- Stocks continue to move higher
- China and the US will sign the “phase one” trade agreement tomorrow, on January 15
- Lots of volatility in oil and gold in the back of tensions between the US and Iran- New highs lead to corrections
- The January WASDE was a non-event, but prices remain stable
- Coffee corrects to the downside while the price of sugar rises
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, January 2, stocks came out of the gate in the new decade posting significant gains. The DJIA was 1.16% higher, with the NASDAQ up 1.33%. The S&P 500 gained 0.84% on the session as stocks started the New Year with a continuation of gains. March 30-Year Treasury futures were 0-24 highs to 156-21 level. The March dollar index rebounded by 0.467 to settle at 96.525. Grains edged higher, as did crude oil and oil products. Natural gas dropped to just over the $2.10 per MMBtu level on the February futures. All precious metals moved higher on the session with palladium leading the way on the upside. Gold, silver, and platinum all rallied on the first business day of 2020. Copper was up, and the red metal settled at the $2.8250 level on the March futures contract. Lean hogs moved a touch higher, and cattle posted marginal declines. Cotton and lumber edged higher, but FCOJ, coffee, sugar, and cocoa price slipped. Bitcoin was down $270 as the price moved below the $7000 level to $6940 per token.
On Friday, the US attack that killed Iranian Major General Soleimani caused the political temperature in the Middle East to rise to the highest level in years, if not decades. Ayatollah Ali Khamenei pledged that his nation would retaliate for the murder of the many who was his number two when it comes to the leadership of the theocracy. The stock market moved lower in risk-off conditions was the DJIA fell by almost 234 points. The S&P 500 was 23 points lower, and the NASDAQ fell by 71.42 on the session. US 30-Year Treasury bond futures rose 1-23 to the 158-10 level. The dollar index was steady at the 96.521 level. Grain prices fell with soybeans leading the way on the downside with a 14.75 cents per bushel loss on the session. Corn and wheat were 5 cents and 4.50 cents lower on the final session of the first week of the new decade. Crude oil exploded higher, with products posting gains. Brent crude oil outperformed the WTI futures as the Middle East is home to over half of the world’s crude oil reserves. Natural gas was weak, as the price put in a new low at $2.083 per MMBtu on the February futures contract. The price closed at $2.13 after the EIA told markets that inventories fell by a lower than expected 58 bcf for the week ending on December 27. All of the precious metals moved higher with gold leading the way. Gold traded to a high of $1556.60, only $3.20 below the early September high. The yellow metal closed at over the $1550 level, with silver around $18.15, platinum at close to $990, and palladium over $1950 per ounce. Live and feeder cattle prices fell by over one penny per pound, but lean hogs were down the three cents limit to 68.55 cents on the February contract. Sugar edged higher, but cotton, coffee, FCOJ, cocoa, and lumber prices all slipped to the downside. Bitcoin made a significant comeback in risk-off conditions as the price rose $445 per token to $7,385.
On Monday, January 6, markets continued to be nervous as the tension between the US and Iran remained at a peak level. Stocks moved modestly higher on Monday, even as the tensions in the Middle East hung over the markets. Grains moved a touch higher across the board. Crude oil and products settled higher on the session, and they rose to a new medium-term high as the February NYMEX contract rose to $64.72 before settling at $63.27. Natural gas was steady at $2.135 per MMBtu, up just one-half cent on the session. Gold moved to a new high of $1579 before settling at $1568.80 up $16.40. Silver was $0.28 higher at $18.179 after trading up to $18.55 per ounce on March futures. Platinum fell by $24.10, but palladium moved $33.90 higher to the $2000 per ounce level. Cattle futures were higher, but lean hogs posted a marginal gain after Friday’s losses. FCOJ, coffee, cocoa, and lumber prices fell, but cotton moved up on the day to over 70 cents per pound. Sugar also moved to a new high at 13.76 cents before settling at 13.73. Bitcoin rose $230 to $7615 per token.
On Tuesday, stocks slipped with all of the leading equity indices posting marginal losses of under 0.50%. Grain prices moved a touch lower. Crude oil and product prices also edged lower, but natural gas posted a small gain and moved to just over the $2.15 per MMBtu level. Gold, silver, and platinum prices moved higher on the session. Palladium sailed through the $2000 per ounce level as a hot knife goes through butter. The nearby March futures contract settled at $2023 per ounce. Rhodium exploded $1000 per ounce higher on the session to a midpoint price of $7250 per ounce. Live and feeder cattle prices edged lower, but lean hogs posted a marginal gain on the session. Cotton, sugar, and lumber prices moved to the downside, but coffee, cotton, and cocoa were higher. Bitcoin was $665 high and settled at $8280 per token. The uncertainty surrounding the Middle East boosted the price of digital currencies.
On Wednesday, the markets initially responded to Iranian attacks on Iraqi bases that were home to some of the US troops in the region. The attack did not kill any US citizens, and after President Trump spoke on January 8, the markets calmed. It seemed as if the situation in the region de-escalated for the first time since earlier in the month. Stocks moved higher across the board on Tuesday. The March US 30-Year Treasury bond fell 1-04 to the 156-09 level. The March US dollar index rallied to settle at just under the 97 level. Grains were stable with soybeans and wheat posting marginal gains and corn down only one tick on the session. Crude oil had a wild session as the price traded to a new high at $65.65 on the February NYMEX futures contract and then fell to probe below the $60 level. The energy commodity settled at $59.61 per barrel but moved back over the $60 level late in the day. Oil products followed crude oil higher and then lower. Crude oil, gasoline, and heating oil futures put in bearish reversals on their respective daily charts. Significant inventory increases on oil products from the API and EIA weighed on prices, as did the apparent de-escalation of tensions in the Middle East. Natural gas settled at $2.141 per MMBtu on the February futures contract as the price traded in a narrow range near the recent low. Gold rose to a new high of $1613.30, the highest price since March 2013 after the attack by Iran, but the active month February contract fell back to the $1560 level by the close. Silver rose to a new short-term high of $18.895 before settling at $18.167 on the March futures contract. Palladium moved to a new record high of $2068.50 on the March contract and settled just under the new peak and above the $2060 level. Platinum moved lower to settle at $963.80 after trading to a high of $980 on April futures. Rhodium was at a midpoint of $7550 as the explosive price action continued. Cattle edged higher while lean hogs posted a marginal loss. Cotton and lumber prices moved modestly to the upside, but FCOJ, coffee, sugar, and cocoa prices were lower on the session. Bitcoin futures dropped $170 to $8,110 per token.
On Thursday, January 9, stocks continued to move higher with significant gains in all of the leading indices. The US 30-Year Treasury Bond moved 0-16 higher to 156-28 on the March futures contract. The March dollar index rose 0.166 to 97.162. Soybean, corn, and wheat prices edged lower. Crude oil was marginally lower. Gasoline posted a small gain, while heating oil went the other way and moved a touch lower on the session. The EIA reported a small withdrawal from storage of 44 bcf in the natural gas market. The price settled at $2.166 per MMBtu on the February futures contract, up just 2.5 cents from the previous day. Gold and silver prices continued to slip as calm over Iran weighed on the two precious metals. Platinum was higher, and palladium remained around the recent high as the metal closed at just over $2060 per ounce. Copper was around the $2.80 per pound level on the March futures contract. Hog prices moved lower, but cattle were marginally higher. Cotton, cocoa, and sugar were higher, while FCOJ, coffee, and lumber prices fell. Bitcoin was down $225 to $7885 per token.
On Friday, the employment data was a bit weaker than expected, with a gain of 145,000 jobs in December. Stocks edged lower on the session, and the March Treasury Bond futures contract gained 0-28 to the 157-22 level. The dollar index was down a touch to 97.078 on March futures. The USDA released its January WASDE report, which was relatively benign. However, the prices of soybean, corn, and wheat all edged higher in the aftermath of the monthly report, and all three closed near the highs of the session. Crude oil fell with heating oil futures, but gasoline edged higher. Natural gas climbed above the $2.20 per MMBtu level for the first time in 2020 as the February contract settled at $2.202. Precious metals prices moved higher across the board on Friday, January 10. Copper was also higher at just above the $2.81 per pound level on the March futures contract. The animal proteins posted modest gains across the board, as did soft commodities and lumber prices. Sugar moved above 14 cents per pound to a new high. Bitcoin was up $250 to $8135 per token.
On Monday, January 13, stocks moved higher as the markets await the impeachment trial and signing of the “phase one” trade deal with China during the week. March 30-Year Treasury bond futures fell 0-12 to 157-08, and the dollar index in March settled at 97.06, virtually unchanged from Friday’s closing level. Grains edged higher on the first full day of trading after the January 10 WASDE report. Crude oil fell to just over the $58 per barrel level on February NYMEX futures. Gasoline outperformed heating oil futures on the session, as the gasoline crack spread rose, and the heating oil processing spread was marginally lower on the session. Gold, silver, and platinum prices moved to the downside, but palladium continued to show strength as the price moved towards the $2100 level. Copper was strong as the price of March futures rose to a high of $2.8640 and settled at $2.8610 per pound. Cattle and hog futures prices moved lower. Coffee continues to decline, and FCOJ and cocoa prices slipped. Cotton and sugar rose to new highs, and lumber posted a small gain on the session. The price of Bitcoin moved $65 higher to $8200 per token. The US removed the “currency manipulator” designation on the Chinese yuan as the two nations prepare to sign the trade deal on Wednesday.
On Tuesday, stocks were mixed on news that US tariffs on China may remain in place until after the election despite the “phase one” trade deal. The DJIA rose marginally, but the S&P 500 and NASDAQ posted small losses. March 30-Year Treasury bond futures rose by 0-24 to the 158 level, while the dollar index was virtually unchanged at 97.094. Wheat futures moved higher, soybeans were unchanged, and corn futures fell by two ticks. Crude oil was marginally higher, and product prices were stable. Natural gas rallied to a new short-term high at $2.255 but settled below the $2.20 level. Gold and silver prices slipped, but platinum and palladium posted gains. Copper moved to a new high of $2.8745 and settled at the $2.8735 level on the March COMEX futures contract. Hogs and live cattle were high, but feeder cattle edged lower. Cotton and lumber prices fell, but sugar, coffee, cocoa, and FCOJ prices moved to the upside. Sugar rose to a new high of 14.53 cents per pound and settled at the 14.32 cents level. Bitcoin posted an impressive $550 gain to $8750 per token.
Weekly Spreadsheet:
Copy of Spreadsheets for The Hecht Commodity Report January 14, 2020
Stocks and Bonds
2019 was an excellent year for investors in the US stock market. So far, in 2020, the leading indices have added to gains. Despite increasing tensions and incidents in the Middle East, the stock market moved higher since December 31. While 2020 has the potential to be a volatile year, stocks continue to climb to new highs.
The S&P 500 moved 1.62% higher since the previous report, while the NASDAQ moved an impressive 3.11% to the upside. The DJIA posted a 1.41% gain since the last report. The bull market in stocks has been in place for more than a decade, 2019 was a banner year, and the start of 2020 has added to gains.
Chinese stocks moved higher since last week as the US and China will sign the “phase one” agreement on trade, tomorrow, January 15, in Washington DC.
Source: Barchart
As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $44.82 level on Wednesday, which was 2.73% higher than the closing level on December 31. Technical support is at $37.66 per share from August 14. Resistance stood at the July 1 high at $44.02 per share for months. FXI traded to a high of $45.29 on January 13. Further progress towards a “phase two” and comprehensive trade protocol between the US and China should lift Chinese stocks and the FXI ETF product. The next level of resistance is at the early April peak of $45.96 per share.
US 30-Year bonds moved higher from last week. On Tuesday, January 14, the March long bond futures contract was at the 158 level, up 1.57%. On Friday, a slightly weaker US employment report that put the unemployment rate at 3.50% with a gain of 145,000 jobs in December pushed the bond higher. The odds of any changes in Fed monetary policy in 2020 are low as it is an election year in the US. The Fed is an apolitical body and will exercise patience and restraint when it comes to any changes in interest rates that could impact the results of the election in November.
Open interest in the E-Mini S&P 500 futures contracts fell by 0.81% since December 31. Open interest in the long bond futures rose by 0.80% over the past week. The VIX moved lower since the previous report as the stock market climbed to higher highs. The volatility index was at the 12.39 level on January 14, 10.09% lower over the period.
The VIX is at a low level that favors the long side from a risk-reward perspective. I continue to look for buying opportunities that offer 2:1 reward versus risk opportunities using the VIX futures or VIXY-related products like VIXY or VIXX. While the stock market shrugged off recent hostilities between the US and Iran, we could see incidents in the Middle East or other parts of the world over the coming weeks and months that cause sudden selloffs in the US stock market. The risk of a correction will continue to rise with the prices of stocks. While I will continue to trade the volatility instruments from the long side, I will employ tight stops to limit risk and allow for entry at lower levels.
The dollar and digital currencies
The March dollar index rebounded since December 31. The contract posted a 1.08% gain since last week. The index settled at 97.094 on Wednesday. Interest rate differentials continue to provide support for the dollar index despite the reductions in the Fed Funds rate over recent months. 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, while resistance is at 97.405 on the March futures. Continuous contract support stands at 95.365 with resistance at the 99.33 level. The dollar index moved to the bottom end of its range at the end of 2019, but it has bounced higher in early 2020. Bullish and bearish factors are pulling the dollar in opposite directions. While interest rate differentials are bullish for the greenback, Brexit and trade agreements could weigh on the dollar index. At the same time, the 2020 US election could inject uncertainty over the future of US policy into currency markets throughout most of this year.
The euro currency was 0.98% lower against the dollar since the end of 2019 on the March futures contract. Since the euro accounts for 59.5% of the dollar index, we could see some euro and pound-related volatility as the deadline for Brexit is at the end of this month. Over the past week, the pound fell 1.81%, but support is at the $1.30 level against the dollar. We could see another rally in the pound and the euro against the dollar at the end of this month when Brexit occurs, and the UK separates from the EU. I expect more volatility in currency markets in 2020 compared to 2019.
Bitcoin staged an impressive comeback since December 31 after trading to a new low at $6420 in mid-December. Bitcoin was trading at the $8,786.69 level as of January 14, as it moved 21.56% higher than the value on December 31. The recent crackdown by the Chinese on digital currencies put pressure on cryptocurrency prices, for a time, but the situation between the US and Iran seemed to drive money back into the cryptocurrency asset class. Ethereum rose by 26.32% and was at $164.31 per token on Tuesday. The market cap of the entire asset class moved 24.87% higher as it outperformed the price action in Bitcoin. The number of tokens increased by 45 to 5031 tokens since December 31. The rise in the number of digital currencies 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 $239.423 billion. Open interest in the CME Bitcoin futures rose by 62.58% since last week. Bitcoin futures hit a high of $8955 on January 14. The rise in open interest could be a sign that Bitcoin and the other cryptocurrencies will attract more interest in 2020. Rising price and increasing open interest tend to be a bullish sign. The first target on the upside is around the $10,000 level in Bitcoin.
The Canadian dollar moved 0.64% lower since last week. Open interest in C$ futures rose by 8.08% 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. I expected the currency to continue making higher lows against the US dollar, which is a pattern that has been in place since late 2018. The support level for the Canadian currency is at just above $0.75 against the US dollar on the active month March futures contract.
The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. Tragic fires in Australia could be weighing on the nation’s currency. The A$ fell by 1.76% since the December 31 report as the progress on trade provided a boost for the Australian currency, but the fires could be presenting economic challenges down under.
The British pound posted a 1.81% 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 the $1.30 level. 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. We could see more action in the pound as the UK exits the EU at the end of this month.
The Brazilian real moved lower against the US dollar since December 31, as it moved to the downside by 3.49%. The real remains not far above its multiyear lows and in a long-term downtrend. 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. Meanwhile, supply concerns over the Brazilian coffee and sugar crops caused the soft commodities to work to higher levels in late 2019. While coffee pulled back so far in early 2020, sugar rose to new short-term highs over the past week.
Precious metals continued to experience lots of volatility over the past two weeks. The three of the four metals in the best-performing sector of the commodities asset class posted gains over the past two weeks, but we have seen more than a little price variance in many of the metals. Gold rose to a new multiyear high on the back of the situation between the US and Iran but pulled back from the new peak.
Precious Metals
Gold, platinum, and palladium prices all moved higher since December 31, while silver moved lower. Gold was above $1540, silver was just below of $17.75, platinum was above $987, and palladium was above the $2120 level on January 14. The price action in rhodium was explosive.
Gold rose by 1.41% since last week, while silver was 1.00% lower. The price of February gold was just at the $1544.60 per ounce level on Tuesday, while March silver was at $17.742 per ounce. February gold futures reached a peak at $1613.30 on January 8, and March silver climbed to $18.895 on the same day at the height of the Iranian missile attack on Iraqi airbases. Gold made a new multiyear high, but silver remained below its September 2019 peak of $19.54 on the continuous futures contract during the most recent rally.
The price of April platinum rose by 0.97% since last week was at $987.30 per ounce. The level of technical resistance is at $1001.40, the January 3 high on the April futures contract. Support in platinum is at $952.50 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 surged higher since the end of 2019. The midpoint price of the metal was at $7600 per ounce on January 14, $1,820 per ounce higher than on December 31. Palladium rose by 11.21% since the previous report. The price traded to a new peak at $2132 on January 14 on the March futures contract and closed at the $2123.30 per ounce level on Tuesday. Palladium suffered a sharp correction on December 20, but the move to below $1800 per ounce turned out to be a launchpad for a new record high.
Open interest in the gold futures market moved 3.07% higher over the past week. The metric reached a new record peak of 797,110 contracts on January 3. The metric moved 5.56% higher in platinum while it was 8.92% higher in the palladium futures market. Silver open interest rose by 3.63% over the period. Across the board increases in open interest in the four precious CME are signs of increasing interest in the precious metals sector. Given the price action in all of the metals, the rise in the total number of risk positions is a technical validation of the bullish trend in the sector.
The silver-gold ratio moved higher since December 31 as gold outperformed silver over the past two weeks.
Source: CQG
The daily chart of the price of February gold divided by March silver futures shows that the ratio was at 86.86 on Tuesday, up 1.94 from the level on December 31. 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.
We are long the gold mining stock ETF products GDX and GDXJ, which underperformed gold since the last report. Volatility in gold and equity markets during the heightened tensions likely caused the divergence between the yellow metal and gold mining shares. Mining shares had outperformed gold over the recent weeks and months, and the relationship corrected a bit over the first two weeks of 2020.
Gold moved up by 1.41%, while the GDX was 3.48% lower since December 31, and GDXJ fell by 3.90% 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. Last week, GDX and GDXJ underperformed gold in a departure from the normal price behavior. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 0.36% loss since December 31, which outperformed the price action 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.
Platinum and palladium moved in higher since December 31. March Palladium was trading at a premium over January platinum with the differential at the $1136.00 per ounce level on Wednesday, which widened significantly from December 31 to a record level. January platinum was trading at a $557.30 discount to February gold at the settlement prices on December 24, which also widened since the previous report as platinum continues to underperform gold and palladium.
The price of rhodium, which does not trade on the futures market, was a rocket ship over the past week and was at $7,600 per ounce on Tuesday. 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. Some analysts are now projecting that the price of the rare metal could make a move to the $10,000 per ounce level, and the price action says it could well be on its way to the record high. Markets rarely move in a straight line, and spreads are likely to widen the higher rhodium prices climb. The spread between the bid and offer rose to $500 per ounce at the current price level. Rhodium has been then best-performing precious metal since 2016. The price has moved higher from a low at $575 per ounce. Rhodium continued to shine in the early days of 2020.
We are long the PPLT platinum ETF product, which moved 1.97% higher since December 31 as it outperformed 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 $1000 and $1200 resistance levels to break to the upside on a technical basis.
We are long the ETFMG Prime Junior Silver ETF (SILJ) product at $10.36 per share to diversify risk. SILJ was at $11.31 on January 14, down 9.08% since the last report as mining shares underperformed the silver futures market. However, we exchanged EXK for SILJ, which was 12.86% lower over the period.
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. Low interest rates and increased interest in precious metals should contain any corrections. However, risk will continue to rise with prices as we witnessed over the past two weeks when the situation between Iran and the US pushed prices appreciably higher, leading to corrective moves in the gold and silver futures markets.
Energy Commodities
Energy commodities were highly volatility over the first two weeks of 2020. Crude oil is in the crosshairs of the conflict in the Middle East, and it moved higher on hostilities and lower when the situation calmed. Crude oil and oil product prices posted losses since December 31. Gasoline crack spreads rose, while heating oil processing spreads fell. Brent crude oil outperformed WTI as Brent is the benchmark pricing mechanism for Middle Eastern petroleum. Natural gas was a touch lower, and ethanol posted a loss. Rotterdam coal also moved to the downside since December 31.
February NYMEX crude oil futures fell 4.64% since the previous report. March Brent futures moved 2.29% lower since December 31. February gasoline was 2.14% lower, but the processing spread in February posted a 12.74% gain since December 31 as gasoline outperformed the price of crude oil over the period. February heating oil futures moved 5.56% lower since the previous report, and the heating oil crack spread was 7.82% lower since the last report.
Technical resistance in the February NYMEX crude oil futures contract is at $65.65 per barrel level, the high from January 8, with support at the $55.01 level. Volatility in crude oil increased over the first two weeks of 2020. Crude oil open interest rose by 3.85% over the period. The price of crude oil will be highly sensitive to the news cycle. Any hostilities between the US and Iran or Iran and Saudi Arabia could push the price to the recent peak or higher. However, any signs of negotiations and movement towards a nuclear nonproliferation agreement could push the price of NYMEX futures to the lower end of the trading range at $50 per barrel. I expect lots of price variance in the oil futures arena.
In the last report, I wrote, “2019 was a year where oil-related equities underperformed both crude oil and the stock market. Sector rotation could cause value-seeking market participants to flock to the inexpensive shares in 2020.” As of January 14, the XLE, VDE, and OIH ETF products that hold shares in crude oil-related companies fell less than the price of crude oil on a percentage basis, which represents a bit of mean reversion in the sector.
Meanwhile, Iran continues to pose a clear and present danger in the oil market. Therefore, any price spikes are most likely to come on the upside, as we witnessed in mid-September with the attack on Saudi oilfields that temporarily knocked out production, and in early January. Any actions that impact logistics in the Straits of Hormuz could push prices a lot higher as 20% of the world’s daily oil supplies flow through the passageway that separates the Persian Gulf from the Gulf of Oman.
Meanwhile, the prospects for changes in US energy policy could cause volatility in the oil market based on the outcome of the November Presidential election. The US is currently the world’s leading producer of both crude oil and natural gas. OPEC is hoping that the US production of crude oil begins to decline in 2021. The oil cartel will review its current production cut in early March. Based on the recent price action, OPEC is likely to keep the cuts in place throughout 2020.
The spread between Brent and WTI crude oil futures in March moved higher to the $6.22 per barrel level for Brent, which was $1.00 above the level on December 31. The spread moved to a high of $6.70 on January 8 as Iranian missiles attacked Iraqi airbases that house US troops. 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, but the March contract reached a high at a lower level at $7.11 on the high in late April when it comes to the spread. The spread found what looks like a significant bottom at $3.93 on September 3. Tensions in the Middle East should keep a bid under the price of Brent crude oil and the spread between the two benchmarks. The critical level on the downside in NYMEX crude oil remains at $50 per barrel and $66.60 on the upside.
US daily production stood at 12.9 million barrels per day as of January 3, according to the Energy Information Administration, which was at a record peak for daily output. As of January 3, the API reported a decrease of 5.95 million barrels of crude oil stockpiles, while the EIA said they rose by 1.20 million barrels for the same week. The API reported a rise of 6.70 million barrels of gasoline stocks and said distillate inventories rose by 6.40 million barrels as of January 3. The EIA reported an increase in gasoline stocks of 9.10 million barrels and a rise in distillates of 5.30 million barrels. Rig counts, as reported by Baker Hughes, fell by 11 last week to 659 rigs in operations as of January 10, which is 214 below the level operating last year at this time. The recent steady decline in the number of rigs with daily output at 12.9 million barrels per day level was a sign of the efficiency of the oil business in the US, which is a significant factor for the oil market. The recent inventory data from both the API and EIA was bearish for the price of oil as product stocks rose substantially.
OIH and VLO shares moved in opposite directions since December 31. OIH fell by 2.19%, which outperformed the action in NYMEX crude oil over the period. VLO moved 1.87% higher since December 31. Rising gasoline crack spreads in 2020 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 just under the $13 per share level on Tuesday. I believe the ETF that reflects the price of oil service company shares remains too low at its current price level. I will consider adding to the position on further price weakness. Oil services stocks did much worse than other oil-related equities in 2019. I will wait before adding any more shares to the position in OIH. 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 1.31% lower since last week’s report. I continue to use tight stops on long positions in the ERX product. Oil-related equities edged lower over the past week, but they did better than the oil futures.
February natural gas futures were at $2.187 on January 14, which was 0.09% lower than on December 31. The futures contract traded to a high of $2.926 on November 5. Natural gas traded at its lowest price since August and at the lowest level at this time of the year since 2015, when it hit $2.083 on January 3.
A recovery in natural gas is overdue, but there are only around eleven weeks left until the 2020 injection season begins in late March.
Source: EIA
The EIA reported a lower than expected withdrawal of 44 bcf, bringing the total inventories to 3.148 tcf as of January 3. Stocks were 19.8% above last year’s level and 2.4% 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 eleven weeks to go until inventories begin to climb, we would need to see an average withdrawal of 185.6 bcf to fall below last year’s low in stockpiles, which is more than unlikely. This week the consensus expectations are that the EIA will report a withdrawal of 99 bcf from storage for the week ending on January 10. The EIA will release its next report on Thursday, January 16, 2020.
Open interest rose by 11.61% over the past week. Technical resistance is at $2.290 per MMBtu level on the February futures contract with support at $2.083. The $2.029 per MMBtu levels stand as technical support on the continuous futures contract with resistance at $2.377 per MMBtu. The island reversal on the daily and weekly charts is from $2.781 to $2.786 and $2.738 to $2.753, respectively, are currently the critical technical levels on the upside, but they have faded in the market’s rearview mirror. Price momentum and relative strength on the daily chart crossed higher from oversold conditions. However, the price action suggests that sellers could be lurking above looking to take advantage of any attempts at a significant price recovery. A rally to $2.255 on January 14 attracted selling that took the price back below the $2.20 level.
The GASL ETF product was volatile over the past two weeks. GASL was trading at $8.92 per share on January 14, 8.98% lower than on December 31. However, GASL hit a high of $10.79 on January 7. Last week, shares of Apache Corporation (APA) surged on the reports of a significant oil discovery in Surinam. APA has a joint venture with Total SA in the area. The stock jumped by over 30% after the news of the crude oil reserve discovery. The action in APA should remind us that good news on any energy stocks could cause dramatic price moves on the upside.
February ethanol prices moved 3.52% lower over the past week. Open interest in the thinly traded ethanol futures market moved 3.54% higher over the past week. With only 703 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product rose 1.62% compared to its price on December 31, but the price of February coal futures in Rotterdam fell by 1.02% over the past two weeks.
The EIA oil and natural gas inventory numbers for the week ending on January 10 will come out on January 15. Late Tuesday, the API reported a 1.10-million-barrel rise in crude oil inventories for the week ending on January 10. Gasoline stocks rose by 3.20 million barrels, while distillate stockpiles increased by 6.80 million barrels over the period. The API report was bearish for the energy commodity.
The potential for high volatility in the oil futures market has increased in 2020. Without any fresh news from the Middle East, the price is likely to follow inventory data over the coming week.
In natural gas, despite attempts at a recovery, the price action continues to be bearish for this time of the year.
Source: NYMEX/RMB
As the forward curve over the coming months shows, the peak price at $2.187 in February on the settlement price on January 14, which was 0.20 cents per MMBtu lower than on December 31. With April future sat below $2.16, if the current trend continues, we could see a return of sub-$2 prices over the coming months and a test of the March 2016 low at $1.611 per MMBtu. However, the oversold condition of the market could increase the chances of a technical recovery rally. Keep in mind that price action tends to fill the gaps created by the island reversals on the daily and weekly charts. The top end of the gaps could be a target for the price action if a recovery develops over the coming week. However, time is not a friend for natural gas bulls. The longer the price takes to recover, the lower the chances of any significant move to the upside. Sellers are likely to take advantage of any price recovery over the coming days and weeks. The rise in open interest could be a sign of increasing short positions, which could lead bears to push the price of the energy commodity lower as the winter season has not come with below-average temperatures across the US.
I have been tracking the price action in BG shares. BG is a significant producer of ethanol in Brazil. Since December 31, the price of BG shares moved 3.39% lower to $55.60 per share on January 14. 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 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. As of January 14, the short-term path of least resistance in oil was lower while gas was cautiously higher.
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 3.58% lower over the past two weeks at $15.37 per share. I will add another unit at a much lower price to lower the average cost of the long position.
I expect lots of volatility in the energy sector in 2020. During the first half of the year, the weather, events in the Middle East, and inventories should guide prices. In the second half, the US election that will determine the future of energy policy in the world’s leading producer of oil and gas could cause wide price variance in both markets. Fasten your seatbelts for what could be a wild ride in oil and gas. I continue to believe that related equities will experience sector rotation. The sudden jump in APA shares should stand as an example of the potential for recoveries. Any good news out of companies in the oil and gas sector could cause similar moves in the blink of an eye.
When it comes to crude oil, which put in a bearish reversal on the daily chart on January 8 and the weekly chart last week, the bearish price action from a technical perspective could encourage selling. However, events in the Middle East are likely to trump any technical factors over the coming weeks.
Grains
On Friday, January 10, the USDA released its first World Agricultural Supply and Demand Estimates report of 2020. The January report can influence markets, but this time the price action in the aftermath of the release was quiet, with grain prices holding near recent highs. Tomorrow, on January 15, the US and China will sign a “phase one” trade agreement, which is highly supportive of agricultural commodity prices. In 2018 and 2019, the escalating trade war weighed on soybeans, corn, and wheat. The prospects for further progress on trade could continue to lift prices into the time of the year when uncertainty over the crop tends to peak. Each year is a new adventure in agricultural markets when it comes to supplies because of the weather and other events that can impact harvests. However, the demand side of the fundamental equation is an ever-increasing factor. This year, compared to last, there are around 80 million more people that require nutrition in the world.
The full January WASDE report is available via the following link:
https://www.usda.gov/oce/commodity/wasde/wasde0120.pdf
March soybean futures declined by 1.44% over the past two weeks and was at $9.4225 per bushel on January 14. Open interest in the soybean futures market rose by 4.06% since last week. Price momentum and relative strength indicators on the daily chart were falling towards oversold territory on January 14. The USDA said soybean supplies were close to unchanged from the December report but increased the price forecast by 15 cents per bushel. Since the bean futures market has been in the crosshairs of the trade war, the January 15 signing of the deal between the US and China is a bullish factor for the oilseed futures.
The March synthetic soybean crush spread did not move much over the past two weeks and was at the 97.00 cents per bushel level on January 14, down 0.25 cents since December 31. 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.
March corn was trading at $3.8900 per bushel on January 14, which was only 0.32% higher on the week. The USDA report said that US and global corn stockpiles declined since the December report.
Open interest in the corn futures market rose by 4.85% since December 30. Technical metrics were above neutral territory in the corn futures market as of Tuesday. The price of February ethanol futures fell by 3.52% since the previous report on the back of the price action in crude oil and gasoline futures. February ethanol futures were at $1.3430 per gallon on January 14. The spread between January gasoline and ethanol futures widened to 31.14 cents per gallon on December 31, up 1.29 cents since last week.
March CBOT wheat futures were 1.75% higher since last week. The March futures were trading $5.6850 level on January 14. Open interest rose by 14.35% over the past week in CBOT wheat futures. Technical metrics were rising in the lower region of overbought territory on Tuesday. According to the January WASDE, US and global wheat inventories fell since the December report.
As of Wednesday, the KCBT-CBOT spread in March was trading at a 71.50 cents per bushel discount with KCBT lower than CBOT wheat futures in the March contracts. The spread narrowed by 1.25 cents since December 31. 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.” While the spread continues to be at a level that is bearish for the wheat market, it is drifting away from the highest level in years. 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. The trade deal resulting in a de-escalation of the trade war is supportive of the prices of grains. The uncertainty of the 2020 crop year could add volatility to the market as the spring planting season gets underway.
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 higher over the past week and was at the 2.3973:1 level on January 14, down 0.0389 since two weeks ago. The ratio is just a touch below the long-term norm. The beginning of the year is an excellent time to put the corn-bean ratio on your radar as any significant moves in the spread could provide clues about the path of least resistance for the prices of the grain and the oilseed futures markets. On January 14, the spread was at a level that provides few clues about farmers planting behavior in the coming months. If it continues to decline, farmers would likely increase corn at the expense of soybeans when it comes to the planting season in the early spring.
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.
Copper, Metals, and Minerals
Base metals and industrial commodities drifted over the past two weeks, but the price of copper remained above the $2.80 per pound level and made new highs. The Baltic Dry Index continues to decline on the back of winter shipping conditions. COMEX copper, iron ore, zinc, nickel, and tin prices moved higher, while LME copper, aluminum, and lead prices slipped.
Copper moved 2.74% higher on COMEX, while the red metal posted a 0.21% loss on the LME since the last report. The one-day delay in the LME settlement prices accounts for the differential. Open interest in the COMEX futures market moved 3.35% higher since December 30. March copper was trading at $2.8735 per pound level on Tuesday. Copper is one of the leading barometers when it comes to the trade war between the US and China. The “phase one” agreement pushed the price of the red metal higher and above the $2.80 level. Copper is a leading indicator in the base metals sector. The next technical level on the upside is at just under $3 per pound.
Since the previous report, copper inventories continued to fall on the LME and COMEX. Political and labor issues in Chile could continue to impact production, and the de-escalation of the trade war has been a supportive factor for the price of the red metal. Low global interest rates have also been bullish for the price of copper.
The LME lead price moved lower by 1.44% since December 30. 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 rose by 0.28% over the past week. The export ban in Indonesia began on January 1, 2020. Tin rose 2.07% since the previous report. The illiquid metal recently moved back above $17,000 per ton level. Aluminum was 1.29% lower since the last report. The price of zinc was up 2.00% since December 30. Critical support was around $2355, with resistance at $2550 in the zinc market. Zinc moved below the bottom end of its recent trading range and tested the $2200 per ton level, but the price bounced higher and had been flirting with the $2355 level over the past weeks. It was just below that level on January 13. 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 could also impact prices. The current level of global interest rates is supportive of the prices of nonferrous metals.
March lumber futures were at the $420.40 level, down 1.36% since the previous report. Interest rates in the US will influence the price of lumber. The US Fed paused at the December 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 February delivery fell 1.80% to $24.60 per pound. The volatile Baltic Dry Index plunged by 29.82% since December 30 to the 765 level as shipping demand tends to decline during the winter months in the northern hemisphere. March iron ore futures rose 5.12% compared to the price on December 30. Open interest in the thinly traded lumber futures market increased by 0.74% over the period.
LME copper inventories dropped by 11.64% to 130,000 metric tons since last week. COMEX copper stocks fell by 7.15% from December 30 to 35,237 tons. Lead stockpiles on the LME were down 0.15%, while aluminum stocks were 5.49% lower. Aluminum stocks declined to the 1,396,550-ton level. Zinc stocks moved 0.88% lower from the last report. Tin inventories moved 3.81% lower since December 30 to 6,935 tons. Nickel inventories were 18.28% higher compared to the level on December 30. The export ban from Indonesia took effect on January 1, so consumers likely increased inventories over the past two weeks.
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 are bound to 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 further progress would serve to strengthen prices in the sector.
We own two units of Energy Fuels Inc. (UUUU), a US producer of uranium and vanadium, at an average of $2.55 per share. We are working a stop at $1.19 and have an initial profit target at $6 per share. There is a double bottom on the long-term chart at the $1.29 level. I am giving this position plenty of room and plenty of time. If the shares continue to fall, I will add another one and possibly two units to this trade to average down the price on the long position. UUUU was trading at $1.77 per share on Wednesday, down 14 cents over the past two weeks. Lower uranium prices weighed on the prices of all producers.
We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 99 cents on January 14, down 33 cents since last week after US Steel issued a warning on earnings in December. I believe this option is an inexpensive way to hold a long-term position in X shares at a low level for the next twelve months. The details for the call option are here:
https://finance.yahoo.com/quote/X210115C00015000?p=X210115C00015000
US Steel shares were at $10.91 per share and moved 4.38% lower since December 31 after the company’s warning.
We own two units of FCX shares at an average of $10.56. The stock was trading at $13.21 on Tuesday, 9 cents higher since the previous report. I will 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. China is the demand side of the fundamental equation for the raw materials in the industrial sector. Any disappointment that leads to an escalation of protectionist policies would weigh on the Chinese economy leading to selling in base metals and other industrial commodities. However, the “phase one” deal and further progress should eventually send prices higher. I remain cautiously bullish on the prospects for base metals and industrial commodities prices in 2020.
Animal Proteins
During the heart of the winter season, cattle prices moved higher over the past two weeks, while lean hog futures fell. The January WASDE report adjusted cattle forecasts to account for price strength but did not take into account the potential for Chinese demand for US pork exports. The severe shortage of pork in China continues after the 2019 outbreak of African Swine Fever that killed millions of pigs in China and neighboring countries in Asia.
February live cattle futures were at $1.26850 per pound level up 0.74% from December 31. Technical resistance is at $1.2790 and $1.3000 per pound. Technical support stands at around $1.23125 per pound level, as the market continues to trade at the top end of its trading range. Price momentum and relative strength indicators were rising above neutral readings on Tuesday. Open interest in the live cattle futures market moved 3.29% higher since the last report. The total number of open long and short positions in the live cattle futures market moved higher since mid-October.
March feeder cattle futures underperformed live cattle as they rose by 0.28% since last week. March feeder cattle futures were trading at the $1.45725 per pound level with support at $1.41325 and resistance at $1.47750 per pound. Open interest in feeder cattle futures rose by 8.79% 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 underperformed the cattle futures since the previous report. The active month February lean hogs were at 67.675 cents on January 14, which was 5.25% lower over the past two weeks. Price momentum and the relative strength index were falling towards oversold readings on Tuesday. Support is at 65.400 cents with technical resistance on the February futures contract at 72.60 cents per pound level, the January 2 high.
The forward curve in live cattle is in contango from February 2020 until April 2020. From April 2020 until August 2020, a backwardation or tight market returns to the forward curve for live cattle, but it shifts back to contango until from this August 2020 through April 2021, when backwardation returns until June 2021. The Feeder cattle forward curve is in backwardation from January 2020 through March 2020 and then contango from March 2020 through November 2020.
In the lean hog futures arena, there is contango from February 2019 until July 2020. From July 2020 through December 2020, the curve is in backwardation, but contango returns from December 2020 through June 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 hog market continues to wait for more progress on trade and the potential for Chinese buying of US pork. The latest WASDE did not account for potential US pork exports to China.
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 February 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 1.87440:1 compared to 1.76304:1 in the previous report. The spread increased significantly by 11.136 cents as live cattle became more expensive compared to lean hogs. The spread moved away from the historical norm.
Trade had been the most significant factor facing the animal protein sector. We are now in the winter months, which is the height of the offseason for demand in the US. 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. A rise in the Brazilian real and Argentine peso could provide support for meat prices, while lower values for the South American currencies would likely weigh on futures prices as they cause production costs to decline. As we move towards the 2020 peak grilling season in the US that begins in late May, the focus will shift towards increased consumption.
The agreement between the US and China that could open the door for pork exports could be extremely bullish for the lean hog futures market in the US. The all-time high in the lean hog futures market came in 2014 when the PED virus killed over seven million pigs in the US, lifting the price of nearby futures to a peak at $1.33875 per pound. I believe that any selling that takes the lean hog futures market lower creates a buying opportunity from the current price level.
Soft Commodities
Three of the five members of the soft commodities sector posted gains over the past week. Coffee prices moved substantially lower since the last report, and FCOJ fell. Sugar, cocoa, and cotton futures prices rose since December 31. The most significant percentage move on the upside came in the sugar futures market, which rose above its 2019 high.
March sugar futures rose 6.71% since December 31, as the price of the sweet commodity was around the 14.32 cents per pound level. Technical resistance is at 14.53 cents with support at 13.10 cents. Nearby sugar futures traded to a low at 11.74 cents on September 12, which is a critical level of support. The value of the January Brazilian real against the US dollar fell over the last two weeks and was at the $0.24175 level against the US dollar on the February contract, down 3.49% over the period. The Brazilian currency remains near 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 remained above the critical support level since 2015, during the extended period of weakness. 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 rising towards overbought territory as of January 14. 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 is the early 2018 high at 15.49 cents per pound. Open interest in sugar futures was 5.90% higher since last week.
March coffee futures corrected to the downside over the past two weeks as they fell 11.41% since December 31, March futures were trading at the $1.1490 per pound level. The first level to watch on the downside is $1.10150. Below there, support is at around $1.025 on the continuous futures contract. Resistance is at $1.4245 the December 17 high on the nearby contract. The resistance on the continuous contract is at $1.3840 per pound. I continue to favor coffee on the long side, but coffee can be a highly volatile commodity in the futures market. 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 $37.31 on Wednesday. Open interest in the coffee futures market rose by 3.71% since last week. I am holding a small long core 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. Supply concerns over Brazilian production in the off-year for crops have been supportive of the price of the soft commodity since mid-October. 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. Coffee has made higher lows since reaching 86.35 cents in mid-April. The ultimate target is the November 2016, high at $1.76 per pound. Coffee had moved into overbought territory on the short-term chart and crossed lower. Price momentum and relative strength displayed deeply oversold readings on Tuesday. On the monthly and quarterly charts, the price action remains bullish as price momentum crossed to the upside. As I wrote in the previous report, “The risk rises with the price in the volatile coffee futures market. We should expect wide intraday trading ranges in the coffee futures market.”
The price of cocoa futures rebounded over the past weeks. On Tuesday, March cocoa futures were at the $2655 per ton level, 4.53% higher than on December 31. Open interest rose by 1.67%. Relative strength and price momentum crossed higher in oversold territory on the daily chart and were rising towards overbought readings. The price of cocoa futures rose to a new peak and the highest price since May 2018 at $2783 per ton on the December contract in mid-November. We are long the NIB ETN product at $25.76. NIB closed at $30.80 on Tuesday, January 14. 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 at $2914 per ton. On the downside, short-term technical support stands at $2388 per ton.
March cotton futures moved 3.37% higher over the past two weeks. On August 26, the price of nearby futures fell to a low at 56.59 cents, less than one cent above the critical 2016 low at 55.66 cents per pound. March cotton was trading at 71.38 cents on January 14, a touch under the recent high. On the downside, support is at 65, 61.73, 56.19, and 55.66 cents per pound. Open interest in the cotton futures market rose by 11.16% since December 30, which is a bullish sign for the price. Price momentum and relative strength metrics were in overbought territory on Tuesday. The metric crossed higher from an oversold condition on the monthly chart. The “phase one” trade agreement between the US and China was a bullish factor for the price of the fiber futures.
March FCOJ moved lower since the final day of trading in 2019. On Tuesday, the price of March futures was trading around 96.55 cents per pound. FCOJ nearby futures moved 3.21% lower over the past two weeks. Support is at the 94.75 cents level. Technical resistance is at $1.00 per pound. Open interest rose by 9.11% since December 30. The Brazilian currency could support the price of FCOJ futures if it posts gains against the US dollar. $1 per pound could become a critical pivot point for the OJ futures market.
Soft commodities can be highly volatile as the weather and other growing conditions determine annual supplies and prices. Coffee is undergoing a correction after trading to over the $1.40 per pound level on the March futures contract. Sugar has become sweeter, with the price moving over 14 cents. I continue to favor both but would take profits during periods of price strength on a scale-up basis, and re-purchasing on significant corrections to the downside. I would only trade sugar and coffee from the long side of the market. Cocoa seems to have found a bottom, and I continue to favor higher prices for the primary ingredient in chocolate confectionery products. Cotton looks poised to challenge 80 cents per pound as we enter the time of the year when the fiber futures tend to move to highs. OJ is simply too inexpensive at below $1 per pound.
A final note
January began with a bang as tensions between the US and Iran reached a boiling point and then calmed over the first two weeks of 2020. We should expect lots of volatility in markets across all asset classes throughout this year. The Middle East, trade issues, the US election, and many other factors should make price variance this year higher than last.
I will return with my next report on Wednesday, January 22, to return to the usual Wednesday schedule.
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.
