the US stock market.

US 30-Year bonds continued to move higher over the past week. On Wednesday, February 26, the March long bond futures contract was at the 167-17 level, up 2.78%, adding to recent gains. Bonds traded to a new high at 168-09 on Wednesday. The odds of any changes in Fed monetary policy in 2020 have been low as it is an election year in the US. At its January meeting, the Fed left rates unchanged. If a risk-off period returns and intensifies, the Fed is more likely to cut than increase short-term rates. We could see a flood of liquidity if the Coronavirus spreads, particularly to the US. A flight to quality during risk-off periods puts upward pressure on the long bond. However, the US central bank has little room to push rates significantly lower from the present level as they reduced the Fed Funds rate by 75 basis points in 2019 to 1.50%-1.75%. The Fed minutes last Wednesday told the market that the central bank would be watching the impact of Coronavirus on the global economy. While the central bank is not likely to change monetary policy before the election in the US, the odds favor a cut in rates over a hike if any monetary policy shift were to occur.

Open interest in the E-Mini S&P 500 futures contracts rose by 0.16% since February 18. Open interest in the long bond futures exploded by 12.89% over the past week as the market remains concerns over the economic impact of Coronavirus. The VIX surged as the volatility index was at the 27.56 level on February 26, 91.66% higher over the period. Falling stocks over the past week caused the volatility index to explode.

I had been advocating buying the VIX and VIX-related products when volatility is low, and the stock market was making new highs. Buying volatility on dips and taking profits on rallies has been the optimal approach over the past months. I have only traded these products from the long-side and maintain a very small core long core position in case risk-off conditions reach a peak, and we see an explosive move in the VIX. The gains in the volatility instruments covered many losses in other markets over the recent sessions. At the 27.56 level, the VIX is not at a level that offers value and is in the sell than the buy zone. I took profits on VIX-related instruments on a scale-up basis but had a small long core position as of Wednesday.

 

The dollar and digital currencies

The March dollar index futures contract put in a new high since February 19 at 99.815 but closed a lower on the week after failing to test the 100 level. The contract posted a 0.66% loss since last week. The index settled at 98.938 on Wednesday. The dollar index continues to make upside progress, and higher highs and higher lows as interest rate differentials between the US currency and the euro continue to provide support for the dollar index. The dollar index traded to its lowest level since July 2019 when it fell to 96.02 on December 31, which is now the technical support level, there is some support at 97.165. Technical resistance on the continuous contract stands at the 100 level with support at 95.365. The dollar index moved to the bottom end of its range at the end of 2019 and has moved steadily higher in 2020. While interest rate differentials are bullish for the greenback, Brexit and trade agreements could eventually weigh on the dollar index if the European economy ever exhibits any degree of strength. So far, the economy in Europe remains weak. The spread of Coronavirus to Italy is problematic for the continent.

Moreover, the 2020 US election is likely to inject mounting uncertainty over the future of US policy into currency markets. A highly contentious election season in the US is now underway, and the contest could cause volatility in the dollar. I expect a wider trading range in the dollar index in 2020 compared to the previous year. With Senator Bernie Sanders, a Democratic Socialist in the lead going into Super Tuesday, stocks could be feeling a second degree “Bern” as many of the policies he supports could result in an implosion in the stock market. Over the past week, the dollar continued to be the king of currencies, but the price action in gold has been a commentary on the value of all foreign exchange instruments as the yellow metal continued to move to higher highs.

The euro currency was 0.91% higher against the dollar since February 19 on the March futures contract. Weak economic data out of Europe continues to prevent any significant rebound in the euro. The euro versus the dollar currency pair has moved steadily lower throughout February. Over the past week, the pound moved 0.09% lower against the US currency. Short-term technical support is at the $1.2857 level against the dollar. I continue to believe that the pound below the $1.30 level is in the buy zone against the US dollar.

 

Bitcoin and the digital currency asset class fell in the risk-off environment over the past week. Bitcoin was trading at the $8,816.69 level as of February 26, as it fell 9.11% compared to the value on February 19. The cryptocurrency had been trading on either side of the $10,000 level, which has become a pivot point before the current situation. Ethereum fell and was 13.10% lower at $229.17 per token on Wednesday. The market cap of the entire asset class moved 11.41% lower as it underperformed the price action in Bitcoin. The number of tokens increased by 9 to 5146 tokens since February 19. The rise in the number of digital currencies over the past months continues to dilute the asset class. 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 $250.468 billion. Open interest in the CME Bitcoin futures fell by 12.86% since last week. Open interest had been moving higher during rallies and lower during dips in the Bitcoin futures market, which tends to be a bullish sign. As I have been writing, “an ETF product in 2020 could cause even more attention and higher prices for the digital currency asset class. The Chinese government cracked down on the asset class over the past months, but these days it has its hands full with Coronavirus.

The Canadian dollar moved 0.68% lower since last week as the price of oil dropped. Open interest in C$ futures rose by 2.50% over the period. 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 lower level of the C$ over recent weeks. The support level for the Canadian currency is at just above $0.75 against the US dollar on the active month March futures contract, and it was at that level as of February 26.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ fell by 1.74% since the February 19 report. The geographical proximity to China makes the Australian dollar sensitive to the Coronavirus and accounts for its decline.

The British pound posted a 0.09% loss since the previous report. The pound rose to just over $1.35 after the December 12 election, the highest level since May 2018, but pulled back to just below the $1.30 level. As I wrote over recent weeks, “I continue to believe the pound could be heading for higher levels and would be a buyer against the dollar and the euro on any dips.” I continue to believe the British currency presents a scale-down buying opportunity against the dollar below the $1.30 level.

The Brazilian real continued to trade at the lowest level in years against the dollar, as it moved 1.66% lower after hitting a new low below the $0.23040 2015 bottom. The low in February was at $0.22350 as emerging markets fell in the risk-off environment. The Brazilian currency 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. I continue to believe that the real will eventually appreciate against the US dollar, but so far, I have been wrong, and the currency made a new low over the past week. Risk-off conditions and a strong dollar have weighed on emerging market currencies. While a lower low has occurred, I continue to believe that the upside potential for the Brazilian currency is far greater than the downside risk at the current exchange rate.

Meanwhile, the low level of the currency makes Brazilian exports more attractive in the global market and has supported the prices of shares of companies in the South American country. US President Trump is likely to put pressure on Brazil to raise the level of its currency based on trade imbalances over the coming months if the real continues to slip lower. Meanwhile, Brazilian stocks have done well as the low level of the currency reduces domestic expenses while making products highly competitive in global markets. While the Brazilian currency looks ugly at new lows, I continue to believe that a recovery is on the horizon.

 

Precious metals prices moved mostly higher over the past week, except for platinum and silver, which continue to lag the other members of the sector. I expect wild swings in markets across all asset classes given the recent price action.

 

Precious Metals

Platinum and silver prices moved lower over the past week as they were caught up in the risk-off conditions. Gold, palladium, and rhodium posted gains since February 19. Gold and rhodium reached new highs with the yellow metal above the $1640 level and rhodium at $11,800 per ounce. Gold moved higher in the face of a rising US dollar, which means it has rallied in all currencies. Gold is on a path to challenge the 2011 all-time high at $1920.70 per ounce.

Gold rose by 1.98% since last week, while silver was 3.17% lower. April gold futures were just over the $1640 per ounce level on Wednesday, while March silver was below $18.00 per ounce. Open interest in the gold market rose by 2.46% as the yellow metal continues to attract buying. The open interest metric fell during the correction but rose as gold moved to a new high. The action in the total number of open long and short positions is supportive of more gains in the gold market.

April gold futures reached a peak at $1691.70 on February 24, and March silver rise marginally above the recent high at $18.895 on January 8 as tensions rose in the Middle East. Silver made it to a peak of $18.92 but reversed and dropped by $1 per ounce. Gold continues to outperform silver, but it may be only a matter of time until silver suddenly catches up with its precious cousin. The price action and trends in both gold and silver markets remained bullish over the past week, but silver is a bucking bronco. I expect the trends to continue in both metals. I would not be surprised to wake up one morning and see silver above the $20 per ounce level.

The price of April platinum tanked and moved 8.93% lower since February 19, as the precious metal continued to be the red-headed stepchild of the sector. April futures were at the $914.80 per ounce level. The level of technical resistance is at $1,021 on the April futures contract as platinum continues to struggle with the $1000 level. Support in platinum is now at $892.50 per ounce. Rhodium is a byproduct of platinum, and the price of the metal has been in a bull market since early 2016. The price of rhodium continued to explode to the upside as it has since the end of 2019. The midpoint price of the metal was at $11,700 per ounce on February 26, up $400 from the level of February 19. Palladium moved higher and rose by 4.73% since the previous report after an over 10% gain last week. The price traded to a new peak at $2755.90 on February 19 on the March futures contract and settled at the $2692.80 per ounce level on Wednesday. The risk of significant volatility in palladium and rhodium rises with the prices of the metals, and we should expect a continuation of wide price ranges over the coming weeks.

Open interest in the gold futures market moved 2.46% higher over the past week. The metric moved 4.65% lower in platinum while it was 25.48% lower in the palladium futures market. Silver open interest rose by 0.38% over the period. The bullish trend in the precious metals sector remains firmly intact as of February 26, but we are likely to see lots of price variance.

The silver-gold ratio rose significantly since February 19, as gold outperformed silver.

Source: CQG

The daily chart of the price of April gold divided by March silver futures shows that the ratio was at 92.00 on Wednesday, up 4.32 from the level on February 19. The long-term average for the price relationship is around the 55:1 level. The ratio remains at an elevated historical level. Silver remains historically cheap compared to gold, and over the past week, it got more inexpensive. The ratio had dipped to a low at 79.13 on September 4, 2019, on the active month contracts when silver moved to its most recent high. The ratio tends to move lower during bull market periods and higher when there is bearish price action in the markets, which is a warning sign that we could be in for a bumpy ride in the gold and silver markets.

We are long the gold mining stock ETF products GDX and GDXJ, which underperformed the price action in gold and followed the stock market since the last report.

Gold moved up by 1.98%, while the GDX was 0.40% higher since February 19, but GDXJ fell by 3.02% since the previous report. The mining stocks tend to outperform gold on the upside and underperform during corrective periods as it provides a leveraged return. Over recent weeks, GDX and GDXJ underperformed gold. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 3.19% loss since February 19, which kpt pace with the percentage decline in the silver futures market. I continue to believe that both gold and silver prices will head higher over time. However, the potential for periodic corrections will rise with prices. Silver could be a sleeping giant based on the price action in the gold and other precious metals markets sans platinum.  Silver moves with the market’s sentiment, and a rally to challenge the 2016 high at $21.095 is necessary to light a bullish fuse under the sleeping silver market. Speculators and trend-following traders would likely flock to the silver market if it can muster the strength to break out to the upside above the $21 level.

Platinum and palladium prices moved dramatically in opposite directions since February 19. March Palladium was trading at a premium over April platinum with the differential at the $1778.00 per ounce level on Wednesday, which continued to widen to a new record level since February 19. The spread between the two metals is now over $860 above the price of platinum. April platinum was trading at a $728.90 discount to April gold at the settlement prices on February 26, which widened significantly since the previous report as platinum continued to underperform gold in a pattern that has remained intact for over half a decade.

The price of rhodium, which does not trade on the futures market was at $11,800 per ounce on Wednesday, up $400 per ounce on the week. Rhodium is a byproduct of platinum production. The low price of platinum has caused a decline in output in South African mines, creating a shortage in the rhodium market. Rhodium is part of the reason that platinum is finally making a move on the upside. As I wrote since late 2019, when the price of rhodium was below $5500 per ounce, “Some analysts projected that the price of the rare metal was heading for the $10,000 per ounce level.” Rhodium is now around a new milestone at $12,000, which is a new all-time high. The bid-offer spread at $1200 per ounce is a sign of the wild price action in the illiquid metal. Markets rarely move in a straight line, and we could see an increase in volatility in the rhodium market, which is in a deficit condition. Rhodium has been then best-performing precious metal since 2016. The price has moved higher from a low at $575 per ounce. Rhodium has more than doubled since the end of 2019. In a runaway bull market, it is a challenge to pick a top, but the risk of a correction rises with each new price peak in the illiquid metal that only trades in the physical market.

We are long the PPLT platinum ETF product, which moved 9.61% lower since February 19 as it underperformed the price action in the futures. Platinum continues to offer the most attractive value proposition in the precious metals sector even after the recent rally. Platinum needs to make a move and take out the $1200 resistance level to break to the upside on a technical basis. After the recent price action, the price is back way below the $1000 level, which has been a problem area over the past years.

We are long the ETFMG Prime Junior Silver ETF (SILJ) product at $10.36 per share to diversify risk. SILJ was at $10.41 on February 26, down 7.38% since the last report as mining shares underperformed the silver futures market.

I have been writing, “I continue to be bullish on the prospects for all of the precious metals. The period of consolidation and correction continued over the past week and could go on for a time. I believe that any price weakness in the sector will create excellent buying opportunities.” My outlook has not changed over the past week despite the risk-off conditions.

I expect platinum and silver to eventually catch up with the other precious metals over the coming months. I believe that gold is heading to a new all-time high in US dollar terms that will take the price of the yellow metal above $2000 per ounce. When it comes to palladium and rhodium, the prices are in the stratosphere, and the potential for wild price swings on the up and downside is high. As I wrote last week, “Gold continues to be the best bet for stability in the sector as central banks continue to have a healthy appetite for the yellow metal.” The next level of resistance in the gold futures market is at the 2012 high at $1794.80 per ounce, which is a gateway to the all-time 2011 peak. I continue to advocate buying gold, silver, and platinum on any price weakness. Extreme caution is advisable for any risk positions in palladium or rhodium, and markets across all asset classes in the current risk-off environment.

 

Energy Commodities

The energy sector of the commodities market tanked over the past week after a weak attempt at a recovery. All of the members of the sector posted losses. Crude oil and oil product prices fell compared to the closing levels on February 19. Heating oil and gasoline prices were weaker than crude oil, sending both the gasoline and distillate crack spreads substantially lower. Brent fell more than WTI futures. Natural gas and Ethanol prices moved lower, and coal posted a loss over the past week.

March NYMEX crude oil futures rolled to April and fell 8.90% since the previous report. After probing below $50 per barrel in early February, the oil market recovered, but failed at just below the $55 per barrel level. The price rose to a high of $54.66 on February 20. After putting in a bearish reversal on the monthly chart in January, the price still faces the jeopardy of further downside pressure. If nearby futures settle below the $50.99 per barrel level at the end of March, they will put in a bearish reversal trading pattern on the quarterly chart. The price was below that level on Wednesday.

April Brent futures moved 9.55% lower since February 19. March gasoline was 12.20% lower, so the processing spread in March posted a 19.77% loss since the previous report as gasoline underperformed the price of crude oil over the period. April heating oil futures moved 12.03% lower from the last report, and the heating oil crack spread fell 19.78% higher since February 19.

Technical resistance in the March NYMEX crude oil futures contract is at $54.66 per barrel level with support at the late 2018 low at the $42.36 level on the continuous contract. Crude oil open interest rose by 1.95% over the period. Crude oil continues to face bullish and bearish factors. The bears had been in control since January 8, but the price has stabilized at over the $50 level over the past weeks. Iran remains a potential source of supply concerns that could send the price of oil higher if another round of hostilities breaks out or the theocracy in Teheran undertakes further provocative actions. OPEC will meet in early March with some members currently advocating for deeper production cuts, which could support the price of the energy commodity. However, economic weakness in China because of Coronavirus has increased fears of a global slowdown, which weighs on the price of crude oil futures. At the same time, US production continues to be at record levels, with inventories increasing. In recent reports, I wrote, “Crude oil is at a significant level just above $50 per barrel on the nearby NYMEX futures contract. The price could hang around the level and enter a period of consolidation at the low end of its range over the past year. Crude oil has been failing to push through on the upside above $65 or on the downside below $50. Overall, the odds favor the upside at the current price with a tight stop based on the trading range.” Crude oil fell sharply this week on significant losses in the stock market and concerns over the spread of the virus.

Oil equities continue to lag the price of petroleum, and the sector remains ugly. With stocks at record levels, the only sector that had offered value had been oil and gas-related stocks. Energy companies have low price to earnings multiples and high dividend levels compared to the rest of the market. However, shares of energy-related companies continue to underperform the market in a trend that was in place throughout 2019 and into 2020. Some of the best values in the stock market are in the energy sector, but a recovery has yet to materialize. As stocks fell over the past sessions, the energy sector continued to experience selling and lower lows.

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. Meanwhile, technological advances and regulatory reforms in the US has made the world’s leading economy independent when it comes to energy supplies. With 13 million barrels per day of output, the US produces more oil than either Saudi Arabia or Russia. The Trump administration has encouraged oil and gas production over the past four years. However, the 2020 Presidential election will be a referendum on the future of energy policy as the opposition party has embraced the “Green New Deal” that would reduce fracking and energy output when it comes to fossil fuels. The potential for a dramatic shift in US energy policy could cause lots of price volatility in the oil and gas market during the second half of 2020 as the prices could begin to move higher and lower with the political polls in the US. In November, the world’s largest energy-producing nation will decide if it continues to produce or if new regulations cause a sudden decline in output beginning in 2021. Senator Bernie Sanders has taken the lead with a string of victories going into the South Carolina primary and Super Tuesday. While the Democrats do not have a clear choice to take on President Trump in the November election, the Senator Sander’s support is a sign that the “Green New Deal” will become an integral part of the party’s platform for the November election.  A close contest could cause lots of volatility in the energy sector; the election will be a referendum on the future of US energy production given the impact of policy on the regulatory environment for fossil fuels.

The spread between Brent and WTI crude oil futures in April declined to the $4.72 per barrel level for Brent, which was $0.88 below the level on February 19. The spread moved to a high of $6.23 on January 8 as Iranian missiles attacked Iraqi airbases that house US troops. The most recent peak was at $5.76 on February 19. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. The Brent premium traded as high as $11.59 per barrel in late May. The level to watch in the spread at $3.48, the low from August 2019. Tensions in the Middle East should keep somewhat of a bid under the price of Brent crude oil and the spread between the two benchmarks. However, the decline over recent sessions has contributed to pressure on prices.

US daily production remained at the record high 13 million barrels per day level as of February 14, according to the Energy Information Administration. The level of output was unchanged from the previous week. As of February 14, the API reported an increase of 4.16 million barrels of crude oil stockpiles, while the EIA said they rose by 400,000 barrels for the same week. The API reported a decline of 2.67 million barrels of gasoline stocks and said distillate inventories fell by 2.63 million barrels as of February 14. The EIA reported a decrease in gasoline stocks of 2.0 million barrels and a drop in distillates of 600,000 barrels. Rig counts, as reported by Baker Hughes, rose by one last week to 679 rigs in operations as of February 21, which is 174 below the level operating last year at this time. The inventory data from both the API and EIA continued to be mostly bearish for the price of oil, as stocks have been trending higher since October.

OIH and VLO shares plunged with the stock market since February 19. OIH declined by 16.95%, and VLO moved 13.84% to the downside since last week. Eventual strength in crack spreads would be supportive of the price of VLO stock. We are long two units of the OIH ETF product at an average price of around $13.40 per share. OIH was trading at $9.31 per share level on Wednesday. I believe the ETF that reflects the price of oil service company shares remains too low at its current price level. I will add to the position at a lower level. Oil services stocks continue to underperform the other oil-related equities.

Last week, I suggested selling put options on VLO shares. I favor selling the May 15, 2020, $80 put option on VLO for $3.50 or higher per share. This option can be found here:

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

 

The put option was below $3.50 on February 20, but opened at $3.65 on February 21, triggering a sale. If the price of the stock is above $80 on May 15, the option will expire, yielding a $3.65 profit on the trade. If the shares are below the $80 level, we will assume a long position in VLO shares at $76.35, which I believe is an attractive level for the stock. VLO was trading at $71.72 on Wednesday, so the position is out of funds. This week, I recommend averaging down on the position with the sale of a $70 put option for the same expiration date for $4.00 or higher. A link to the option is below:

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

 

If the price of VLO shares are below $70 on May 15, we will be long the stock at $66 per share on this position, and an average of $71.18 per share on the two positions. If you are not comfortable assuming this level of risk, please do not follow this recommendation. I continue to believe that VLO shares will eventually recover. The company pays a 5.27% dividend at its closing price of $71.72 per share on February 26 and was under pressure. However, we are coming into a time of the year where gasoline demand tends to rise putting upward pressure on refining spreads. The position in VLO is not a long position on crude oil or gasoline, but on the margin for processing the energy commodity into oil products.

 

I believe that crude oil-related equities are far too inexpensive at current levels and could experience a rebound as sector rotation in the strong stock market occurs. As I mentioned in the report over the past weeks, “I have been trading the Direxion Daily Energy Bull 3X Shares (ERX) from the long side of the market. ERX is a triple-leveraged product, so time and price stops are significant for managing risk. ERX holds leveraged positions in the leading energy companies.”

ERX was 34.95% lower since last week’s report. I will be a bit more aggressive with this product at the current levels with very tight stops in a quest to catch an updraft. I do not view ERX as an investment position, so I would use a trailing stop and take profits on a scale-up basis if I can catch a recovery rally.

March natural gas futures rolled to April and rallied to a high of $2.024 on February 20 before running out of steam on the upside. Nearby April futures were at $1.837 on February 26, which was 6.89 % lower than on February 19. The April futures contract traded to a high of $2.447 on November 5. Natural gas traded at its lowest price since 2016, when it hit $1.788 on February 11 on the April contract. In January, natural gas fell to its lowest price in twenty-one years since 1999. Natural gas bounced since February 11, but the move over $2 encouraged selling to return to the market.  The recent price action was the most significant attempt at a recovery since November, but it appears to have failed.

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. A recovery in natural gas was overdue, but there are only around five weeks left until the 2020 injection season begins in late March, and the price has reflected injection season trading conditions throughout most of the peak season.

 

Source: EIA

The EIA reported a withdrawal of 151 bcf, bringing the total inventories to 2.343 tcf as of February 14. Stocks were 35.4% above last year’s level and 9.3% 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. With around five weeks to go until inventories begin to climb, we would need to see an average withdrawal of 247.2 bcf to reach last year’s low in stockpiles. This week the consensus expectations are that the EIA will report a withdrawal of 133 bcf from storage for the week ending on February 21. The EIA will release its next report on Thursday, February 27, 2020.

Open interest fell by 2.87% in natural gas over the past week. The metric had been rising as the price declined. The price action likely attracted trend-following and technical shorts to the natural gas futures market. Technical resistance is at $2.024 per MMBtu level on the April futures contract with support at $1.788. The $1.611 per MMBtu level from March 2016 stands as technical support on the continuous futures contract. Price momentum and relative strength on the daily chart rose above neutral conditions after the recent rebound from the low but have come back to below neutral readings as of Wednesday. The price action continues to suggest that sellers are lurking above looking to take advantage of any attempts at a price recovery above the $2 level.

The GASL ETF product was trading at $2.48 per share on February 26, 44.52% lower than on February 19. I have been on the sidelines in GASL. If I do dip a toe back into the leveraged ETF product on the long side, I would use a very tight stop and trade it like the ERX product.

April ethanol prices moved 5.31% lower over the past week on the back of weakness in crude oil and gasoline prices. Open interest in the thinly traded ethanol futures market moved 5.62% lower over the past week. With only 470 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product fell 10.42% compared to its price on February 19, and the price of April coal futures in Rotterdam moved 3.54% lower over the past week.

Late Wednesday, the API reported a 1.30-million-barrel rise in crude oil inventories for the week ending on February 21. Gasoline stocks rose by 74,000 barrels, while distillate stockpiles fell 706,000 barrels over the period. The EIA said crude oil stocks rose 500,000 barrels. Gasoline inventories were 2.70million barrels lower, while distillate stocks fell 2.10 million barrels. The API and EIA inventory reports were modestly bearish for the price of the energy commodity, but the market has responded to risk-off conditions over the Coronavirus. Crude oil has the potential to decline to the late 2018 low at just over $42 per barrel.

In natural gas, the price experienced a long overdue bounce but failed to follow through on the upside as the rally attracted selling.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the price at $1.837 in April on the settlement price on February 26, was 11.8 cents per MMBtu lower than on February 19. Natural gas has done well in the face of price action in the crude oil futures market over the past sessions. However, the $1.611 per MMBtu level is a target for the energy commodity over the coming weeks.

I have been tracking the price action in BG shares. BG is a significant producer of ethanol in Brazil. The price of BG shares moved 6.01% lower to $50.53 per share on February 26. We are working a stop on close in BG at $49.49 per share on the downside. Our average cost of the shares is at $54.82. I will continue to post weekly updates on this position. I will stop out of this position if the shares close below $49.49.

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 have attracted lots of volume over the past week as the price of natural gas fell to new lows. I expect volatility to continue in both energy commodities.

We are holding a long position in PBR, Petroleo Brasileiro SA. We are long two units at an average price of $15.16 per share. PBR shares were 15.72% lower over the past week at $12.55 per share. I will add another unit at a much lower price to lower the average cost of the long position. Weakness in crude oil and the Brazilian real weighed on PBR shares. I will wait for the $10 to $11 level to add another one or two units to this position. We are currently long two units meaning we purchased twice. I leave it up to subscribers to determine individual risk levels when it comes to volumes of shares in a unit.

Energy stocks continue to lag the price of crude oil, which has become a falling knife. The next significant event for the energy commodity will be in early March when OPEC decides if it will increase its production cut. The recent price action rises the prospects of a move by the international oil cartel to stabilize the oil market. Later this year, the US election is likely to cause an increase in volatility in both the oil and gas futures market as the future of energy policy will depend on the outcome of the contest.

 

Grains                                                             

All of the leading grain prices moved lower over the past week, with CBOT wheat futures posting the most substantial loss over the period. Coronavirus continued to weigh on prices even though uncertainty tends to peak at the start of the 2020 planting season. From 2013 through 2019 bumper crops of grains that satisfied global demand erased memories of the 2012 drought that lifted the prices of corn and beans to all-time highs and took wheat futures to over $9 per bushel. However, each year is a new adventure when it comes to the production of the agricultural products that week the world. While trade, macro-economic issues and other factors will influence prices. It will be the weather conditions across the fertile plains of the US and other producing countries in the northern hemisphere that dictate the direction of prices. Rising population around the globe continues to underpin the prices of the commodities that are essential for nutrition. The next time a weather event causes supplies to be at anywhere under bumper levels, the potential for significant rallies will increase dramatically.

The USDA will release its next WASDE report on March 10.

 

 

March soybean futures rolled to May and fell by 1.46% over the past week and was at $8.92 per bushel on February 26. Open interest in the soybean futures market fell by 5.57% since last week. Price momentum and relative strength indicators were below neutral readings on Wednesday.

The May synthetic soybean crush spread fell slightly over the past week and was at the 88.25 cents per bushel level on February 26, down 0.75 cents since February 19. The crush spread is a real-time indicator of demand for soybean meal and oil. Therefore, 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. However, the spring planting season is right around the corner now that we are in February, and it is the wrong time of the year to become overly bearish in soybeans or any of the grain markets. I continue to believe that soybean futures are in the buy-zone at prices below $9 per bushel.

March corn rolled to May was trading at $3.7450 per bushel on February 26, which was 2.73% lower on the week. Open interest in the corn futures market fell by 1.45% since February 18. Technical metrics were at oversold readings in the corn futures market on the daily chart as of Wednesday. The price of April ethanol futures fell by 5.31% since the previous report on the back of the rebound in energy prices. April ethanol futures were at $1.3010 per gallon on February 26. The spread between May gasoline and ethanol futures narrowed 15.13 cents per gallon on February 26, down 15.13 cents since last week on weakness in gasoline prices.

 

March CBOT wheat futures rolled to May and were 4.84% lower since last week. The May futures were trading $5.3575 level on February 26. Open interest fell 9.35% over the past week in CBOT wheat futures. We should expect to see open interest rise in all of the grain markets over the coming weeks as farmers continue to hedge the 2020 crops. Technical metrics in CBOT wheat were falling towards oversold readings 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 recent sessions.

As of Wednesday, the KCBT-CBOT spread in May was trading at a 76.50 cents per bushel discount with KCBT lower than CBOT wheat futures in the May contracts. The spread widened by only 0.25 cents since February 19. 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.

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 has been a bearish factor for the grain markets. The uncertainty of the 2020 crop year could add volatility to the market as the spring planting season gets underway. I would be a scale-down buyer of beans, corn, and wheat on price weakness.

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 watching the spread to determine 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 2.3912:1 level on February 26, up 0.0336 since last week. The ratio is now near the long-term norm. On February 26, the spread was at a level where farmers would likely plant equal corn and soybeans crops when it comes to the planting season in the early spring at near the 2.4:1 level.

The uncertainty of the 2020 crop year is likely to add price variance to the grain futures markets over the coming weeks. I will look to build long positions during periods of price weakness. The deal with China should limit any downside until the 2020 growing season during the summer months. However, Coronavirus has weighed on the prices over the past weeks. Lower price levels could create a buying opportunity in the agricultural products that feed the world for the coming weeks and months. I continue to believe that the demand side of the fundamental equation for grains will limit any selloffs. At the same time, the uncertainty of the weather during the coming crop year could create the ideal conditions for sudden sharp rallies. 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.

Each year is a new adventure in the agricultural commodities that feed the world. The beginning of spring is the time of the year when uncertainty can lead to increased price variance. I view the current price levels as areas to establish long positions, leaving room to add on further price weakness.

 

Copper, Metals, and Minerals

Base metals and industrial commodities moved mostly lower over the past week. The leader of the pack, copper, fell on both the LME and COMEX. Aluminum, lead, nickel, and zinc prices moved lower, while tin posted a marginal gain. Iron ore edged lower despite Brazilian supply issues, while the Baltic Dry Index posted a double-digit percentage gain as the spring season approaches. The demand for shipping often reflects seasonal changes as it declines during the winter months and recovers during spring. Lumber moved lower, while uranium edged slightly higher.

Copper fell 1.63% on COMEX, while the red metal posted a 1.22% loss on the LME since the last report. Open interest in the COMEX futures market moved 5.33% lower since February 18 as the price sits below the $2.58 per pound level. May copper was trading at $2.5735 per pound level on Wednesday after recovering from a low of $2.4945 on February 3. Copper is a leading barometer for the overall health and wellbeing of the Chinese and global economies. The outbreak of Coronavirus has weighed on Chinese economic growth. The increase in stockpiles had weighed on the price of the red nonferrous metal. Over the past four weeks, copper inventories moved lower.

Just as in the crude oil market, copper put in a bearish reversal on the monthly chart in January. A close below $2.5150 per pound at the end of March would put in the same bearish price reversal pattern on the quarterly chart. Copper was above the levels that would create bearish reversal on the long-term chart on Wednesday.

The LME lead price moved lower by only 0.11% since February 18. 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. The price of nickel fell by 2.74% 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 0.70% since the previous report. Aluminum was 0.23% lower since the last report. The price of zinc moved 3.78% to the downside since February 18. Zinc was approaching the $2000 level on February 25. Base metals will continue to be highly sensitive to any news and developments on trade between the US and China. The path of least resistance of the US dollar is also impacting prices, as the greenback recently moved to a new high on the dollar index. Bullish and bearish factors continue to pull base metal prices in opposite directions.

March lumber futures rolled to May and were at the $445.00 level, down 5.16% since the previous report. Interest rates in the US will influence the price of lumber. The US Fed left interest rates unchanged at its recent meeting. Lumber is a requirement for new home construction, which is a function of the level of interest rates. Low rates are likely to support the price of wood in 2020. The price of uranium for April delivery was up 0.81% at $24.85 per pound. The volatile Baltic Dry Index gained 12.89% since February 19 to the 508 level after significant losses throughout the winter months. June iron ore futures were 0.38% lower compared to the price on February 19. Open interest in the thinly traded lumber futures market increased by 5.44% over the period, after consistent increases over the past weeks, which continues to be a bullish sign for the price of wood.

LME copper inventories moved 3.74% lower to 160,250 metric tons since last week. COMEX copper stocks fell by 1.30% from February 4 to 28,957 tons. Lead stockpiles on the LME were up 1.27%, while aluminum stocks were 5.27% lower. Aluminum stocks fell to the 1,115,400-ton level. Zinc stocks rose 0.67% since the last report, after a significant rise in inventories in recent weeks. Tin inventories fell by 1.87% since February 18 to 7,345 tons after a recent significant increase. Nickel inventories were 5.52% higher compared to the level on February 18. The export ban from Indonesia took effect on January 1.

The dollar, US interest rates, trade, and the overall direction of the global economy are the primary factors when it comes to base metal prices. Trade and the Chinese economy will have the most significant impact on the path of least resistance for the nonferrous metals. The trade deal provided some support for the sector but concerns over Coronavirus have overwhelmed the markets over the past weeks and caused risk-off conditions in industrial commodities and markets across all asset classes until some light buying stabilized prices.  The higher dollar continues to weigh on the sector.

We stopped out of the position in Energy Fuels Inc. (UUUU), this week as the shares dropped below the $1.19 per share level.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 37 cents on February 26, down one cent since last week. I believe this option is an inexpensive way to hold a long-term position in X shares at a low level until early 2021. The details for the call option are here:

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

 

US Steel shares were at $8.26 per share and moved 10.22% lower since last week.

We own two units of FCX shares at an average of $10.56. The stock was trading at $10.46 on Wednesday, $1.64 lower since the previous report. I continue to maintain a small long position in FCX shares.

The base metals and other industrial commodities are likely to move higher and lower based on the news cycle on trade between the US and China over the coming months. However, the most significant factor will continue to be the progress of Coronavirus and its impact on the Chinese economy.

I remain cautiously bullish on the prospects for base metals and industrial commodities prices in 2020. I would be a buyer on price weakness, leaving plenty of room to add at lower prices in all of the industrial commodities. I would widen out buying scales in the current environment.

 

Animal Proteins

Animal protein futures prices all posted significant declines over the past week. The next event for the sector will be the March 10 WASDE report. As we move into the beginning of spring, the grilling season will start in late May during the Memorial Day weekend holiday and run through Labor Day in early September. Prices tend to move higher as the time of the year for peak demand approaches. However, risk-off conditions have trumped the coming peak consumption season.

April live cattle futures were at $1.12350 per pound level down 7.00% from February 19. Technical resistance is at $1.21175 per pound. Technical support stands at around $1.1000 per pound level. Price momentum and relative strength indicators were at oversold readings on Wednesday. Open interest in the live cattle futures market moved 2.55% higher since the last report.

April feeder cattle futures outperformed live cattle as they declined by 4.93% since last week. March feeder cattle futures were trading at the $1.35975 per pound level with support at $1.3000 and resistance at $1.43250 per pound level. Open interest in feeder cattle futures fell by 5.85% 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 outperformed the live cattle futures since the previous report, but the price of pork also lost ground. The active month April lean hogs were at 65.150 cents on February 26, which was 3.59% lower from the level on February 19. Price momentum and the relative strength index has been rising since early February but were below neutral readings on Wednesday. Support is at 61.00 cents with technical resistance on the April futures contract now at 68.25 cents per pound level.

The forward curve in live cattle is in backwardation from February 2020 until August 2020, and the market shifts to contango from August 2020 through April 2021. Backwardation returns until June 2021. The Feeder cattle forward curve is in contango from March 2020 through November 2020, and there is a small backwardation from November 2020 through January 2021.

In the lean hog futures arena, there is contango from April 2020 until July 2020. From July 2020 through December 2020, the curve is in backwardation, but contango returns from December 2020 through July 2021. The forward curves reflect the seasonal trading patterns in the meat markets. In lean hogs, the shortage in China could impact the forward curve over the coming weeks and months now that the trade war de-escalated. China needs US pork exports given the current situation, and we could see purchases as a result of Chinese concessions as the nation continues to suffer from a severe shortage of pork. The Coronavirus could increase demand for pork from China as the country is banning the consumption of other meat products, which could be the source of the virus. However, the kneejerk reaction to the virus had caused significant selling and risk-off conditions in the lean hog futures arena. Lean hog futures were mostly steady over the past week.

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 April futures contracts moved higher as the price of live cattle outperformed lean hogs on a percentage basis.

Source: CQG

Based on settlement prices, the spread was at 1.72450:1 compared to 1.78760:1 in the previous report. The spread decreased by 6.31 cents as live cattle became less expensive than lean hogs over the past week. The spread moved towards the historical norm on the April futures contracts.

Soon the markets will turn their focus to the upcoming 2020 grilling season of peak demand in the US, which begins in late May and runs through early September. Production in Argentina and Brazil and any moves in the currency markets for the peso or the real could impact the prices of beef and pork. Over the past weeks, both currencies remained weak. Any rise in the Brazilian real and Argentine peso could provide some support for meat prices. Lower values for the South American currencies would likely weigh on futures prices as they cause production costs to decline. Grain prices over the coming weeks could also impact the path of least direction for the prices of meat futures. Lower grain prices make animal feed prices lower and weigh on meat prices. We could see two-way price volatility increase as the winter season ends in the US.

I continue to believe we will see recoveries in cattle and hog prices, the COW ETN product, as we move closer to the season of peak demand. The trade agreement between the US and China could boost US exports of beef and pork to China. I believe the USDA underestimated demand in the most recent February WASDE report, which could lead to higher prices over the coming weeks and months. The next test will come on March 10 in the upcoming USDA report. Any significant further price weakness could offer an opportunity for some bargains in the beef and pork markets. I would use wide scales for any buying to leave lots of room on the downside.

 

Soft Commodities

Four of the five soft commodities posted losses over the past week. Coffee was only product that moved higher since the previous report. FCOJ, cotton, sugar, and cocoa futures prices all fell.

May sugar futures declined 3.58% since February 19, as the price of the sweet commodity was around the 14.54 cents per pound level on the active month futures contract. Technical resistance is at 15.29 cents with support at 13.98 cents. Sugar made a new high at 15.90 cents on February 12 on the continuous contract. Nearby sugar futures traded to a low at 13.20 cents on January 2, which is a critical level of short-term support. The value of the January Brazilian real against the US dollar continued to fall over the past week and was at the $0.22500 level against the US dollar on the March contract, 1.66% lower over the period. The Brazilian currency recently fell below its multiyear lows, which is a factor for the price of sugar and other commodities where Brazil is a leading producer and exporter. The currency fell through the critical support level at $0.23040 and moved to a new low of $0.22350. 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 trending lower below neutral territory as of February 26. The metrics on the monthly chart crossed higher from a neutral condition and are headed for overbought territory. Sugar made a new high above its 2019 peak, and the next significant target on the upside could be the 20 cents per pound in the volatile sugar futures market if a deficit develops in the sweet commodity.  Open interest in sugar futures was 2.82% lower since last week. Open interest had been rising with the price, which was a bullish technical factor. Sugar rallied to new highs over recent weeks as drought conditions in Thailand created the supply concerns that lifted the price of sugar futures. The recent correction in sympathy with the risk-off conditions came as open interest edged lower, which could be a sign that sugar will find a bottom at a higher low.

May coffee futures moved 1.51% higher since February 19 after a significant correction from the December 2019 high. May futures were trading at the $1.1065 per pound level. The first level to watch on the downside is 99.55 cents. Below there, support is at around 97.40 cents on the continuous futures contract. Resistance is now at $1.1380 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; we are long two units of the ETN at an average price at $34.92 per share. JO was trading at $35.01 on Wednesday. Open interest in the coffee futures market was virtually unchanged since last week. I am holding a long position in the coffee futures market and the JO ETN product after taking profits scale-up in late 2019. Volatility has increased in the coffee futures market. I began buying as the price fell below the $1 per pound level. I started selling at around $1.10 but will continue to hold a small core long position.

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 ultimate upside target is the November 2016, high at $1.76 per pound. Price momentum and relative strength were above neutral levels on Wednesday. On the monthly and quarterly charts, the price action was neutral to positive, given the recent rebound. 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.

The price of cocoa futures fell over the past week. On Wednesday, May cocoa futures were at the $2739 per ton level, 3.79% lower than on February 19. Open interest rose by 0.21%. Relative strength and price momentum fell below neutral territory on February 26 as the price correction continued after recent gains after the soft commodity ran out of buying at just below the $3000 level. 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 at $25.76. NIB closed at $32.45 on Wednesday, February 26. 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 on price dips. The level to watch on the upside above the recent high is now at $3000 per ton. On the downside, short-term technical support now stands at $2702 per ton.

May cotton futures fell 6.00% over the past week on the back of continued concerns about the Chinese economy. May cotton was trading at 65.47 cents on February 26. On the downside, support is at 64.88 cents per pound. Resistance stands at 70.24 cents per pound. Open interest in the cotton futures market fell by 5.79% since February 18. Price momentum and relative strength metrics were falling towards oversold territory on Wednesday. The “phase one” trade agreement between the US and China was a bullish factor for the price of the fiber futures, but Coronavirus cuts the other way. Cotton is coming into a time of the year when the price tends to peak. However, news out of China will determine the path of the fiber futures over the coming weeks, and that news has been problematic for the cotton market. As the Chinese economy grinds to a halt, the demand for cotton suffers.

May FCOJ futures posted a loss since last week. On Wednesday, the price of May futures was trading around 97.15 cents per pound. FCOJ nearby futures moved 4.94% lower over the past week. Support is at 95.55 cents level. Technical resistance is at $1.0275 per pound, where there is a double top formation on the daily chart. Open interest fell by 8.00% since February 18. The Brazilian currency weighed on the FCOJ futures. $1 per pound continues to be a critical pivot point for the OJ futures.

Most of the soft commodities are sitting below neutral readings when it comes to momentum and price strength indicators. Coffee, cotton and FCOJ are sitting at levels that are likely closer to the bottom end of their respective pricing cycles. The weak Brazilian currency is weighing on the coffee and FCOJ markets. Events in China have depressed the price of cotton at a time of the year, where the uncertainty of the annual crop would typically cause an upward price bias. Sugar continues to watch developments in Thailand where drought could force world sugar into a deficit condition in 2020 if dry conditions persist. I would be a buyer on dips in all of the commodities that are close to the bottom end of their pricing cycles. The bullish trends in sugar and cocoa over the past weeks and months could continue given the weather in Thailand and surcharge on cocoa beans from West Africa, the world’s leading supplier of the primary ingredient in chocolate. Risk-off in all markets means that buying scales on dips should be wide.

 

A final note

Risk-off conditions in markets led to ugly price action on the downside over the past week. However, the rise in the price of gold is a significant event as it could be a harbinger of inflation pressures on the world economy. As I have been writing, I view the ascent of gold as a spotlight on the descent of fiat currency values. Even though the US dollar index rose to a new high at almost the 100 level, the dollar may be the king of currencies, but gold is the monarch of money. I would view any corrections in gold as a buying opportunity to add to long positions over the coming weeks. I believe that gold is heading for a new all-time high and will eclipse the $2000 per ounce level. I also think silver will catch fire along with platinum. The two metals that have lagged gold and the other PGMs offer compelling value at their current price levels. However, the price action in silver and platinum has been more than frustrating. Both metals looked ugly on Wednesday, which has been the best time to buy over the past months.

At the same time, if gold is signaling inflationary pressures and the decline of all fiat currencies, it may not be long before the economic condition begins to lift the prices of many of the members of the commodities asset class. With population increases underpinning demand, weaker currencies are bullish for the prices of all of the raw materials, and we could be heading for a period as we witnessed in 2011 when the asset class experienced across the board gains. Risk-off conditions over Coronavirus force us to re-evaluate risk-reward parameters. I would widen scales and close any positions where the comfort level is not high. When buying on a scale-down basis, there is often pain before pleasure when it comes to losses and profits. Be careful out there in all markets. There is nothing wrong with moving to the sidelines.

As I wrote last week, 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.

 

 

 

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.   

 

 

 

OH Editor

Author

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