- The Fed says the short-term rate will remain at zero through 2022
- The dollar index continues to slip
- Gold and silver prices steady, but rally in the wake of the Fed meeting- Strength continues in crude oil
- Copper breaks out to the upside as COMEX July futures move towards $2.70 per pound
- Agricultural commodities await Thursday’s June WASDE report from the USDA
Summary and highlights:
On Thursday, June 4, the stock market turned in a mixed performance with the DJIA up only 0.05%. The S&P 500 and NASDAQ posted losses of 0.34% and 0.69%. The Russell 2000 was virtually unchanged on the session. The September long bond futures were 1-16 lower to the 174-00 level as the bond market declined. The dollar index also continued its path to the downside, falling 0.602 to 96.657 on the June contract. Grains moved to the upside with corn 5 cents higher, soybeans up 10.25 cents, and July wheat futures 11.75 cents higher. Soybeans broke out to the upside above its first level of technical resistance. Crude oil edged higher on the WTI and Brent benchmark active month contracts. Gasoline and heating oil moved higher as the gas crack edged higher, but the distillate refining spread remained under pressure at below $8 per barrel. Natural gas was up only one tick to $1.822 per MMBtu after the EIA reported an injection of 102 bcf into storage for the week ending on May 29. Gold, silver, and platinum prices moved higher, but palladium in a volatile trading range that was over $110 per ounce wide. Copper was a touch higher to settle at $2.4895 per pound on July futures after probing above the $2.50 level. August live cattle drifted higher along with feeder cattle, and lean hogs in August posted a gain on the session. Sugar, cocoa, and lumber prices were a bit higher, but cotton, FCOJ, and coffee fell. Bitcoin was $240 per token higher to the $9895 level.
On Friday, the report of 2.5 million job gains in May that took the unemployment rate to 13.3% lit a bullish fuse under the stock market. Relative calm across the US after the recent civil unrest was also a supportive factor. The DJIA gained 3.15%, with the S&P 500 up 2.52%. The NASDAQ gained 2.06% and rose to a new record higher. We will find out soon if the NASDAQ will trade over the 10,000 level in the coming days and weeks. The Russell 2000 small-cap index was 3.79% higher on the final session of the week. September US 30-Year Treasury bonds fell 1-00 to 173-00. The dollar index edged 0.265 higher to 96.922 after losses earlier in the week. Corn was 2.25 cents higher, soybean futures were unchanged, and wheat fell 8.5 cents per bushel on the July contracts. Crude oil continued to power higher as the price of July NYMEX futures settled at just below the $40 per barrel level. Brent futures were at over $42 per barrel. Gasoline and heating oil posted significant gains, sending crack spreads higher. OPEC and the Russians are meeting on Saturday, but all signs were that the cartel would extend its production quota for another month, which supported the energy commodity. Natural gas edged lower and settled the week at $1.782 per MMBtu on the July futures contract. Ethanol moved higher to the $1.238 level on July, up 5.3 cents on the session. Gold, silver, and platinum prices fell sharply on the back of strength in the stock market. Palladium moved higher on the session with copper, which traded to a high of $2.5715 and closed at $2.5555 on the July contract. August live and feeder cattle moved lower while July lean hogs posted a marginal gain. Lumber was high along with all of the members of the soft commodities sector as cotton, FCOJ, coffee, sugar, and cocoa posted gains. Cotton traded to over 62 cents and sugar futures closed at over the 12 cents per pound level. Bitcoin was around $95 lower to the $9800 per token level.
On Monday, stocks continued their march to the upside. The Russell 2000 led the way on the upside with a 1.97% gain. The DJIA was 1.70% higher, and the S&P 500 moved 1.20% to the upside. The NASDAQ gained 1.13% as the index approaches the 10,000 level. US 30-Year Treasuries were 0-17 higher to 173-01. The June dollar index continued to decline and was 0.314 lower to 96.608. Corn moved 2.25 cents higher in sympathy with energy prices, while soybeans and wheat were down 3.0 and 8.50 cents lower on the July futures contracts. July NYMEX crude oil was $2.14 higher, while Brent August futures gained $2.31 per barrel as OPEC agreed to roll the production cuts one month into the future. Gasoline and heating oil futures fell on the session, causing declines in crack spreads. Natural gas was marginally higher as the energy commodity settled at just below the $1.79 per MMBtu level on the July futures contract. Ethanol was 1.3 cents higher to $1.245 per gallon on the July futures contract. All of the precious metals moved higher with significant gains in the gold, silver, platinum, and palladium futures market. July copper settled at $2.5655 per pound, up one cent on the session. August live cattle edged marginally higher, but the August feeder cattle were down just over one penny per pound. August lean hog futures were up 0.45 cents. Cocoa and lumber moved a touch higher, while coffee was unchanged. Cotton, FCOJ, and sugar futures moved lower. Bitcoin fell $20 to the $9780 per token level.
On Tuesday, only the NASDAQ posted a gain on the session, with the tech-heavy index 0.29% higher. The Russell 2000 fell 1.90%, and the DJIA was 1.09% lower. The S&P 500 fell 0.78% on the session. September US 30-Year Treasury futures rose 1-14 to 174-10, and the June fold index fell to settle at 96.321. Grains moved lower across the board with corn falling 6.25 cents and wheat down 7.0 cents per bushel on the July futures contracts. Soybeans were 1.5 cents lower. July crude oil futures on NYMEX gained 75 cents to $38.94, and Brent was just below the $41 per barrel level. Oil products moved higher, with gasoline keeping pace with crude oil and heating oil outperforming the energy commodity. Distillate cracks rose, while gasoline refining spreads were steady on the session. Natural gas edged lower to settle at $1.767 per MMBtu. Ethanol also edged lower by one-half cents to $1.24 per gallon. Gold was higher, while silver, platinum, and palladium all posted losses. Copper was higher and began to probe above the $2.60 level for the first time since early March. Live and feeder cattle moved to the upside, but lean hog futures in August slipped lower. Cotton, coffee, and lumber prices were lower. FCOJ, sugar, and cocoa posted gains on Tuesday. Bitcoin was around the $9800 level, up $20 per token from the previous close.
On Wednesday, the FOMC left the short-term Fed Funds rate at zero percent and told markets to expect it to remain at the lowest level in history “through 2022.” The committee and Chairman Powell stand ready with asset purchases to do anything and everything to stabilize the US economy. The vote was 10-0, and the committee expects GDP to decline by 6.5%. The stock market finished mostly lower, but the NASDAQ climbed to a new record high at over the 10,000 level. The S&P 500 was 0.53% lower, with the DJIA losing 1.04% on the session. The Russell 2000 lost 2.63%, but the NASDAQ gained 0.67%. The September US 30-Year Treasury bond futures moved 1-26 higher to 176-04. The June dollar index edged lower and finished at the 95.995 level, down 0.326 on the session. Grain prices were stable ahead of Thursday’s June WASDE report. Corn fell 1.25 cents, soybeans were 2.25 cents higher, and July wheat futures rose 1.75 cents per bushel on Wednesday. NYMEX crude oil rose to settle at $39.60 on the July contract. Brent also edged higher. Gasoline was close to unchanged, but heating oil moved higher. Natural gas settled at $1.78 on the July futures contract. Gold and silver prices settled around unchanged but rallied in the aftermath of the Fed meeting with gold moving towards the $1740 level and silver at $18.20. Platinum and palladium prices fell. Copper roared higher settling at $2.6565 on July and trading up to just under $2.70 per pound late in the day on the back of zero interest rates through 2022. Live and feeder cattle prices and lean hog prices posted declines on the session. Cotton, coffee, and cocoa price slipped, while FCOJ, sugar, and lumber posted gains. Bitcoin was heading towards the $10,000 level at over $9900 per token late in the day. Chairman Powell’s press conference was downbeat. While he said the Fed will do everything possible to stabilize the economy, he expects economic contraction and a prolonged period where millions in the US lose their jobs. I believe the Fed’s path is bullish fuel for gold and silver prices.
Stocks and Bonds
As the US economy continues to reopen, the stock market’s gains continued, and the bond market slipped to the downside. The trend higher since the March low in the stock market continued as the tidal wave of liquidity from the US Fed and ECB has supported gains in the stock markets. The trend is always your best friend in markets, but the extent and trajectory of the recovery from the March low have been V-shaped. Time will tell if the move to the upside is a mirage or if it will continue and take the markets to new and higher highs. The trend is a friend until it bends. The S&P 500 rose by 2.15% since last week. The NASDAQ was 3.48% higher to a new record above 10,000, and the DJIA posted a 2.74% gain. The S&P 500 posted gains in eight of the past 12 weeks, with only small down moves during the three weeks it posted losses. The level of stimulus makes the stock market a magnet for capital.
Chinese stocks underperformed US stocks over the past week. Relations between the US and China and Europe and China have suffered over the spread of the virus and the situation in Hong Kong.
As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $41.56 level on Wednesday, as it rose by 0.95% since the previous report. Chinese stocks remained above the $40 per share level since June. The targets on the upside are at $42.95 and $45.29 from earlier this year before the pandemic spread around the world.
September US 30-Year bonds eased higher over the past week. Interest rates in the US are not moving appreciably higher any time soon because of the level of stimulus. On Wednesday, June 10, the September long bond futures contract was at the 176-04 level, 0.32% higher than on June 3. Short-term support for the long bond moved lower to 170-30 with resistance at 178-26. The bonds moved higher after the latest Fed meeting reminded us that liquidity will continue, and short-term rates will remain at zero percent through 2022.
Open interest in the E-Mini S&P 500 futures contracts rose by 1.90% since June 2. Open interest in the long bond futures fell 2.66% over the past week. The VIX traded to a high of 85.47 on March 18, the highest level since 2008. 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. I have traded from the long side over the past week. The volatility index was at 27.64 on June 10, up 7.72% on the week.
At below 28, the VIX is highly attractive and could experience periods of sudden dramatic increases. The VIX related products like VIXX and VIXY are short-term, trading tools. I continue to look for at least a 2:1 reward over risk on any long positions in the VIX or VIX-related products. I continue to believe that it is not a question of if volatility will rise, but when it will move to higher levels. I have been trading the VIX and related products from the long side, taking marginal losses with tight stops. I will continue to buy VIXY or VIXX on dips when the volatility index falls. These are short-term trading instruments, so I will use very tight stops and re-enter on the long side at lower levels after the markets trigger stops.
The markets are assuming that the situation has returned to normal, but the number of coronavirus cases continues to rise, and the potential for additional hot spots over the coming weeks and later this year is high. The recovery in the stock market, but caution is necessary for the current environment.
The dollar and digital currencies
The dollar index continued to work its way lower over the past week. The interest rate differential between the dollar and euro declined dramatically since the US Fed set the Fed Funds rate at zero percent. Bitcoin and digital currencies posted gains since June 3.
The June dollar index future contract was at 95.95 on June 10, down 1.35% from the level on June 3. The dollar index fell on the back of a combination of rate differentials, weak US data, and outbursts of civil unrest over the past weeks. Open interest in the dollar index futures contract moved 30.49% higher since June 3. A move below the 94.61 level would threaten the long-term uptrend in the dollar index. Daily historical volatility in the dollar index rose to over 21.5% in late March but was at around the 3.77% level on Wednesday. Volatility moved lower as the dollar index fell.
The euro currency was 1.37% higher against the dollar. The European economy is slowly opening after the virus took a significant toll over the past three months. The interest rate differential between the dollar and the euro has narrowed, which supported the euro. The pound moved 1.43% higher against the dollar since last week. We could see a bounce in the dollar against European currencies if coordinated intervention was selling the dollar at higher levels over the recent months. However, the narrowing of the rate differential and civil unrest in the US is weighing on the value of the dollar index.
Bitcoin and the digital currency asset edged higher over the past week. Bitcoin was trading at the $9,857.83 level as of June 10, after probing above the $10,000 level recently. Bitcoin was moving towards the top end of the short-term trading range as it rose by 2.65% since last week. Ethereum posted a 1.52% gain since June 3. Ethereum was at $245.71 per token on Wednesday after a more than 16% gain last week. The market cap of the entire asset class moved 2.50% higher over the past week. Bitcoin marginally outperformed the whole asset class since the previous report. The number of tokens increased by 26 to 5563 tokens since June 3. 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 $279.628 billion. Open interest in the CME Bitcoin futures rose 7.75% since last week.
Bitcoin reached my first target at the $10,000 level and now looks set to move to the upside again. The next level on the upside stands at the recent high of $10,565. The trend is your friend in Bitcoin, and it remains higher.
The Canadian dollar moved 0.79% higher since June 3. Open interest in C$ futures fell by 6.24% over the period. 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. Weakness in grain prices has not been helping the value of the Canadian currency, but oil has been a different story.
The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ moved 1.26% 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. I would be cautious with any positions on the long or short side of the A$ given the potential for volatility in the current conditions. 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.
The British pound rose 1.43% since June 3 as the dollar continues to correct to the downside. The pound remains at a depressed level against the US dollar, and there is room for a recovery if the pandemic continues to ease over the coming weeks.
Over the past week, the Brazilian real moved 2.98% higher against the US dollar on the July futures contract after a more than 7.5% gain last week. The debt default by neighboring Argentina had little impact on the Brazilian real. The real moved above the $0.2000 level against the US dollar. The July Brazilian currency was trading at the $0.20200 level after falling to a new and lower low at $0.16730 on May 14. 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 the value of its currency. However, in the long run, I am bullish for the real because of Brazil’s commodity production. The nation is a supermarket to the world for many products. The trends over the past week remained intact in the currency market with the dollar sliding lower.
Gold and silver were on either side of unchanged at their settlement prices on June 10. In the aftermath of the Fed meeting, the prices of both metals rallied significantly. Platinum and palladium fell, but rhodium posted a gain since last week.
As of the settlement prices on June 10, gold was a touch higher, rhodium rallied, and silver, platinum, and palladium moved lower. After the Fed meeting gold was over $25 high and silver moved around 50 cents to the upside. The prices below were the settlement prices from June 10.
Gold was 0.93% higher over the past week. Silver fell 0.390% since June 3. August gold futures were at $1720.70 per ounce level on Wednesday. July silver settled at $17.796 per ounce on June 10. 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.
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 $1789.00 per ounce, the high from mid-April. Support is at $1671.70, the recent low. In silver, support is at $17, with resistance at $18.95 on the July 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 will follow the yellow metal to the upside. Silver’s recent move is a bullish sign for the two metals. Silver tends to move on sentiment, which remains bullish. However, markets rarely move in a straight line, which could lead to corrective periods and price consolidation. Silver’s rise is a bullish sign for the two metals. We have seen a correction over the past sessions, which turned out to be a buying opportunity, once again.
Gold mining shares moved higher over the past week, with the GDX up 5.18% and GDXJ moving 5.85% higher. The mining shares tend to outperform the yellow metal on the upside and underperform on the downside. The SIL and SILJ silver mining ETF products that hold portfolios of producing companies moved 4.96% and 6.68% higher since June 3.
Gold marginally underperformed silver over the past week. 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.
July platinum fell 1.69% since the previous report. Platinum had been a laggard in the precious metals sector in 2020. July futures fell to the $846.00 per ounce level on June 10. The level of technical resistance is at $943 on the July futures contract, the recent high. Support in platinum remains at $767.50 per ounce on the nearby futures contract. Rhodium is a byproduct of platinum, and the price of the metal had been in a bull market since early 2016. The price of rhodium was at a midpoint price of $7,200 per ounce on June 10, up $400 or 5.88% over the past week. September Palladium declined by 1.40% since last week. Support is at $1832.20 on the September contract with resistance at $2159. September palladium settled at the $1930.80 per ounce level on Wednesday.
Open interest in the gold futures market moved 0.02% lower over the past week. The decline over the past weeks in open interest is 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 3.75% lower in platinum. The total number of open long and short positions decreased by 0.44% in the palladium futures market. Silver open interest rose by 3.18% over the period.
The silver-gold ratio was stable over the past week.
The daily chart of the price of August gold divided by July silver futures shows that the ratio was at 95.31 on Wednesday, up 0.46 from the level on June 3. The ratio traded to over the 124:5 level on the high on March 18. The long-term average for the price relationship is around the 55:1 level. The ratio rose to the highest level since futures began trading in 1974 as the price of silver tanked recently. The move lower since mid-March has been a supportive factor for the two metals. In 2008, the ratio peaked during the risk-off selling and then fell steadily until 2011.
Platinum and palladium prices posted 1.69% and 1.40% losses over the past week. September Palladium was trading at a premium over July platinum with the differential at the $1084.80 per ounce level on Wednesday, which narrowed since the last report. July platinum was trading at an $874.70 discount to August gold at the settlement prices on June 10, which widened since the previous report.
The price of rhodium, which does not trade on the futures market, rose $400 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 remains at the $3000 per ounce level, unchanged from previous weeks. The spread is at a level that makes any investment in the metal irrational. Rhodium is an untradeable commodity, but it can provide clues about the price path of the other PGMs.
I continue to favor buying physical platinum as well as gold and silver during corrective periods. In gold and silver, the GLD, IAU, BAR, and SLV ETF products hold physical bullion and are acceptable proxies for the coins and bars. In platinum, PPLT and PLTM are the proxies. Since a NYMEX platinum futures contract contains 50 ounces of metal, purchasing a nearby futures contract on NYMEX and standing for delivery is a way to avoid significant premiums for the metal. At $846 per ounce, a contract on NYMEX has a value of $42,300, 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.
The bullish price action in the energy sector continued over the past week. The July NYMEX crude oil futures contract was flirting with the $40 per barrel level, and Brent was just below $42 per barrel. OPEC, Russia, and other world producers extended the most extensive production cut in history for another month while waiting for demand to return to the market. Natural gas and coal for delivery in Rotterdam fell, but all over the other members of the energy sector, including oil, oil products, crack spreads, and ethanol, posted gains since June 3.
July NYMEX crude oil futures rose 6.20% since June 3 as the recovery continued. The July contract settled at $39.60 per barrel on June 10 after trading to a low of $17.27 on April 28. Crude oil made a new short-term high at $40.44 on the July futures contract over the past week. Production cuts by OPEC and the decline in US output contributed to the recovery from the lowest prices in history for WTI crude oil futures in late April. While crude oil inventories fell for the week ending on May 29, according to both the API and EIA, product stockpiles increased significantly during the final week of May. Oil inventories moved higher for the week ending on June 5.
Chinese demand for crude oil has been robust over the past weeks. With parts of the economy reopening in Europe and the US, the demand side of the equation has improved. When it comes to gasoline demand over the summer months in the US, we could see some surprises as stay-at-home guidelines ease, and people return to the workplace and venture out in their cars during the summer vacation period after being cooped up at home for months. These factors continue to underpin the price of the energy commodity and have pushed oil to the $40 per barrel level. The bullish trend continued over the past week but could stall around the $40 per barrel level.
August Brent futures underperformed June NYMEX WTI futures, as they rose 5.05% higher since June 3. July gasoline was 8.09% higher, and the processing spread in July was 15.24% higher since last week. The July gasoline crack spread was at $11.19 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.
July heating oil futures moved 10.18% higher from the last report. The heating oil crack spread was 31.61% higher since June 3. Heating oil is a proxy for other distillates such as jet and diesel fuels. The July distillate crack spread recently traded to a low of $7.20, the lowest since 2010, and closed on Wednesday at $9.66 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 weeks. 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.
Technical resistance in the July NYMEX crude oil futures contract is at $41.88 per barrel level with support at the $30.00 level on the July contract. The measure of daily historical volatility was at 37% on June 10, lower than the 52.20% level on June 3. The price variance metric was at over 180% in early May. 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 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 around $40 per barrel, 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.
Crude oil open interest decreased by 0.05% over the period. Crude oil rose, and the energy shares underperformed the energy commodity since June 3. The XLE rose 2.76% for the week as of June 10.
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 last week when it comes to opportunities for oil-related equities.
The spread between Brent and WTI crude oil futures in August was steady at the $2.02 per barrel level for Brent, which was down 18 cents from the level on June 3 The August spread moved to a high of $4.41 on April 30. 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.
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 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.
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 reflects the flood of supplies in the crude oil market. Oil traders have 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. The cash and carry trade put upward pressure on freight and storage rates. The forward curve in crude oil highlights the current state of the widest contango in years. The US is filling its strategic petroleum reserve to the brim at the current low price levels. The contango caused the price of May futures to plunge to an incredible low of negative $40.32 per barrel. As prices moved higher over the recent weeks, contango declined.
Over the past week, July 2021, minus July 2020, moved from a contango of $2.79 to $1.93, a decrease of $0.86 per barrel. In early January, the spread traded to a backwardation of $5.65, $7.58 per barrel tighter than the level on June 10. The spread hit a high of $13.46 per barrel on April 27, the day that July futures reached a low of $17.27 per barrel. 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 could see an unwind of the spreads continue as they gravitate back towards flat as production declines and inventories begin to fall over the coming months, which would result in significant profits for well-capitalized crude oil traders. The recent decline in contango was a supportive sign for the price of oil. The number of rigs operating in the US continued to decline significantly over the past week, and production has been moving lower in response to the lowest price levels in years and demand problems over the past months.
US daily production fell to 11.10 million barrels per day of output as of June 5, according to the Energy Information Administration. The level of production fell 100,000 barrels from the previous week. As of May 29, the API reported a decrease of 483,000 barrels of crude oil stockpiles, and the EIA said they fell by 2.10 million barrels for the same week. The API reported an increase of 1.706 million barrels of gasoline stocks and said distillate inventories rose by 5.917 million barrels as of May 29. The EIA reported a rise in gasoline stocks of 2.80 million barrels and an increase in distillates of 9.90 million barrels. Rig counts, as published by Baker Hughes, fell by 16 for the week ending on May 29, which is 583 below the level operating last year at this time. The decline in the rig count has been significant and should lead to falling output in the US. The number of rigs operating stood at 206 as of June 5. The inventory data from both the API and EIA was not bullish, but the price continued to recover on optimism over the economy, and that falling output would lead to lower inventory levels in the future.
OIH and VLO shares moved in opposite directions since June 3 with other energy stocks. OIH rose by 14.24% higher, while VLO moved 2.11% to the downside over the past week. As I wrote last week, “the level of crack spreads is a reason for short-term caution for VLO.” OIH was trading at $147.87 per share level on Wednesday. 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 $69.05 per share on Wednesday.
The July natural gas contract settled at $1.78 on June 10, which was 2.25% lower than on June 3. The July futures contract traded to a high of $2.364 on May 5, where it failed miserably. Support in July stands at $1.674, this week’s low on the July contract, and at $1.519 per MMBtu the low from late March and early April on the continuous contract. Short-term resistance is at the $2.027 level, the high from May 19.
Last Thursday, the EIA reported a triple-digit increase in natural gas stockpiles.
The EIA reported an injection of 102 bcf, bringing the total inventories to 2.714 tcf as of May 29. Stocks were 39.0% above last year’s level and 18.4% 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, this year the low was at 1.986, 879 bcf higher. This week the consensus expectations are that the EIA will report an 87 bcf injection into storage for the week ending on June 5. The EIA will release its next report on Thursday, June 11, 2020. Over the past ten 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 39% last week could provide some 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 76 natural gas rigs were operating in the US as of June 5 compared to 186 last year at this time. 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.
Open interest fell by 3.25% in natural gas over the past week. Short-term technical resistance is at $2.027 per MMBtu level on the June futures contract with support now at $1.674 per MMBtu, lower than last week. Price momentum and relative strength on the daily chart were below neutral conditions as of Wednesday.
July ethanol prices moved 8.77% higher over the past week. Open interest in the thinly traded ethanol futures market moved 56.95% lower over the past week. With only 127 contracts of long and short positions, the biofuel market is untradeable and looks like it could be delisted. The KOL ETF product rose 2.15% compared to its price on May 27. The price of July coal futures in Rotterdam fell 4.91% over the past week.
On Tuesday, June 9, the API reported an 8.42 million barrel increase in crude oil inventories for the week ending on June 5. Gasoline stocks fell by 2.913 million barrels, while distillate stockpiles increased 4.271million barrels over the period. On Wednesday, the EIA said that crude oil stocks moved 5.70 million barrels higher, and gasoline inventories rose by 900,000 barrels. Distillate stockpiles increased by 1.60 million barrels, according to the EIA. The API and EIA reports were bearish for the price of the energy commodities, given the rise in product stocks, but the futures market continued to ignore the supply data. Demand remains the significant factor for the price direction of crude oil, but optimism over reopening parts of the economy continues to lift prices.
Meanwhile, the output is declining fast with the number of operating rigs plunging and the daily production data from the EIA trending lower. 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. Production is falling, but demand remains the most significant factor when it comes to the price direction. Nothing has changed since last week, and the price continues to work its way above the $40 per barrel level. When crude oil was trading near its lows, Russian President Vladimir Putin said that his target for the price of Brent crude oil is around the $42 per barrel level. After falling to $16 in April, August Brent futures were at his desired prices as of June 10.
In natural gas, the forward curve continues to be wide, with January 2021 futures trading at a significant premium over natural gas for July 2020 delivery.
As the forward curve over the coming months shows, the settlement prices on June 3, at $1.78 in July was 4.10 cents per MMBtu lower than on June 3.
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. Meanwhile, the differential between nearby July futures and natural gas for delivery in January was $1.206 per MMBtu or 67.8% higher than the nearby price, reflecting both seasonality and substantial inventory levels.
I have been taking profits quickly and stopping losses looking for a 1:2 risk-reward ratio on forays into the crude oil futures market. UCO and SCO products can be helpful for those who do not trade futures. In natural gas, UGAZ and DGAZ attract lots of volume and are excellent short-term proxies for natural gas futures. I will not take positions in leveraged products overnight and will only day trade, given the volatility in the markets.
We are holding a long position in PBR, Petroleo Brasileiro SA. PBR shares tanked with oil and the Brazilian real but has made a comeback. At $8.89 per share, PBR was 1.37% higher than on June 3. 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.
Crude oil has made a significant recovery and has mostly filled gaps on the WTI and Brent futures charts. The demand side of the equation will determine if crude oil can continue to move higher over the coming weeks. In natural gas, I favor the upside over the coming week but would only approach the market with tight stops on long positions.
The price of wheat drifted lower since last week, while corn and soybean futures posted marginal gains. As the tensions between the US and China grow, it could threaten US grain exports to the world’s most populous nation over the coming months. Meanwhile, the US Department of Agriculture will release its June World Agricultural Supply and Demand Estimates report tomorrow, on June 11, at noon EST.
July soybean futures edged 0.93% higher over the past week and was at $8.6550 per bushel on June 10. The rising tensions with the Chinese could weigh on soybean prices, but the weather is the leading factor for the price of the oilseed over the coming weeks. Open interest in the soybean futures market moved 0.44% lower since last week. Price momentum and relative strength indicators were rising towards overbought territory on Wednesday. Soybean futures were moving away from the bottom end of the recent trading range. The move above the $8.62 level is a technical break to the upside, but the oilseed futures are not running away on the upside as they await the release of the June 11 WASDE report.
The July synthetic soybean crush spread edged a touch higher over the past week and was at the 77.75 cents per bushel level on June 10, down 1.0 cent since June 3. The crush spread is a real-time indicator of demand for soybean meal and oil. Price trends in the crush spreads can signal changes in the path of the price of the raw oilseed futures at times. The crush spread bounced off another marginal new low at 74.0 cents on June 5, a sign of some light buying in the soybean meal and oil markets.
I had been writing, “I believe that a relief rally is possible in the soybean futures and would only position from the long side of the market at under $8.50 per bushel.” US relations with China could throw cold water on the chances of higher price levels as we are now in June. I suggest tight stops on long risk positions and would be looking to take profits on rallies. I will tighten risk parameters the further we move into the growing season, which risks tailing off to minimal levels during the peak summer months when crops become established in August. The best chances for a supply-based rally will come early in the growing season when the plants are most vulnerable. My guidance is unchanged from last week. The soybean futures market has been so quiet that something is bound to wake it from its slumber. The recent move above the $8.60 level has been a constructive sign. While the prospects for trade between the US and China are bearish, a period of dry weather conditions could cause a short-covering rally. The weather is the most significant factor over the coming weeks.
July corn was trading at $3.2625 per bushel on June 10, which was 0.69% higher on the week. Open interest in the corn futures market rose by 1.03% since June 2. Technical metrics were above neutral readings in the corn futures market on the daily chart as of Wednesday. Support on nearby corn futures is at then $3.09 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 now at $3.3475, after the move above the $3.30 level. 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 July ethanol futures rose by 8.77% since the previous report. July ethanol futures were at $1.2400 per gallon on June 10. The spread between July gasoline and July ethanol futures was at 3.01 cents per gallon on June 3 with ethanol at a premium to gasoline. The spread was 0.94 cents wider since last week as gasoline marginally underperformed the biofuel in July futures. The prospects for corn prices are a function of both the weather and the price of gasoline and crude oil. Corn found support from the energy sector over the past weeks, which lifted the price to its highest level since April 14.
July CBOT wheat futures fell 1.12% since last week. The July futures were trading $5.0625 level on June 10 after rejected prices below $5 in mid-May. Open interest decreased by 4.92% over the past week in CBOT wheat futures. The support and resistance levels in July CBOT wheat futures stand at $4.9375 and $5.2900 per bushel. Price momentum and relative strength were below a neutral condition on Wednesday on the daily chart.
As of Wednesday, the KCBT-CBOT spread in July was trading at a 48.75 cents per bushel discount with KCBT lower than CBOT wheat futures in the May contracts. The spread narrowed by 5.50 cents since June 3. 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, which was a sign of stability for the price of wheat.
I will continue to hold long core positions in futures and the CORN, WEAT, and SOYB ETF products over the coming weeks. The further we move into the growing season without any significant price appreciation, I will work to cut position sizes. The time of the year when crops are most vulnerable to the weather is between now and July. 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. Grains have been disappointing, but we are only at the beginning of the growing season, and uncertainty over the 2020 crop will remain at an elevated level over the coming weeks.
The grain markets are awaiting Thursday’s WASDE report. However, the weather will be the critical factor when it comes to prices over the rest of June and into July and early August.
Copper, Metals, and Minerals
The industrial commodities moved mostly higher for the second consecutive week. Copper on COMEX and the LME were higher. The prices of all of the other base metals moved to the upside since June 2, except for zinc, which posted a marginal loss. The Baltic Dry Index, iron ore, and lumber posted gains, but uranium moved lower since the previous report.
Copper rose 6.79% on COMEX over the past week. The red metal was 3.95% higher on the LME since the last report. Open interest in the COMEX futures market moved 0.40% lower since June 2. July copper was trading at $2.6565 per pound level on Wednesday. Copper is a leading barometer for the overall health and wellbeing of the Chinese and global economies. Over the past week, LME inventories were lower, while COMEX stockpiles grew in a continuation of the trend that began over the recent weeks.
Long-term technical support for the copper market is at the early 2016 low of $1.9355 per pound. From a short-term perspective, the first level on the downside now stands at $2.3585 per pound on July futures, and then the $2.2895 and $2.0595 levels. Chinese demand will continue to be the most significant factor when it comes to the path of the price of copper and other base metals and industrial commodities over the coming weeks and months. Then rising tensions over coronavirus, Hong Kong, and trade could cause volatility in the sector. Keep in mind that 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. Technical resistance is now at $2.8860 per barrel on the continuous futures contract on COMEX. The markets are not yet out of the woods when it comes to coronavirus. Any outbreaks 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. 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. However, the recent price action continues to be highly constructive. COMEX copper was flirting with the $2.70 level after the Fed meeting.
The LME lead price moved higher by 3.62% since June 2. 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 1.00% higher over the past week. The export ban in Indonesia began on January 1, 2020 but has had little impact on the price of the nonferrous metal so far this year. Tin rose 5.99% since the previous report as inventories declined. Aluminum was 4.15% higher since the last report. The price of zinc posted a 0.86% loss since June 2. Zinc was at the $2012 per ton level on June 9. Nonferrous metals remained within their respective trading ranges.
July lumber futures were at the $362.00 level, 3.99% higher since the previous report. Interest rates in the US will eventually influence the price of lumber. Lumber can be a leading economic indicator, at times. The price of uranium for July delivery fell 0.90% after recent gains and was at $33.20 per pound. The world’s leading producer, Kazakhstan, suspended production nationwide for three months to slow the spread of COVID-19, which helped to lift the price over the past months. The volatile Baltic Dry Index rose 30.77% since June 3 to the 714 level. June iron ore futures were 2.14% higher compared to the price on June 3. Supply shortages of iron ore from Brazil have supported the price over the past year. Open interest in the thinly traded lumber futures market fell by 1.33% since the previous report.
LME copper inventories moved 6.96% lower to 236,575 as of June 9. COMEX copper stocks rose by 8.70% from June 2 to 68,539 tons. Lead stockpiles on the LME were 0.40% lower as of June 9, while aluminum stocks were 2.37% higher. Aluminum stocks rose to the 1,541,150-ton level on June 9. Zinc stocks increased by 3.81% since June 2. Tin inventories rose 2.89% since June to 2,495 tons after an almost 24% drop last week. Nickel inventories were 0.30% lower compared to the level on June 2.
We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 62 cents on June 10, up 35 cents since the previous report. The details for the call option are here:
US Steel shares were at $10.04 per share and moved 15.54% higher since last week.
FXC was trading at $11.47 on Wednesday, $1.33 higher since the previous report. I continue to maintain a small long position in FCX shares. FCX moves higher and lower with the price of copper.
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. Very little changed in this sector since last week.
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 $26.15 on June 10, up 2.91% 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 are sending positive signals about the health of the global economy.
Live and feeder cattle prices edged lower since last week, and lean hogs posted a gain. The USDA will release its next WASDE report tomorrow at noon EST. The report will summarize the supply and demand factors impacting the meat markets now that we are in the 2020 grilling season. The meat markets continue to experience the impact of bottlenecks at processing plants. Producers are receiving the lowest peak season prices in years. At the same time, consumers are paying more for animal proteins and face limited availabilities.
August live cattle futures were at 96.500 cents per pound level down 0.87% from June 3. Technical resistance is at $1.0190 per pound. Technical support stands at 95.45 cents per pound level. Price momentum and relative strength indicators were below neutral readings on Wednesday. Open interest in the live cattle futures market moved 0.38% lower since the last report. The disconnect between cattle prices in the futures market and consumer prices at the supermarket continued as slowdowns at processing plants have created supply shortages.
August feeder cattle futures underperformed live cattle as they fell by 1.16% since last week. August feeder cattle futures were trading at the $1.32675 per pound level with support at $1.28325 and resistance at $1.38450 per pound level. Open interest in feeder cattle futures rose by 5.44% 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. Price momentum and relative strength metrics were on either side of neutral territory on Wednesday.
Lean hog futures rose since the previous report. The August lean hogs were at 55.825 cents on June 10, which was 2.52% higher from last week’s level. Price momentum and the relative strength index also on either side of neutral readings on June 10 on the August contract. Support is at 53.85 cents with technical resistance on the August futures contract at the 58.95 cents per pound level. 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.
The forward curve in live cattle is mostly in contango from June 2020 until April 2021. There is a backwardation between April 2021 and August 2021, when contango returns until October 2021. The Feeder cattle forward curve is in slight contango from August through November 2020 before it flattens with a bias to contango until May 2021. The forward curves did not move over the past week.
In the lean hog futures arena, after contango from June through August 2020, there is backwardation from August 2020 until October 2020. Contango exists from October 2020 through June 2021. There is a backwardation from June through October 2021. Futures prices have moved to reflect the potential for shortages for consumers. Some supermarkets continue to limit beef, pork, and chicken purchases to prevent hoarding.
The long-term average for the spread between live cattle and lean hogs is around 1.4 pounds of pork for each pound of beef. Over the past week, the spread between the two in the June futures contracts moved lower as the price of live cattle underperformed lean hogs on a percentage basis.
Based on settlement prices, the spread was at 1.72860:1 compared to 1.77320:1 in the previous report. The spread fell by 4.46 cents as live cattle fell and lean hog futures rose over the past week. 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 compared to pork on a historical basis on the August futures contracts.
We will get a look at the supply and demand fundamentals for beef and pork in tomorrow’s WASDE report. Meats remain at bargain prices in the futures market, but there are few bargains in supermarkets for consumers. The dislocation in markets has been the result of bottlenecks in the supply chain caused by the global pandemic over the past three months. Little changed since last week in the meat markets.
Sugar and cocoa futures moved higher over the past week. Cotton posted a marginal gain, but coffee and FCOJ moved lower. Sugar moved higher on the back of energy prices and a stronger Brazilian real. However, the real did not provide support for the price of Arabica coffee futures since last week.
July sugar futures rose by 5.25% since June 3, with the price settling at 12.23 on June 10. 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 July futures is now at 12.27 cents with support at 10.55 cents on July 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. Meanwhile, the Brazilian real moved higher over the past two weeks, pushing sugar over the 12 cents per pound level.
The value of the July Brazilian real against the US dollar was at the $0.202000 against the US dollar on Wednesday, 2.98% higher over the period after trading to a new low of $0.16730 on May 14. 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. Argentina’s recent default on debt obligations did not put downward pressure on 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.
Price momentum and relative strength on the daily sugar chart were rising towards overbought territory as of June 10 as the price recovery continues. 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 moved higher. A stronger real has also provided support for the sweet commodity.
In February, risk-off conditions stopped the rally dead in its tracks. Sugar found at least a temporary bottom at a lower low of 9.05 cents per pound. Open interest in sugar futures was 1.24% lower 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 week, the price continued to move higher.
July coffee futures continued to decline and moved 2.37% to the downside since June 3. July futures were trading at the 96.75 cents per pound level. The technical level on the downside is 94.80 cents on the July futures contract. Below there, support is at around 86.35 cents on the continuous futures contract, the bottom from 2019. Short-term resistance is now at $1.0075 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. Our stop on the long position in JO is at $27.99. JO was trading at $30.44 on Wednesday. Open interest in the coffee futures market was 0.61% lower since last week. I continue to hold a small core long position in coffee after taking profits during the rally in March. I stopped out of new purchases and will sit with the long core position and added again below $1. I will leave scales on the downside wide. I believe the price of coffee will find another bottom and recover. From a technical perspective, a bottom above 92.25 cents would be constructive. Coffee could make a similar move to sugar give the recent strength in the Brazilian currency.
Supply concerns over Brazilian production in the off-year for crops had been supportive of the price of the soft commodity from mid-October through December. The ICO has warned that a deficit between supply and demand could be in the cards for the market because of the 2019/2020 crop year. However, those fears subsided, causing the price of the soft commodity to decline to a level where buying returned to the market. Coffee had made higher lows since reaching 86.35 cents in mid-April. The price of coffee has remained firm despite the risk-off conditions. The ultimate upside target is the November 2016, high at $1.76 per pound. Price momentum and relative strength were in oversold territory on Wednesday. On the monthly chart, the price action was below neutral and falling towards an oversold condition. The quarterly picture was also below a neutral condition. Coffee can be a wild bucking bronco when it comes to the price volatility of the soft commodity. Bottlenecks on South American ports could prove highly supportive of coffee prices as they could create a shortage of the beans. I expect volatility in coffee to continue, and I will look to trade on a short-term basis with a bias to the long side. Any new positions should have tight stops and defined profit objectives.
The price of cocoa futures edged higher over the past week. On Wednesday, July cocoa futures were at the $2470 per ton level, 3.13% lower than on June 3. Open interest fell by 6.43% as July futures are rolling to September. Relative strength and price momentum were just above neutral readings on June 10. 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. We are long the NIB ETN product. NIB closed at $28.35 on Wednesday, June 10. 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 $2475, $2509, and at the mid-March high of $2631 per ton on the July contract on the daily chart. On the downside, technical support now stands at $2354 and $2183 per ton. The potential for Coronavirus to disrupt production in West Africa is high, which could lead to shortages of beans over the coming months. The health systems in producing countries like the Ivory Coast, Ghana, Nigeria, and others are not sufficient to treat patients or prevent the spread of the virus. Africa could suffer tragic consequences over the coming weeks and months. The flow of cocoa beans to the world could suffer as bottlenecks at ports could reduce exports. I continue to favor the long side in cocoa but will be cautious in the deflationary environment in markets.
July cotton futures rose only 0.05% over the past week. The recent declines had been on the back of continued concerns about the Chinese and global economies. The increase in tensions between the US and China is not supportive of the price of cotton. However, the weather conditions across growing regions will determine the price direction over the coming weeks and months. July cotton was trading at 60.51 cents on June 10, after falling to the lowest price since 2009 in early April. On the downside, support is at 56.56, 52.15 cents, and then at 48.35 cents per pound. Resistance stands at the 62.32 cents per pound level. Open interest in the cotton futures market fell by 2.51% since June 2. Daily price momentum and relative strength metrics were turning lower above neutral territory on Wednesday. The USDA’s WASDE report will provide fundamental data on the cotton March tomorrow.
I remain bullish on the prospects for the price of cotton at above the 50 cents per pound level but would use tight stops on any long positions. Cotton is inexpensive, but the fundamentals remain problematic. The China-US issues remain a bearish factor for the price of the fiber, but the price level remains at a low level. The move above 60 cents for the first time since March was constructive for the fiber futures. Optimism in the economy could lead to more garment purchases, which supports the demand for cotton. Cotton has made higher lows and higher highs since early April.
July FCOJ futures corrected a bit lower since the last report. On Wednesday, the price of July futures was trading around $1.2650 per pound, 1.33% below the price on June 3. Support is at the $1.21500 level. Technical resistance is at $1.30500 per pound. Open interest fell by 0.04% since June 2. The Brazilian currency could 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. The price ran out of steam on the upside above the $1.30 level.
Sugar is following energy and the Brazilian currency. Coffee has yet to react to the strength in the real versus the dollar. The decline of the US currency could be bullish for most members of the soft commodities sector over the coming days and weeks. Coffee is in the buy zone below the $1 per pound level. Any risk positions in the soft commodities require tight stops. I continue to favor the long side of the sector.
A final note
The move higher in the copper market could be a bullish alarm for all commodities. Many commodity traders watch the price action in the red metals as it is a barometer for the global economy.
The weekly chart highlights copper reached $2.70 per pound on June 10. The base metal is at its highest price level since January. If copper is a leader, we could see a continuation of the rally in many other commodity markets. I continue to favor the long side of the asset class. Markets rarely move in a straight line. The road higher could be bumpy. However, monetary and fiscal policies worldwide are highly supportive of raw material prices. Moreover, the decline in the dollar index tends to be a highly favorable for commodities prices.
As I wrote over the past weeks, I plan to increase the price of The Hecht Commodity 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.