- The tech-heavy NASDAQ continues to rise to record higher
- The dollar drifts lower, all precious metals post gains with silver back above $20 per ounce
- Energy prices move lower across the board
- Mixed results from agricultural commodities
- Copper remains strong, lumber rallies, but other industrial commodities mostly stall
On Thursday, July 16, stocks slipped after initial jobless claims reported that 1.3 million Americans filed for first-time jobless benefits last week. Approximately 51 million people in the US filed for benefits since March. Meanwhile, retail sales rose a better than expected 7.5% in June. The four leading stock indices fell between 0.34% and 0.73% with the NASDAQ falling the most, and the S&P 500 the least. September US 30-Year Treasury Bonds fell 0-05 to 180-02, while the September dollar index futures contract settled at 96.319, up 0.280 on the session. New crop corn and soybean prices recovered, but CBOT wheat fell from the $5.50 to the $5.35 level. Crude oil was 45 cents per barrel lower, while gasoline and heating oil moved to the downside. Both the gasoline and distillate crack spreads fell as the products underperformed the crude oil price action. The EIA reported a 45 bcf build in inventories, which was the lowest in weeks, but natural gas in August fell to $1.723 per MMBtu and put in a bearish reversal trading pattern on the daily chart. Ethanol recovered to $1.205. Gold, silver, and platinum fell, but palladium moved higher. Copper was at just over the $2.90 level up 1.65 cents on Thursday. Live and feeder cattle futures broke out to the upside with the live cattle at the $1.03425 level and feeders rallying to over $1.40 per pound for the first time since early March. Lean hogs were 3.50 cents higher to 53.675. Sugar and FCOJ futures fell, but coffee, cocoa, and cotton prices moved higher. September lumber was $19 higher to $524.20 per 1,000 board feet. Bitcoin barely moved $90 lower to $9145 per token.
On Friday, housing starts data was surprisingly strong for June. The DJIA fell 0.23%, but the S&P 500 and NASDAQ were both 0.28% higher on the final session of the week. The Russell 2000 gained 0.39%. September US 30-Year Treasury Bonds fell 0-08 to 179-26, while the September dollar index futures contract settled at 95.889 down 0.430 on Friday. New crop corn and soybean prices moved higher, but CBOT wheat posted a marginal loss. Crude oil was 16 cents per barrel lower, while gasoline and heating oil moved to the downside. Both the gasoline and distillate crack spreads fell as the products underperformed the crude oil price action. Natural gas in August edged lower to $1.718 per MMBtu. Ethanol fell to $1.170 per gallon. Gold, silver, platinum, and palladium prices moved higher. Copper was at just over the $2.90 level up only 0.30 cents on Friday. Live and feeder cattle edged higher after Thursday’s gains. Lean hogs were slightly lower to 52.80 cents per pound. Sugar, cocoa, and cotton futures edged lower, but coffee and lumber prices moved higher. Bitcoin edged $40 higher to $9185 per token.
On Monday, the NASDAQ rose to another in a series of new record highs. The Russell 2000 was 0.36% lower, while the DJIA posted a marginal 0.03% gain. The S&P 500 was up 0.84%, and the NASDAQ was 2.51% higher. US 30-Year Treasuries moved higher to over the 180 level, and the US dollar index continued to drift lower to settle at 95.772. Soybeans were higher to the $9 per bushel level. Corn and wheat prices moved to the downside. August crude oil is rolling to September, and it gained around 20 cents per barrel. Oil product prices moved higher; pushing crack spreads slightly higher. Natural gas fell to settle at $1.64 per MMBtu, and ethanol was lower to the $1.107 per gallon level. Precious metals moved higher across the board with the most significant move in silver when eclipsed the $20 per ounce level for the first time since 2016. September copper settled higher at $2.9155 per pound. Cattle and hog prices posted losses on the first session of the week. Sugar was slightly lower, coffee fell, but cocoa moved higher and back over the $2200 level. Cotton rallied, but FCOJ fell. Lumber rose to a new high but settled lower on the day at $532.20 per 1,000 board feet. Bitcoin was steady at the $9200 level.
I am publishing the weekly report on Monday, July 20 this week. On Tuesday, I will be having TURP surgery to correct my BPH condition. Since it will require a recovery period, I decided to post the report two days early. I plan to return with the next weekly issue on Wednesday, July 29. Thank you for understanding.
Stocks and Bonds
The stock market was mixed since July 15. The report of 1.3 million new jobless claims and the climbing number of coronavirus cases in the US likely weighed on stocks. The increase in retail sales and new home building likely cushioned the declines in the leading indices.
The S&P 500 rose 0.78% since July 15. The NASDAQ was 2.05% higher to a new record high, and the DJIA posted a 0.70% loss. While the Fed’s monetary policy approach will continue to support the stock market, the US election, which is now less than four months away, could add volatility to share prices over the coming weeks.
Chinese stocks edged lower since July 15 and underperformed US equities after its outperformance in the previous report.
As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $43.11 level on Monday, as it fell by 0.83% since the previous report. The Chinese large-cap ETF product has short-term technical support at $41.65 with resistance at the July 9 high at $45.93 per share. The Chinese government could be supporting the level of Chinese stocks. Tensions between the US and China remain high over the spread of coronavirus, Chinese actions in the South China Sea and Hong Kong, and trade issues.
September US 30-Year bonds continued to edge higher since July 15. Interest rates in the US are not moving appreciably higher any time soon. The most recent Beige Book from the Fed expressed concerns over the level of unemployment. On Monday, July 20, the September long bond futures contract was at the 180-05 level, 0.30% higher than on July 15. Short-term support for the long bond is at 177-06, with resistance at 181-14. The bond market action reflects Fed policy, which has made dips in bonds a buying opportunity. The pattern of trading is likely to continue, given the Fed’s approach to monetary policy.
Open interest in the E-Mini S&P 500 futures contracts rose by 0.83% since July 14. Open interest in the long bond futures rose 0.99% over the period. The VIX traded to a high of 85.47 on March 18, the highest level since 2008. I have been writing, “I continue to believe that risk-reward favors buying the VIX and VIX-related products with tight stops and reestablishing positions after the market triggers stops is the optimal approach in the current environment. Nothing has altered my approach to the VIX over the past week.” The volatility index was at 24.46 on July 20, down 11.70% since July 15. I continue to believe that related short-term products like VIXX, and VIXY are in the buy zone. At below 26, risk-reward favors the upside.
We are in the heart of the summer during an atypical year in the Us and worldwide. The virus continues to claim victims, and markets could react violently if it leads to business closures. Congress and the administration have yet to agree on another fiscal stimulus package, which could weigh on the economy. The US election will determine the path of policy initiatives, and we could see an increase in volatility in the stock market. The VIX is at a level that offers value, but I would use tight stops on any long positions in the volatility index or related products.
The dollar and digital currencies
The dollar index continued to drift lower since July 15. The September dollar index future contract was at 95.772 on July 20, down 0.28% from the level on July 15. The dollar has experienced selling pressure since March. Open interest in the dollar index futures contract moved 8.15% higher since July 14 after a more than 21.5% rise in the previous report. A move below the 94.61 level would threaten the long-term uptrend in the dollar index. Daily historical volatility in the dollar index was 4.36% on Monday, slightly higher than on July 15. The metric that measures price variance on the September contract rose to a high of 22.70% in late March. Short-term support is at 95.57 with resistance at 97.81 on the September futures contract.
The September euro currency was 0.30% higher against the dollar. The interest rate differential between the dollar and the euro has narrowed, which provided some support for the euro. Open interest in the euro futures rose by 2.69%. The September pound moved 0.66% lower against the dollar since the previous report, and open interest fell by 3.53%. The dollar index continued to drift to the downside, but governments around the globe tend to intervene in the foreign exchange markets to achieve stability. The trend in the dollar since March threatens the bullish trend and seems headed for a test of critical support at 94.61. The most recent low was at 95.675 on July 20.
Bitcoin and the digital currency asset class posted marginal declines since last Wednesday. Bitcoin was trading at the $9,169.15 level as of July 20. Bitcoin failed after several attempts to conquer the $10,000 level. The leading digital currency fell 0.10% since July 15. Ethereum posted a 0.41% loss over the period. Ethereum was at $236.59 per token on Monday. The market cap of the entire asset class moved 0.20% lower. Bitcoin marginally outperformed the asset class since the previous report. The number of tokens increased by 24 to 5759 tokens since July 15. 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 was around $271.147 billion. Open interest in the CME Bitcoin futures fell by 4.73% since last week. Open interest has been increasing when Bitcoin moved higher and lower during downside moves, which is a bullish sign for the cryptocurrency. The pattern continued over the past week. The target on the upside stands at $10,595 per token. The trend is your friend in Bitcoin, and it remains higher. Support is at $8,950.
The Canadian dollar moved 0.20% lower since July 15. Open interest in C$ futures fell by 8.30% after a 29.54% increase in the prior report. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that produces significant quantities of energy and agricultural products. Keep an eye on the oil futures market for clues about the Canadian dollar as it often acts as a proxy for the price of the energy commodity.
The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ moved 0.17% higher since last week. The geographical proximity to China makes the Australian dollar sensitive to events in China. The A$ is a proxy for both China and raw material prices. Economic strength or weakness in China will determine the path of the Australian economy. Any retribution over the spread of coronavirus could cause retaliatory measures by both sides, which would weigh on Australia’s economy. In the long-term, the stimulus is bullish for commodities prices and both the Australian and Canadian currencies. The brewing tensions with China are a reason to be cautious with the Australian currency. Over the coming months and years, we could see significant gains in the C$ and A$ as commodity prices rise because of inflationary pressures caused by the increase in the global money supply. I believe the price action in 2020 in all markets is similar to 2008. In the years that followed, commodity prices soared because of the stimulus, taking the Australian and Canadian currencies appreciably higher against the US dollar because of their sensitivity to raw material prices. Over the long-term, buying the A$ and C$ during periods of weakness could prove to be the optimal strategy. I am bullish on the two currencies that I view as proxies for commodities prices. Nothing changed since the previous report in these two commodity-sensitive currencies. I believe that any price weakness is a buying opportunity for the A$ and C$ over the coming weeks and months.
Over the past week, the volatile Brazilian real moved 0.86% higher against the US dollar on the September futures contract. The real moved to a high of $0.2053 level against the US dollar on June 10 on the September contract before turning lower. The September Brazilian currency was trading at the $0.187250 level after falling to a new and lower low at $0.16780 on May 13. The real is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets are sensitive to changes in the direction of the Brazilian real. The falling real had been a factor that weighed on sugar and coffee prices as Brazil is the world’s leading producer and exporter of the soft commodities and output costs are in local currency terms over the past weeks along with crude oil. However, as we have seen in other markets, low prices may not stop shortages of supplies as the virus impacts parts of the supply chain when it comes to processing or transporting the commodities. The weather conditions in critical growing regions and the spread of the virus could also cause price volatility in the agricultural products. Brazil has seen a significant increase in the number of infections and fatalities because of coronavirus, which could harm its currency value. The South American nation is second behind the US in cases and deaths. I am bullish for the real because of Brazil’s commodity production. The nation is a supermarket to the world for many products. In the aftermath of the global pandemic, the price tag for liquidity and stimulus could cause inflationary conditions that would provide support for the A$, C$, and even the Brazilian real. A rise in commodity prices could help to bolster the value of the real. I am a buyer of the real on any weakness against the US dollar.
Precious metals moved higher since July 15, as palladium and rhodium were the leaders on the upside. Gold and silver prices posted gains as gold remained over $1800 and silver rallied to over $20 per ounce for the first time in four years.
Gold posted a marginal gain over the past week, while silver continued to rally to new highs. Platinum moved to the upside, but palladium and rhodium outperformed the price action in the platinum futures market on a percentage basis. Precious metals continue to reflect the unprecedented level of stimulus flooding the global financial system.
Gold was 0.20% higher over the past week. The yellow metal made a higher high at $1829.80 on July 8. Silver rose by 2.18% since July 15. August gold futures were trading at $1817.40 per ounce level on Monday. September silver settled at $20.192 per ounce. I maintain a bullish opinion on the gold and silver markets as the odds favor that the price action that followed the 2008 global financial crisis is a blueprint for the coming months and years. Stimulus is bullish fuel for gold and silver as increases in the money supply weigh on the value of fiat currencies. Price corrections continue to be buying opportunities in the silver and gold markets. However, we could see wide price variance given the price levels. I continue to hold a long core position in gold and silver. I am also running short-term long positions looking to buy on dips with the hope of taking profits on rallies. On the short-term risk positions, I am using both the metals and the diversified gold and silver mining ETF products. Nothing has changed since the previous report. Gold continues to make small strides on the upside as the price is now above the $1800 per ounce level and makes new highs. Silver is approaching a challenge of the $21.095 level, the critical technical resistance level from 2016.
While I am bullish on the gold and silver markets, they rarely move in a straight line. Using corrections as buying opportunities is likely to be the optimal approach to trading and investing.
Technical resistance for August gold stands at the recent high at $1829.80 per ounce, the high from July 8. Short-term support is at $1791.10, the low from July 14. In September silver, support is at $18.83, with resistance at $21.095 on the active month contract. If the price action from 2008 through 2011 is a guide, gold will head for the $2000 to $3000 per ounce level over the coming months, and silver should follow the yellow metal to the upside.
In a bullish sign for the yellow metal, gold mining shares moved higher since July 15, with the GDX up 4.42% and GDXJ moving 5.03% to the upside. The mining shares tend to outperform the yellow metal on the upside and underperform on the downside. The market action led to an outperformance by the mining shares on a percentage basis. The SIL and SILJ silver mining ETF products that hold portfolios of producing companies moved 6.73% and 8.74% higher since July 15. The price action outperformed the silver futures market.
Gold continued to underperform silver since the previous report. The silver-gold ratio reached a new modern-day high as risk-off selling hit the silver market, taking the price below the $12 per ounce level. The ratio had been moving steadily lower over the past weeks. I will continue to add to long physical positions in gold, silver, and platinum, during periods of price weakness. I will continue to trade leveraged derivatives and mining stocks on a short-term basis with tight stops. While gold mining stocks and derivatives follow the price of gold, they are not the metal and could experience significant periods of price deviation if risk-off conditions return to the stock market. I hold long core positions but will employ tight stops on any new positions that increase exposure to the two leading precious metals.
October platinum rose 2.37% since July 15. Platinum continues to lag the rest of the precious metals sector in 2020. October futures were at the $863.20 per ounce level on July 20. The level of technical resistance is at $892.90 on the October futures contract, the July 9 high. Support in platinum is at $798.00 per ounce on the active month contract. Rhodium is a byproduct of platinum, and the price of the metal had been in a bull market since early 2016. The price of rhodium was at a midpoint price of $7,300 per ounce on July 20, up $300 or 4.29% over the past week. September Palladium rose by 4.95% since last week. Support is at $1830.20 on the September contract with resistance at $2159.00. September palladium settled at the $2109.40 per ounce level on Monday.
Open interest in the gold futures market moved 1.22% higher over the past week. The significant decline in open interest earlier in the year was because of problems with dealers when it comes to the EFP, or arbitrage positions between gold for delivery on COMEX and London. The metric moved 0.99% lower in platinum. The total number of open long and short positions increased by 5.80% in the palladium futures market. Silver open interest rose by 0.89% over the period. Rising open interest in most of the precious metals futures markets is a bullish sign for the sector.
The silver-gold ratio moved lower over the past week as silver took out the $20 level.
The daily chart of the price of August gold divided by September silver futures shows that the ratio was at 89.51 on Wednesday, down 2.03 from the level on July 15. The ratio traded to over the 124:5 level on the high on March 18 on the continuous contract. The long-term average for the price relationship is around the 55:1 level. The ratio rose to the highest level since futures began trading in 1974 as the price of silver tanked recently. The move lower since mid-March has been a supportive factor for the two metals. In 2008, the ratio peaked during the risk-off selling and then fell steadily until 2011.
Central banks continued to purchase gold over the first half of 2020, and net buying by central banks is a supportive factor for the price of the yellow metal. All signs are the trend will continue in Q3.
Platinum was 2.37% higher, and palladium moved 4.95% to the upside over the past week. September Palladium was trading at a premium over October platinum with the differential at the $1246.20 per ounce level on Wednesday, which widened since the last report. October platinum was trading at a $954.20 discount to August gold at the settlement prices on July, which narrowed since the previous report.
The price of rhodium, which does not trade on the futures market, rose $300 on the week. Rhodium is a byproduct of platinum production. The low price of platinum caused a decline in output in South African mines, creating a shortage in the rhodium market that lifted the price to the $13,000 level before risk-off conditions caused the price to evaporate to $2,000. Rhodium has been highly volatile over the past weeks after reaching its peak. The price moved higher from a low at $575 per ounce in 2016. The bid-offer spread in Rhodium remained at $2000 per ounce, $1,000 narrower than in previous weeks. The spread remains at a level that makes any investment in the metal irrational. Rhodium is an untradeable commodity, but it can provide clues about the price path of the other PGMs.
I continue to favor buying physical platinum as well as gold and silver during corrective periods. In gold and silver, the GLD, IAU, BAR, and SLV ETF products hold physical bullion and are acceptable proxies for the coins and bars. In platinum, PPLT and PLTM are the proxies. Since a NYMEX platinum futures contract contains 50 ounces of metal, purchasing a nearby futures contract on NYMEX and standing for delivery is a way to avoid significant premiums for the metal. At $863.20 per ounce, a contract on NYMEX has a value of $43,160, after falling to the lowest level just under two decades in March.
The GLTR ETF product holds a portfolio of physical gold, silver, platinum, and palladium, for those looking for diversified precious metals exposure. I continue to believe that gold is heading a lot higher, but the route will not be in a straight line. The stimulus in the US and Europe continues to be highly supportive of gold and silver prices. Platinum is inexpensive from a historical perspective compared to gold and palladium. Palladium and rhodium continue to trade in bullish patterns, but both are sensitive to global economic conditions. We should continue to see volatility in all of the precious metals with a bias to the upside. I continue to favor gold, silver, and platinum on price weakness. I hold a long core position and a trading position where I buy dips and take profits on rallies. Since mining shares tend to be more volatile, I have used the mining ETFs and ETNs in gold and silver shares for short-term trading purposes. The higher high in gold over the past week is another sign of technical and fundamental strength for the yellow metal as the Fed continues to add liquidity to markets. As I have written in the past, the ascent of gold marks the descent of fiat currencies that rely on the full faith and credit of the governments that print legal tender. Central banks and governments worldwide continue to hold and be net buyers of gold, which is the ultimate currency. While countries can print legal tender to their heart’s content, the gold stock can only increase by extracting more from the crust of the earth. If 2020 turns out to be anything like 2008, new all-time highs in gold are on the horizon, and the precious metal has the potential to surprise and even shock market participants on the upside in the coming months and years. Gold moved to than $100 below the record high since the previous report, and it reached new highs in a host of other currencies. The target on silver is now the July 2016 high at $21.095 per ounce. The price action in silver has been explosive since the metal created a blow-off low below $12 per ounce in March. Nothing much changed in the precious metals arena since July 15 as the trends remain higher.
The energy sector moved lower over the past week. Oil products underperformed crude oil, leading to losses in processing or crack spreads. Natural gas fell as did ethanol. Coal for delivery in Rotterdam posted a marginal decline. While OPEC, Russia, and other world producers tapered production cuts to 7.7 mbpd beginning in August, crude oil stocks fell last week, providing some support for the price of the energy commodity.
August NYMEX crude oil futures declined 0.95% since July 15. The August contract settled at $40.81 per barrel on July 15 after trading to a low of $20.28 on April 22 and a high of $41.63 on June 23. The bottom of the gap on the daily chart from March remained elusive at the $42.17 level. August futures are rolling to September on NYMEX. Crude oil inventories fell for the week ending on July 10, according to both the API and EIA, product stockpiles were mostly lower during that week. As the price remained above the $40 per barrel level, the tapering of output quotas did not cause any significant selling, which is a sign of strength for the oil market,
Chinese demand for crude oil has been robust over the past weeks. With parts of the economy reopened in Europe and the US, the demand side of the equation has improved. However, the rising number of cases throughout the US poses a threat to the recovery in the energy commodity. The current target on the upside in August NYMEX futures is the bottom end of the gap at $42.17 per barrel from March 6, which stands as a resistance level. The crude oil market has been consolidating around the $40 level on nearby NYMEX futures contracts.
September Brent futures marginally underperformed August NYMEX WTI futures, as they fell 1.23% since July 15. August gasoline was 2.85% lower, and the processing spread in August moved 7.60% lower since last week. The August gasoline crack spread was at $10.95 per barrel. Wild swings in energy prices caused wide price ranges in the crack spreads the reflect refining margins. Gasoline crack spreads tend to exhibit strength during the summer driving season in the US, but 2020 is no ordinary year.
August heating oil futures moved 0.75% lower from the last report. The heating oil crack spread was 0.98% below the July 15 level. Heating oil is a proxy for other distillates such as jet and diesel fuels. The August distillate crack spread traded to a low of $8.47 in late May and closed on Wednesday at $11.12 per barrel. The price action in the processing spreads has been highly volatile, given the timing differences between moves in crude oil and products over the past months. The crack spreads are a real-time indicator of demand for crude oil as well as barometers for the earnings of refining companies that process raw crude oil into oil products. The crack spreads could be a significant indicator of demand over the coming days and weeks as the wheels of the US economy have begun moving. However, the energy market remains highly sensitive to new outbreaks and hotspots in the US and worldwide. Crack spreads are trading at significantly lower levels than in 2018 and 2019 at this time of the year.
Technical resistance in the August NYMEX crude oil futures contract is at $41.63 and $42.17 per barrel level with short-term support at the $37.08 level. The measure of daily historical volatility was at 28.80% on July 20, slightly lower than the 29.90% level on June 30. The price variance metric was at almost 135% in early May on August futures. Demand remains the overwhelming critical factor when it comes to the price direction of the energy commodity. As I wrote over the past weeks, “falling production should eventually balance the market and could create a deficit at some point in the future. The course of the pandemic is crucial for the oil market over the coming weeks and months. If we have seen the peak, we could see prices rise. However, further outbreaks that prompt a return to closing parts of the economy again would be a highly bearish factor for energy demand.” The August NYMEX crude oil futures contract has made higher lows and higher highs. The price needs to remain above the $37.08 and $34.66 levels to keep that pattern intact. However, the market has stalled at the $40 level, which has become a pivot point. The lack of a decline after the tapering of production cuts could be a bullish sign for the oil market.
The Middle East remains a potential flashpoint for the crude oil market. Relations between the US and Iran and Saudi Arabia and Iran have not improved over the past months. While the leadership in Teheran has had their hands full with coronavirus, we could see them lash out at US interests in the region over the coming weeks or months. Any hostilities that cause supply concerns could send the price of crude oil for nearby delivery appreciably higher in the blink of an eye. At just over $43 per barrel for the Brent benchmark, any actions that impact production, refining, or logistical routes could cause a far greater percentage move in the price of oil than we witnessed at the beginning of 2020. The Middle East could provide surprises to the oil market, but global demand remains the primary factor for the price over the coming weeks. The oil market has been quiet over the past week.
Crude oil open interest decreased by 1.74% over the period. NYMEX crude oil fell by 0.95%, and the energy shares underperformed the energy commodity since June 30. The XLE dropped 3.48% since July 15. We are starting to see consolidation in the oil business.
The XLE continued to underperform the price of the energy commodity on the up and the downside.
I continue to be cautious when it comes to any investments in debt-laden oil companies. I would only consider those with the most robust balance sheets like XOM and CVX in the US. Exxon and Chevron could stand to pick up lots of production assets at bargain-basement prices over the coming months as the number of bankruptcies rises in the oil and gas sectors. I would only purchase these companies during corrective periods. Nothing has changed since the prior report when it comes to opportunities for oil-related equities.
The spread between Brent and WTI crude oil futures in September edged lower to the $2.39 per barrel level for Brent, which was down 6.0 cents from the level on July 15. The September spread moved to a high of $5.45 on March 18. The continuous contract peak was at $11.52 on April 20 as all hell broke loose in the crude oil futures market. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. However, this time, it was the carnage in the price of WTI futures that drove the spread to higher levels. Brent crude can travel by ocean vessel to consumers around the globe, while WTI is a landlocked crude oil. The lack of storage capacity was responsible for the price action in the spread and outright prices in late April. The decline in the Brent-WTI could reflect the decline in US output and the anticipation of rising demand for gasoline. August NYMEX futures are rolling to September, and Brent will roll to October at the end of this month.
A decline in US production over the coming months could cause significant volatility in the Brent-WTI spread. Before 2010, WTI often traded at a $2 to $4 premium to Brent. The WTI grade has a lower sulfur content making it the preferable crude oil for processing into gasoline, the world’s most ubiquitous fuel. If US output continues to decline significantly and demand returns to the market, we could see it impact the Brent-WTI differential and cause periods where WTI returns to a premium to the Brent, which is better suited for refining into distillate products. The spread also reflects the political risk in the Middle East as the region uses the Brent price for its output. The USO and BNO ETF products replicate the short-term price action in WTI and Brent futures, respectively. While both do an adequate job tracking the futures in the short-term, neither are particularly effective for medium or long-term positions because of the volatility of the forward curves in both crude oil benchmarks. The path of least resistance of the oil market will be a function of the ups and downs of the global pandemic over the coming weeks and months.
Term structure in the oil market experienced a significant shift as the price of crude oil tanked in March and April. The flip from backwardation to contango in the spread reflected the flood of supplies in the crude oil market. Oil traders filled tanks and storage all over the world to take advantage of the wide contango with financing rates at historic lows. Cash and carry trades in the oil market became one of the only profitable areas of the market as demand evaporated back in February through April. The cash and carry trade put upward pressure on freight and storage rates. The forward curve had moved to the widest contango in years. The contango caused the price of May futures to plunge to an incredible low of negative $40.32 per barrel. As prices moved higher since late April, contango declined.
Since July 15, August 2021, minus August 2020, moved from a contango of $1.23 to $1.33, which was 10 cents higher over the period. The $0.63 level at the end of June was the recent low in the spread. In early January, the spread traded to a backwardation of $5.05, $6.38 per barrel tighter than the level earlier this year. The spread hit a high of $10.19 per barrel on April 28. August futures traded to a low of $20.28 on April 22. Rising contango was a sign of a glut in the oil market while falling contango signifies tighter supplies. The capacity for crude oil storage around the globe fell dramatically as well-capitalized traders purchased nearby crude oil, put it in storage, and sold it for futures delivery. The decline in the spread could have triggered some profit-taking, which opened up more capacity on the storage front. Falling production also caused the spread to tighten. We have likely seen a least a partial unwind of some spreads as they gravitated back towards flat. Production declines and declining inventories over the coming months would result in significant profits for well-capitalized crude oil traders who continue to store crude oil against deferred short positions. The decline in contango since late April is a supportive sign for the price of oil. The number of rigs operating in the US continued to decline. According to Baker Hughes, on July 17, the number of rigs in operation was at 180, down one from the previous week, and 599 below the level last year.
US daily production stood at 11.0 million barrels per day of output as of July 10, according to the Energy Information Administration. The level of production was unchanged from the previous three weeks, as the price remained around the $40 per barrel level on nearby NYMEX futures. As of July 10, the API reported a decline of 8.322 million barrels of crude oil stockpiles, and the EIA said they fell by 7.50 million barrels for the same week. The API reported a decline of 3.611 million barrels of gasoline stocks and said distillate inventories rose by 3.03 million barrels as of July 10. The EIA reported a decrease in gasoline stocks of 3.10 million barrels and a decline in distillates of 453,000 barrels. The inventory data from both the API and EIA was bullish for the price of crude oil. As of July 10, US production dropped by 2.1 million barrels per day since March.
OIH and VLO shares moved lower since July 14. OIH fell by 2.95%, while VLO moved 5.07% to the downside over the period. As I wrote over the past weeks, “the level of crack spreads is a reason for short-term caution for VLO.” OIH was trading at $121.13 per share level on Monday. I am holding a small position in OIH. We are long two units of VLO at an average of $70.04 per share. VLO was trading at $54.33 per share on Monday, which is disappointing. I continue to believe VLO is too low at the current price level.
The August natural gas contract settled at $1.741 on July 20, which was 7.71% lower than on July 15. The August futures contract recovered and traded to a high of $1.924 on July 7, and then pulled back to the $1.60 level. Support in August stands at the June low of $1.517 per MMBtu. The continuous contract made a new twenty-five-year low at $1.432 per MMBtu in late June. Below the June bottom, the next target on the downside stands at $1.335, the low from the second half of 1995. On July 16, the August contract put in a bearish reversal trading pattern on the daily chart, which has kept the pressure on the price of natural gas futures.
Over the past three weeks, the EIA reported smaller increases in natural gas stockpiles.
The EIA reported an injection of 45 bcf, bringing the total inventories to 3.178 tcf as of July 10. Stocks were 26.4% above last year’s level and 15.9% above the five-year average for this time of the year. The previous week, the injection was 56 bcf. Natural gas stocks fell to a low of 1.107 tcf in March 2019, this year the low was at 1.986, 879 bcf higher. This week the consensus expectations are that the EIA will report a 38 bcf injection into storage for the week ending on July 17. The EIA will release its next report on Thursday, July 23, 2020. Over the past sixteen weeks, the percentage above last year’s level has been declining when it comes to natural gas stockpiles. The steady decline from 79.5% above the one-year level as of March 20 to 26.4% last week has not provided much fundamental support to the natural gas market. The trend could reflect higher demand or lower production. Given the events since March, it is likely that output is causing a slower rate of injections into storage. Baker Hughes reported that a total of 71 natural gas rigs were operating in the US as of July 17, down four since last week, and 103 under last year’s level of 174. Meanwhile, the price action over the past few weeks continued to be a sign of fragile demand. I suggest tight stops on any risk positions but continue to prefer the long side over the coming week. The rebound from the late June low was overdue, but it ran out of upside steam before reaching $2 per MMBtu.
Open interest rose by only 0.19% in natural gas over the past week. Short-term technical resistance is at $1.924 per MMBtu level on the August futures contract with support now at the double bottom at $1.517 per MMBtu. Price momentum and relative strength on the daily chart falling towards oversold readings as of Wednesday.
August ethanol prices were moved 5.39% lower over the past week with the price at $1.107 per gallon wholesale. Open interest in the thinly traded ethanol futures market moved 2.27% higher over the past week. With only 90 contracts of long and short positions, the biofuel market is untradeable and looks like it could be delisted. The KOL ETF product fell 0.48% compared to its price on July 15. The price of October coal futures in Rotterdam declined 0.38% since last week’s report.
The API will report on crude oil and product inventories on Tuesday afternoon, July 21. On Wednesday morning, July 22, the EIA will release its stockpile and production data.
I expect volatility in the crude oil market as it will move higher or lower on optimism or pessimism on the back of the progress of the virus and progress on treatments and a vaccine. The latest reports of new outbreaks were bearish for the energy sector. Production is falling, but demand remains the most significant factor when it comes to the price direction. The price recovery threatened to close the gap just above the recent high. While price gaps are powerful magnets for price action, the oil futures market fell short on the August futures contract over the past three weeks.
In natural gas, the forward curve continues to be wide, with January 2021 futures trading at a significant premium over natural gas for August 2020 delivery. Nearby August futures settled at $1.6410 on July 20 with natural gas for delivery in January 2021 at $2.827 per MMBtu., a 72.3% premium or contango. The spread widened over the past week as the price of nearby natural gas futures declined.
The price is in contango where deferred prices are higher than levels for nearby delivery, reflecting the condition of oversupply and high level of inventories compared to past years as we are in the 2020 injection season. Natural gas stockpiles started the 2020 injection season at a level where a build to over four trillion billion cubic feet and a new record high is possible in November, which could keep the price from running away on the upside in the lead-up to the winter of 2020/2021. However, production is likely grinding lower because of the low level of prices that make output uneconomic. The trend in stocks since March 20 compared to last year is a sign of declining output. The debt-laden oil and gas businesses in the US could receive support from the government to keep energy output flowing, but demand destruction is a critical factor.
I have been taking profits quickly and stopping losses looking for a 1:2 risk-reward ratio on forays into the crude oil futures market. UCO and SCO products can be helpful for those who do not trade futures. In natural gas, UGAZ and DGAZ were delisted by Credit Suisse, so I will be using the BOIL and KOLD products, which offer double leverage on the long and short sides. The demise of UGAZ and DGAZ is likely to increase the volumes in the BOIL and KOLD products.
We are holding a long position in PBR, Petroleo Brasileiro SA. At $8.82 per share, PBR was 1.89% lower than on July 15. I have a small position that I will hold as a long-term investment. PBR had been weak on the back of the falling value of the Brazilian currency.
Demand continues to be the primary factor that will drive energy prices over the coming days and weeks. The recovery ran into a roadblock as the number of cases of the virus is climbing in the US. Natural gas faces a bearish reversal on the daily chart from July 16. However, I remain more comfortable with the long side with tight stops because of the low price level. I continue to believe that crude oil will fill the gap on the August chart up to $42.17 per barrel, but the correlation with the stock market should remain firmly in place. Tight stops are key when approaching energy commodities in the futures or ETF arena. When it comes to share prices, I believe that the leading companies will eventually rebound, but it could take some time. Energy powers the world, and demand is critical throughout the rest of 2020. In 2021, US energy policy could change, which would impact the dynamics of the fundamental equation for fossil fuels. The upcoming November election could significantly impact the oil and gas markets in the US as it is the world’s leading producer of both energy commodities. While energy prices moved mostly lower since July 15, there were no significant moves, and most energy commodities remained within the recent trading ranges.
Corn and soybean prices moved higher since July 15, but wheat declined after the recent rally. As we move towards August, the potential for significant rallies in the leading grain market will diminish.
New crop November soybean futures rose 1.95% since July 15 week and was at $9.00 per bushel on July 20. Beans were above the $9 per bushel level over the past weeks but fell below after the July WASDE report.
Tensions between the US and China weigh on soybean prices, but the weather is the leading factor for the price of the oilseed. We are now in the height of the summer growing season. Open interest in the soybean futures market moved 0.07% higher since June 14. Price momentum and relative strength indicators were above neutral territory on Monday. November beans reached a high of $9.1250 on July 6 but retraced back to the $9 level.
The December synthetic soybean crush spread was 3.25 cents higher from the level on July 15 at 89.00 cents. The processing spread in December for new crop beans has been trending lower since reaching a peak at $1.1550 in early April.
US relations with China could throw cold water on the chances of higher price levels as we are now in the heart of the summer season. I suggest tight stops on long risk positions and would be looking to take profits on rallies. I have tightened the risk parameters on long positions, as we are now close to the start of August. I took some profits on a scale-up basis leaving a small core long position in soybeans.
December corn was trading at $3.3575per bushel on July 20, which was 0.52% higher since July 15. Open interest in the corn futures market rose by only 0.57% since July 14.
Technical metrics were below neutral readings in the corn futures market on the daily chart as of Monday. Support on December corn futures is at the $3.3050 level, on the continuous contract, $3 per bushel is a line in the sand on the downside. Long positions should have stops below $3 per bushel. Technical resistance is at $3.6300 per bushel, the July 1 high.
Corn will continue to be highly sensitive to the price path of gasoline. Ethanol production in the US accounts for approximately 30% of the annual corn crop. The price of August ethanol futures declined since the previous report. August ethanol futures were at $1.107 per gallon on July 20, down from the recent high at $1.40 per gallon. The spread between August gasoline and August ethanol futures was at 12.15cents per gallon on July 15, with gasoline at a premium to ethanol. The spread moved 2.70 cents since July 15 as gasoline outperformed the biofuel in August futures. The prospects for corn prices are a function of both the weather and the price of gasoline and crude oil.
September CBOT wheat futures fell 5.22% since July 15. The September futures were trading $5.2200 level on July 20. Open interest decreased by 2.82% over the past week in CBOT wheat futures.
The support and resistance levels in September CBOT wheat futures now stand at $5.1575 and $5.5175 per bushel. Price momentum and relative strength were turning lower from overbought conditions on Monday on the daily chart.
As of July 20, the KCBT-CBOT spread in September was trading at an 87.00 cents per bushel discount with KCBT lower than CBOT wheat futures in the September contracts. The spread narrowed by 4.25 cents since July 15. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.” Any sudden problem in the wheat market that causes consumer hedging to increase could result in a dramatic change in the spread between the hard and soft winter wheat futures contracts. The spread moved towards the long-term average over the past week. However, wheat rallied on the back of weather and supply chain problems in growing regions around the globe, but it ran into selling at over the $5.50 per bushel level.
I continue to hold minimal long core positions in futures and the CORN, WEAT, and SOYB ETF products. The further we move into the growing season without any significant price appreciation, I will cut position sizes. As crops mature, they can withstand periods of adverse conditions. I continue to favor the long side but will be looking at the calendar as a time stop on positions is likely to be the optimal approach to controlling risk. Early August is a line in the sand for the 2020 crop year. I took profits on soybean, corn, and wheat positions during the recent rally. I will not be aggressive when it comes to buying back recent sales as the prices decline.
Copper, Metals, and Minerals
Most base metals and industrial commodity prices slipped lower after recent gains since July 15. Copper on COMEX and the LME was on either side of unchanged since the previous report. Aluminum, lead, and nickel prices moved lower, but zinc and tin posted marginal gains. Iron ore, the Baltic Dry Index, and uranium prices moved lower, but lumber continued to march to the upside.
COMEX copper was 1.06% higher, with copper on the LME down 0.68%. Open interest in the COMEX futures contracts moved only 0.41% higher. Short-term technical support for the copper market is at $2.7035 per pound. Resistance is at $2.9930, $2.9955, and $3.3220 per pound. Chinese demand and output from South American producers will continue to be the most significant factors when it comes to the path of the price of copper over the coming weeks and months. During the 2008 financial crisis, copper fell to a bottom of $1.2475 per pound. The decline came from over $4 per pound in early 2008. By 2011, the copper price rose to a new all-time high at just under $4.65 per pound. A massive level of stimulus is supportive of the price of copper and other commodities. Any events that cause the economy to shut down again or take a significant step back in social distancing easing could cause selling to return to all markets, and industrial commodities could fall sharply after the recent gains. Therefore, caution is advisable in copper, which can become extremely volatile during risk-off periods. We could see volatility increase as tensions between the US and China rise. Copper fell to just below the $2.06 per pound level during the height of risk-off conditions in March, but the price has come storming back. Falling output, Chinese demand, a weakening US dollar, and the record levels of stimulus have created a bullish trend in the red metal. The $3 per pound level is a critical psychological hurdle for the copper futures market.
The LME lead price moved lower by 1.32% since July 15. The rise in demand for electric automobiles around the world had been supportive of lead in the long term as the metal is a requirement for batteries, but coronavirus had weighed on the price of lead because of falling fuel prices. Since late April, the prices of crude oil, gasoline, and lead moved higher. The price of nickel moved 1.82% lower over the past week. The export ban in Indonesia began on January 1, 2020 but has had little impact on the price of the nonferrous metal so far this year as coronavirus has been a far more significant factor for all of the base metals, including nickel. Tin rose 0.99% since the previous report. Aluminum was 1.22% lower since the last report. The price of zinc posted a marginal 0.09% gain since July 15. Zinc was at the $2200.50 per ton level on July 17. Nonferrous metals remained within their respective trading ranges over the past week.
September lumber futures continued to soar and were at the $532.20 level, 5.34% higher since the previous report as the price of wood added to recent gains. The expired July contract traded to a high of $600, the highest price since 2018 when it peaked at $659 per 1,000 board feet. Interest rates in the US influence the price of lumber. Lumber can be a leading economic indicator, at times. Housing starts data for June in the US was bullish for the price of lumber, as is the potential for an infrastructure building project by the government in 2021. The price of uranium for August delivery edged 0.61% lower and was at $32.50 per pound. The world’s leading producer, Kazakhstan, suspended production nationwide for three months to slow the spread of COVID-19 in March, which helped lift the price over the past months. The volatile Baltic Dry Index fell 1.84% since July 15 to the 1710 level after significant increases over the past weeks. June iron ore futures were 2.89% lower compared to the price on July 15 after a better than 17% gain in the previous report. Supply shortages of iron ore from Brazil have supported the price over the past year. Open interest in the thinly traded lumber futures market rose by 11.00% since the previous report. The metric has been increasing with the price, typically a technical validation of a bullish trend in a futures market.
LME copper inventories moved 6.47% lower to 157,350 as of July 17. COMEX copper stocks fell by 0.62% from July 14 to 88,410 tons. Lead stockpiles on the LME were 2.81% higher as of July 17, while aluminum stocks were 0.31% lower. Aluminum stocks fell to the 1,664,400-ton level on July 17. Zinc stocks decreased by 0.65% since July 14. Tin inventories fell 3.28% since July 14 to 3,835 tons. Nickel inventories were 0.23% higher compared to the level on July 17.
Last week, I pointed out that the LME’s release of off-warrant stocks in the base metals was lower than the market had anticipated. Aluminum stockpiles were over one million tons below the projected level. The data was supportive of base metals prices.
We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 21 cents on July 15, down 12.0 cents since the previous report. The details for the call option are here:
US Steel shares were at $7.58 per share and moved 5.84% lower since last week.
FXC was trading at $13.43 on Wednesday, only 10.0 cents, or 0.74% lower since the previous report. I continue to maintain a long position in FCX shares. FCX tends to move higher and lower with the price of copper. I would use a tight stop on this position or look to take profits as we own two units that are over 20% and over 37% in funds as of July 20. There is never anything wrong with booking profits. I will be selling half the position now that the combined gain is approaching 30%. I will sell the shares purchased at $9.75 from August 9, 2019. In the current volatile environment, taking some money off the table is a wise and prudent approach.
I remain cautious on the sector and have limited any activity to very short-term risk positions. Brewing tensions between the US and China could cause a return of risk-off conditions to the industrial metals and commodities as can any new outbreaks of Coronavirus over the coming weeks and months. Keep stops tight on all positions in this sector that is highly sensitive to macroeconomic trends. The price action is bullish, but many of the metals and other industrial commodities are approaching levels that could require more positive support when it comes to the global economy. In the medium to longer-term, the stimulus is bullish for industrial commodities.
We are long PICK, the metals and mining ETF product. We bought PICK at the $23.38 per share level, and it was trading at $26.73 on July 15, up 17 cents or 0.64% for the week. I continue to rate this metals and mining ETF that holds shares in the leading producing companies in the world a long-term hold. I would add to the long position on price weakness over the coming weeks and months if another risk-off period occurs. Base metals and industrial commodities prices could continue to follow crude oil and stocks over the coming week. The price action in the sector has been bullish, but the market’s upward momentum seems to have paused over the past week. Copper is the leader of the pack, so keep an eye on the price action in the red metal over the coming week.
Cattle and hog prices continued to recover since July 15 with lean hog futures leading the way on the upside. The bounce from the lowest level in years during the peak grilling season in 2020 was overdue.
August live cattle futures were at $1.022750 per pound level up 0.96% from July 15. Technical resistance is now at $1.11325 per pound. Technical support stands at 98.425 cents per pound level. The levels moved higher since the previous report. Price momentum and relative strength indicators were above neutral readings on Wednesday and heading for overbought territory. Open interest in the live cattle futures market moved 3.55% higher since the last report. The disconnect between cattle prices in the futures market and consumer prices at the supermarket created a dislocation in the market. The rally in cattle was overdue, and the price moved to the highest level since early March. The end of the grilling season comes in early September, which is typically a time of the year when prices decline. However, 2020 is anything but an ordinary year in the meat markets.
August feeder cattle futures outperformed live cattle as they rose by 1.56% since July 15. August feeder cattle futures were trading at the $1.41600 per pound level with support at $1.33100 and resistance at $1.5200 per pound level, higher than on July 15. Open interest in feeder cattle futures rose by 1.43% since last week, after a more than 13% gain in the previous report. While live cattle futures have a delivery mechanism, feeder cattle are a cash-settled futures contract. Sometimes live cattle prices lead feeder cattle prices, while at others, the opposite occurs. Price momentum and relative strength metrics were also rising towards overbought territory on Wednesday. Cattle futures markets have been recovering over the past three weeks.
Lean hog futures posted a marginal gain since the previous report. The August lean hogs were at 50.400 cents on July 20, which was 0.50% higher than the level in the previous report. Price momentum and the relative strength index were on either side of neutral readings on July 20 on the August contract. Support remains at 47.525 cents with technical resistance on the August futures contract at the 58.95 cents per pound level. The low from April at 37 cents is critical technical support. The same issues impacting beef are present in the hog market with low prices at origination points and bottlenecks at processing plants causing consumer prices to rise and shortages to limit availability for customers. Hog futures could have more upside. Reports of severe pork shortages in China should support the demand side of the fundamental equation, but trade friction between the US and Chinese may exacerbate shortages in China and a continuation of the glut conditions in the United States.
The long-term average for the spread between live cattle and lean hogs is around 1.4 pounds of pork for each pound of beef. Over the past week, the spread between the two in the August futures contracts moved slightly higher as the price of live cattle outperformed lean hogs on a percentage basis.
Based on settlement prices, the spread was at 2.02900:1 compared to 2,01990:1 in the previous report. The spread rose by 0.91 cents as live cattle moved higher, and lean hog futures posted a smaller gain in August since July 15. The spread fell to a low of 1.2241 in mid-March, which was below the long-term average making pork more expensive than beef. The spread moved over the average and kept going, and beef is more expensive than pork on a historical basis on the August futures contracts. The spread narrowed over the past week.
In the previous reports, I wrote, “The current low prices could give way to far higher levels in 2021 as producers adjust to the new price environment. After processing plants resume regular schedules in the eventual aftermath of the virus, shortages could develop. I believe that today’s low price levels will cause prices to rise next year, and consumers will face even higher levels at the supermarket. I am a buyer of cattle and hogs on price weakness and would only trade the beef and pork futures market from the long side over the coming weeks.” On June 15, live cattle futures put in a bullish reversal pattern on the daily chart. I continue to believe that prices will head higher, with the most significant moves to the upside developing in 2021. I will be a buyer of cattle and hog futures on price weakness.
Sugar and FCOJ posted losses over the past week, but coffee, cocoa, and cotton futures moved to the upside. Cocoa was the leader of the sector with an almost 4% gain, which sent the price back over the $2200 per pound level.
October sugar futures fell by 0.85% since July 15, with the price settling at 11.72 on July 20. The price of the sweet commodity fell to a new multiyear low at 9.05 cents per pound on the May contract on April 28. Technical resistance on October futures is at 12.40 cents with support now at the recent low of 11.27 cents on active month futures. Sugar made a new high at 15.90 cents on February 12 on the continuous contract, but the price collapsed on the back of risk-off conditions. The decline in the price of crude oil and ethanol in April weighed on sugar as the primary ingredient in ethanol in Brazil is sugarcane. The recovery in the oil market provided support for the price of sugar. Weakness in the Brazilian currency reduces production costs and had been a bearish factor for the sugar market.
The value of the September Brazilian real against the US dollar was at the $0.187250 against the US dollar on Wednesday, 0.86% higher over the period. The September real traded to a new low of $0.16780 on May 13. The Brazilian currency had been making lower lows as coronavirus weighed heavily on all emerging markets. Anyone with a risk position in sugar should keep an eye on the price action in the Brazilian real.
Meanwhile, Brazil has become a hotspot of the global pandemic, which could lead to supply chain problems for sugar, coffee, and oranges, as well as the other commodities produced by South America’s most populous nation and leading economy. Over the past week, coffee and FCOJ moved higher, but sugar edged to the downside.
Price momentum and relative strength on the daily sugar chart were below neutral readings as of July 20. The metrics on the monthly chart were below a neutral reading, as was the quarterly chart. Sugar made a new high above its 2019 peak in February before correcting to the downside. The low at 9.05 was the lowest price for sugar since way back in 2007. In 2007, the price of sugar fell to a low of 8.36 cents before the price exploded to over 36 cents per pound in 2011. At that time, a secular rally in commodity prices helped push the sweet commodity to the highest price since 1980. If the central bank and government stimulus result in inflationary pressures, we could see a repeat performance in the price action in the commodities asset class that followed the 2008 financial crisis. Sugar could become a lot sweeter when it comes to the price of the soft commodity in a secular bull market caused by a decrease in the purchasing power of currencies around the world. The price action in sugar over the past weeks reflects the recovery in crude oil and gasoline prices as ethanol rebounded. Sugar is the primary ingredient in ethanol in Brazil. The bounce in the Brazilian real provided some support for the sweet commodity. Meanwhile, the lockdowns have weighed on demand, which could eventually cause production to decline.
In February, risk-off conditions stopped the rally dead in its tracks on the upside. Sugar found at least a temporary bottom at a lower low of 9.05 cents per pound. Open interest in sugar futures was 0.09% higher since last week. Sugar had rallied to new highs as drought conditions in Thailand created the supply concerns that lifted the price of sugar futures in late 2019 and early 2020. The correction in sympathy with the risk-off conditions in markets across all asset classes chased any speculative longs from the market. The long-term support level for the sweet commodity is now at 9.05 and 8.36 cents per pound. Without any specific fundamental input, sugar is likely to follow moves in the energy sector as well as the currency market when it comes to the exchange rate between the US dollar and the Brazilian real. Over the longer term, the cure for low prices in a commodity market is low prices as production declines, inventories fall, demand rises, and prices recover. We may have seen the start of a significant recovery in the sugar market after the most recent low. Over the past weeks, the price traded on either side of the 12 cents per pound level. The 12 cents level could become a pivot point as the price of sugar consolidates.
September coffee futures moved 2.62% to the upside since July 15. September futures were trading at the 99.75 cents per pound level. The technical level on the downside is now at 96.30 cents on the September futures contract. Below there, support is at around 92.70 and 86.35 cents on the continuous futures contract, the bottom from 2019. Short-term resistance is at $1.0465 on the active month 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. The lower coffee falls, the higher the odds of a significant rebound become. Our stop on the long position in JO is at $27.99. JO was trading at $30.51 on Monday. Open interest in the coffee futures market was 0.59% lower since last week. I continue to hold a small core long position after adding to my long position over the past weeks when the price fell below the $1 per pound level. From a technical perspective, coffee needs to hold the 92.70 cents level. Coffee could eventually make a similar move to sugar, given the recent bounce in the Brazilian currency.
The ultimate upside target is the November 2016, high at $1.76 per pound. Price momentum and relative strength crossed higher and was above neutral territory on Monday. On the monthly chart, the price action was below neutral. The quarterly picture was also below a neutral condition but was turning higher. Coffee can be a wild bucking bronco when it comes to the price volatility of the soft commodity. Bottlenecks on South American ports could prove highly supportive of coffee prices as they could create a shortage of the beans. I expect volatility in coffee to continue, and I will look to trade on a short-term basis with a bias to the long side. Any new positions should have tight stops and defined profit objectives.
The price of cocoa futures moved higher since July 15. On Monday, September cocoa futures were at the $2219 per ton level, 3.93% higher than on July 15. Open interest rose by 0.51% over the past week. Relative strength and price momentum were over neutral readings on July 20. The price of cocoa futures rose to a new peak and the highest price since September 2016 at $2998 per ton on the March contract on February 13. Risk-off conditions pushed the price of cocoa beans lower, but they bounced after reaching a low that was $7 above the technical support level on the weekly chart. Cocoa had been falling since early June. The soft commodity put in a bullish reversal on July 20. We are long the NIB ETN product. NIB closed at $26.40 on Monday, July 20. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their cocoa exports, it should provide support to the cocoa market. The levels to watch on the upside is now at $2.397, $2475, $2509, and at the mid-March high of $2618 per ton on the September contract on the daily chart. On the downside, technical support remains at $2092 per ton on the September contract.
The potential for coronavirus to disrupt production in West Africa is high, which could lead to shortages of beans over the coming months. The health systems in producing countries like the Ivory Coast, Ghana, Nigeria, and others are not sufficient to treat patients or prevent the spread of the virus. Africa could suffer tragic consequences over the coming weeks and months. The flow of cocoa beans to the world could suffer as bottlenecks at ports could reduce exports. I continue to favor the long side in cocoa but will be cautious in the deflationary environment in markets. Nothing has changed since last week. I continue to view the price action in the cocoa futures market as a buying opportunity. Weakness in the British pound has also weighed on the price of cocoa as London is the hub of international cocoa trading. I would leave wide buying scales in the cocoa futures market or in the NIB product.
December cotton futures moved higher by 1.21% since July 15.
December cotton futures have been making higher lows and higher highs since reaching a low of 50.18 cents in early April. December cotton was trading at 62.88 cents on Monday, after falling to the lowest price since 2009 in early April when the continuous contract reached 48.35 cents per pound. On the downside, support is at 57.75, 52.15 cents, and then at 48.35 cents per pound. Resistance stands at the 64.90 cents per pound level. Open interest in the cotton futures market rose by 0.69% since July 14. Daily price momentum and relative strength metrics were on either side of neutral territory on Monday. I had been optimistic about the prospects for the price of cotton since the 50 cents per pound level, but the risk rises with the price. Cotton needs to hold above the 57.75 cents level to keep the bullish pattern of higher lows and higher highs intact. I would continue to use tight stops on any long positions and a reward-risk ratio of at least 2:1. Cotton remains at an attractive price level, but the fundamentals remain problematic. The China-US issues are not a bullish factor for the price of the fiber. The move above 60 cents for the first time since March was constructive for the fiber futures, and it followed through on the upside. Optimism in the economy could lead to more garment purchases, which supports the demand for cotton. Remember that cotton suffered selling pressure in 2008 that pushed the price to below 40 cents per pound. A decline in production and stimulative policies by central banks took cotton from the bottom end of its pricing cycle twelve years ago to an all-time high of $2.27 per pound in 2011. Cotton remained a lot closer to the low end of its pricing cycle on July 20.
September FCOJ futures moved lower since July 15. On Monday, the price of September futures was trading around $1.2310 per pound, 1.36% below the price on July 15. Support is at the $1.2090 level. Technical resistance is at $1.3200 per pound. Open interest fell by 1.57% since July 14. The Brazilian currency could eventually turn out to be bullish for the FCOJ futures, and bottlenecks at the ports could create volatility. FCOJ broke out to the upside over recent weeks, but the price stopped short of challenging the technical resistance at $1.32 per pound.
Keep an eye on the Brazilian real versus the US dollar when it comes to sugar, coffee, and FCOJ futures. The path of cotton’s price will be a function of US relations with China, the impact of coronavirus, and the weather in critical growing regions in China, India, the US, and Pakistan. Cocoa has been trending lower since falling short of $3000 per ton in mid-February. At below $2200 per ton, the primary ingredient in chocolate confectionery products was likely near the bottom end of its pricing cycle. I continue to believe that the upside potential in all of the soft commodities is greater than the downside over the coming months and years. If 2020 turns out to be anything like 2008, we could see significant rallies in the sector. Buying on price weakness is likely to be the optimal approach to the volatile sector. There are no substantial changes in my view for the prospects of the five soft commodities since last week’s report.
A final note
The heart of the summer months tends to be a slow time for commodity futures markets. However, 2020 is anything but a typical year. The price action in Q2 and since the start of July has been bullish for many raw material prices. Copper’s rise to almost $3 per pound is a sign of recovery for the asset class. The stimulus measures, a falling dollar, and falling production could create a potent bullish force for the future. I believe that the price action from 2008 through 2012 in commodity markets will be a model for the coming months and years. We could see many members of the commodity asset class surprise and even shock on the upside, given the central bank stimulus levels.
I will continue to trade from the long side of the market in most commodity sectors over the coming weeks.
I want to thank you all for your understanding. This week’s report comes unusually early as I will have surgery on Tuesday to correct an over enlarged prostate. The doctor tells me that I will need at least a few days to recover from the procedure. I did not want to miss the weekly report on Wednesday, so I decided to prepare it for Monday. I will return on Wednesday, July 29, on the regular schedule with the next report. Thank you again for understanding.
As I wrote over the past weeks, I plan to increase the price of the report in the coming months. However, all of my current loyal subscribers will never experience an increase in their monthly or annual subscription rates. I will grandfather all subscribers at their current rates for as long as they maintain their subscriptions. Thank you for your support.
Please keep safe and healthy in this environment.
Until next week,
Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.