• Carnage in markets across all asset classes
  • It is prudent to remain on the sidelines
  • Crude oil tanks on a geopolitical supply war
  • Coordinated fiscal stimulus is necessary to address the market slump
  • It is time for extreme caution with health and assets- I view this situation as temporary

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

A more detailed picture is available on the spreadsheet that is linked below. There is nothing wrong with clearing the decks in this environment. All positions are very small, and I will wait for the dust to settle over the coming weeks to take any action. I will continue to day trade, using very tight stops. I have refrained from taking home most day-trading positions over night, given the markets potential for significant price gaps. I view the current situation as temporary– health first, markets later.

The potential for further downdrafts in the coming days is high. During risk-off periods, fundamentals and technical factors take a backseat to panic. If anyone is uncomfortable with any positions or any short-term trading advice, please stay on the sidelines over the coming week.

 

Summary and highlights:

 

On Thursday, March 5, significant selling returned to the stock market as all of the leading indices posted over 3% losses on the session. With fear and uncertainty over Coronavirus rising, risk-off action returned to markets across all asset classes. The yield on the ten-year Treasury dropped below one percent, and June 30-Year Treasury bond futures were 1-28 higher to the 174-00 level. The March US Dollar index suffered a sharp decline that took it to a settlement price of 96.790, and lower levels late in the day. Wheat posted a marginal gain, but corn and soybean prices fell. Crude oil was lower on fears that OPEC would not reach an agreement to cut production by at least one million barrels per day on Friday. A standoff between Saudi Arabia and Russia appeared to be a stumbling block for the cartel to address falling global demand for the energy commodity. Oil products, natural gas, and ethanol prices all moved to the downside. Crack spreads were lower as products underperformed the raw energy commodity. Gold and silver posted significant gains on the session with gold back at the $1375 level and silver near $17.50 per ounce. Platinum was lower, but palladium moved a bit higher. Copper fell to settle at $2.5730 on the active month May COMEX futures contract. Lean hog prices rose by just over one cent per pound on the April contract, but cattle prices posted losses. Cotton was a touch higher, but all of the other soft commodities went the other way. FCOJ, coffee, sugar, cocoa, and lumber all move lower on the session. Late in the day, Bitcoin was $440 per token higher to the $9,200 level.

Friday was a volatile day in markets with wide price swings in the stock market. The DJIA fell a little less than 1% on the session, but it made an incredible comeback from far lower levels on the close. The DJIA was down over 900 points, going into the final half-hour of trading. The S&P 500 and NASDAQ fell by 1.71% and 1.87%, respectively, on the last session of the busy week. The yield on the US ten-year Treasury bond to a record low 0.66%. June 30-Year bond futures rose by 4-21 to 178-10 after trading at a new record high of 180-19. The March dollar index futures contract continued to fall as it settled at 95.934 down 0.856 on the session. A continuation of the unwind of the dollar versus the euro carry trade likely weighed on the US currency. The market expects short-term US rates to return to zero percent and anticipates that quantitative easing will make a comeback if risk-off conditions continue. All of the leader grain futures moved lower. The USDA releases its March WASDE report on Tuesday, March 10. Energy was the leader on the downside as OPEC could not agree on a production cut. Russia and Saudi Arabia disagreed on the need for lower output. The Saudis advocated cutting production by 1.5 million barrels per day in addition to the current level of quotas. Russia refused to consider anything over a 500,000 reduction, so the meeting ended in a stalemate, and the price of crude oil futures tanked. April NYMEX futures fell over $4 per barrel to a low of $41.05, while Brent also plunged by almost $4.50 to a low of $45.16 per barrel. Both benchmarks fell to the lowest price since 2016 as they moved below levels of technical support. Gasoline and distillate prices followed the raw crude oil to the downside on the back of fears over the Coronavirus. Gold moved higher in a volatile session where the yellow metal rose to a new peak at $1692.80 per ounce. Silver moved marginally lower, while platinum and palladium prices posted significant gains. Copper slipped to $2.5555 per pound on the May futures contract. Lean hogs posted a small gain but live and feed cattle prices fell by just under 3 cents per pound. All of the soft commodities and lumber prices moved to the downside with coffee and cocoa, posting the most significant losses. Lumber fell below the $400 per 1,000 board feet level. Bitcoin was $30 lower on the final session of the week at $9165 per token. The market needed a rest after the volatile week. Crude oil was ugly as the nonaction by OPEC could set the stage for significantly lower prices for the energy commodity in the current environment from both a technical and fundamental perspective.

Sunday night was a bloodbath in most markets. Crude oil traded down below $28 per barrel. After Russian and Saudi Arabia failed to agree on a production cut, the Saudis increased output in what is now an all-out war to flood the world with the energy commodity. The move could signal the demise of the international oil cartel.

On Monday, the stock market suffered one of its worst one-day performance in history as all of the leading indices fell by between 7% and 8%. The Russell 2000 was 8.81% lower on the session. The US 30 Year Treasury bond rose to a new record high of 191-22 on the June contract and was trading at 183-25 late in the day, 4-03 higher on the session. The dollar index fell by over 1.000 to settle at 94.87 as market participants continued to unwind the cash and carry trade between the US dollar and euro currencies. Monday was an ugly day on markets across all asset classes. Soybean prices fell sharply with the May futures contract down 21.25 cents per bushel. Corn fell only 3.25 cents while wheat managed to post a 3 cents per bushel gain. Carnage in crude oil pushed the price of nearby NYMEX futures to a low of $27.34 and a settlement price of $31.13, down an incredible $10.15 per barrel on the session. Brent futures declined by over $10 and were trading at around the $34.40 level late in the day after reaching a low of $31.25. Product prices fell like stones alongside the crude oil. Crack spread traded in wide ranges but were a touch higher at the end of the day. Natural gas fell one tick below the March 2016 low of $1.611 per MMBtu and reached the 1998 bottom at $1.61, the lowest price of this century. However, April natural gas rallied and closed at $1.778 per MMBtu as risk-off in the natural gas arena translated to buying to close risk positions, given the overabundance of speculative shorts. Gold rose to a new high of $1704.30 on a flight to quality buying, but the price settled at $1675.70 on April futures, with a marginal gain on the session. Silver fell and settled at just over the $17 per ounce level. Gold and silver mining shares fell in sympathy with the stock market. Platinum was over $30 lower as the weak got weaker, and palladium fell by over $30 per ounce after snapping back from an over $140 loss during the session. Rhodium moved higher on the session. Cattle and hog prices fell sharply as the meats were not immune from wholesale selling. Coffee moved higher to just under the $1.10 per pound level. Cotton, FCOJ, sugar, cocoa, and lumber prices all declined. Bitcoin tanked by $1315 per token to $7850 by the end of the session. Sunday night and Monday were ugly in most markets. The combination of an expanding medical emergency and financial crisis with an output war in crude oil was a bearish cocktail for the markets.

On Tuesday, wild volatility continued in stocks, but this time signs that the US government is working on fiscal policy measures to deal with the Coronavirus crisis lifted stocks. All of the leading stock indices posted significant gains with the DJIA, S&P 500, and NASDAQ all moving just under 5% higher on the session. The Russell 2000 lagged as it posted a 2.85% gain. As buying descended on the stock market, the June US 30-Year Treasury bond futures fell 6-28 to 178-23 as the bond market was not immune to massive price swings. The dollar index recovered to around the 96.5 level after trading to a low of 94.61 in the previous session. The USDA released its March WASDE report on March 10, but market participants had their hands full with wild volatility. Grain prices posted marginal gains across the board. Energy prices bounced, with gains in crude oil, oil products, natural gas, and ethanol. Gasoline cracks moved lower, but distillate processing spreads posted gains. Gold and silver moved lower as some calm returned to markets. Platinum was higher, but palladium dropped by almost $90 per ounce to just over the $2300 level. Cattle and hog prices moved to the upside. Sugar posted a marginal loss, but cotton, FCOJ, coffee, cocoa, and lumber prices all moved higher. Bitcoin was up $145 to $7995 per token.

On Wednesday, the World Health Organization declared Coronavirus a pandemic. Markets were ugly on Wednesday. Stocks fell sharply with the leading indices down anywhere from 4.70% to over 6%. The 30-Year Treasury bond futures were up around 0-17 to 180-04 in highly volatile trading. The dollar index settled at 96.492, marginally higher on the session. Grain prices edged lower across the board as soybeans, corn, and wheat futures prices all slipped. Crude oil and oil products moved lower. Heating oil outperformed gasoline. Natural gas rose to a high at just below $2 per MMBtu but slipped to settle below the $1.90 level. Ethanol fell on the back of weak gasoline prices. Precious metals and copper fell in sympathy with risk-off conditions in all markets. Meat prices declined with cattle leading the way on the downside. Cotton, FCOJ, and cocoa all edged higher, but sugar, coffee, and lumber prices fell. Bitcoin was down around $120 to $7875 per token. The markets are waiting for fiscal stimulus and a plan for addressing Coronavirus in the US and the world.

 

Weekly Spreadsheet:

Copy of Spreadsheets for the The Hecht Commodity Report March 11, 2020

Stocks and Bonds

Risk-off conditions accelerated in the stock market over the past week. As the number of cases of Coronavirus rises in the United States, the stock market has become a falling knife. Time will tell if the virus is the underlying cause or just a trigger the ignited a correction in the stock market that had been on a wild run to the upside. China is ground zero for the virus that has now spread around the world. The old saying, “When China catches a cold, the rest of the world comes down with the flu” is more than apropos over the past years. The trade war with the US weighed on China’s economy. Coronavirus replaced the trade dispute after the “phase one” deal on January 15.

Moreover, the economics of trade are mostly far removed from individuals, but the spread of a disease or a virus is something that can touch everyone, which is increasing panic. Costco and other retailers are experiencing an unprecedented demand for hand sanitizer, toilet paper, water, masks, canned goods, and other “survival” products. At the same time, the fear and uncertainty that is causing people to stockpile these goods are causing them to avoid and mitigate risks when it comes to their portfolios. The bottom line is that emotions drive markets and create trends. Coronavirus may only be a trigger, but we are currently in the midst of the most significant period of risk-off behavior in stocks and all markets since the 2008 global financial crisis. The action in the oil market since last weekend only exacerbated the issues facing the stock market.
At the same time, divisiveness and uncertainty in the US are likely to rise as the 2020 Presidential election in November approaches, creating periods of volatility in markets. Markets are experiencing a perfect storm.

 

The S&P 500 fell 12.42% since the previous report, while the NASDAQ was 11.82% lower. The DJIA posted a 13.06% loss since the last report. Chinese stocks outperformed US indices for the third consecutive week, even though China is ground zero for Coronavirus. Since the Chinese market is far smaller than the markets in the US and Europe, China could be supporting its markets and stocks, which would explain the recent outperformance compared to US stocks. In a country like China, government intervention and management of markets are the norm.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $38.80 level on Wednesday, which was 5.96% lower than the closing level on March 4. Technical support is at $37.66 per share from August 14. FXI traded to a new high of $45.29 on January 13, which stands as technical resistance. Above that peak, the next level of resistance is at the early April high of $45.96 per share. FXI traded down to a low of $38.01 on March 9. The FXI will continue to move lower or higher, depending on developments on the spread of the virus in the current environment. However, Chinese government intervention is likely to impact the price of FXI and all Chinese stocks.

US 30-Year bonds continued to exhibit explosive behavior over the past week. On Wednesday, March 11, the June long bond futures contract was at the 180-04 level, up 5.49%, adding to recent gains. Bonds slipped lower from that level late in the afternoon on Wednesday. The move in bonds is unprecedented. June bonds traded to a new high at 191-22 on March 9 in the after Saudi Arabia decided to flood the world with crude oil. The continuous contract traded to a peak of 193-06. The yield on the US ten-year Treasury fell to a historical low of below 0.40%.

The odds of any changes in Fed monetary policy in 2020 had been low as it is an election year in the US before risk-off hit markets like a ton of bricks. At its January meeting, the Fed left rates unchanged. However, the recent conditions in markets forced the central bank’s hand to come to the rescue with monetary policy accommodation. The world’s monetary authorities are addicted to low rates of interest and asset purchases to stimulate conditions by inhibiting saving and encouraging borrowing and spending. Many analysts expect another significant rate cut at the March Fed meeting. Short-term US rates stood at 1.50%-1.75% after three rate cuts in 2019. At 1.00% to 1.25%, there is not all that much room to cut rates in the US, so we could see the return of quantitative easing, which would push rates lower further out along the yield curve. In the US, the bond market is telling us that we are on a path to zero short-term rates once again.

Open interest in the E-Mini S&P 500 futures contracts rose by 10.84% since March 4. Open interest in the long bond futures fell 0.20% over the past week. The VIX continued to reflect the wild price swings during the week as the volatility index was at the 53.90 level on March 11, 68.49% higher over the period after huge move to the upside over the recent weeks. The VIX traded to a high of 61.62 on March 9, the highest level since 2009. During the height of the 2008 crisis, the VIX reached 89.53.

I had been advocating buying the VIX and VIX-related products when volatility is low, and the stock market was making new highs. Buying volatility on dips and taking profits on rallies had been the optimal approach over the past months. I have only traded these products from the long-side and sold all positions after the explosive move in the VIX. The gains in the volatility instruments covered many losses in other markets over the recent sessions. At the 53.90 level, the VIX is not at a level that offers any value and is in the sell than the buy zone, but I would not go short the VIX in this environment. I took profits on VIX-related instruments on a scale-up basis. The level of the VIX also tells us that options offer more opportunities from the sell than the buy side, which involves too much risk in this market. The VIX reflects the implied volatilities of put and call options on the S&P 500 stocks. The higher VIX reflects more demand for options, which are price insurance. Insurance premiums rise when risk increases. I expect volatility to continue, but history teaches that the current level is likely unsustainable for the long term.

 

The dollar and digital currencies

The dollar index fell by 0.84% since the previous report. The index continued to reflect the stronger euro, which has been rising because of risk-off conditions. Since the euro accounts for 57.6% of the dollar index, the rise in the European currency pushed the index lower over the recent weeks. The ongoing unwind of a massive carry trade where market participants were long dollars and short euros because of interest rate differentials and the strength of the dollar in the currency pair is the reason for the move to the upside in the euro currency. In risk-off conditions, market participants have been liquidating the carry trade. With US rates coming down, and the dollar dropping, the rationale for the carry trade has gone up in smoke over the past weeks.

The dollar index traded to a new low of 94.61 over the last week, which is the lowest level since October 2018. Technical resistance on the continuous contract stands at the 99.815 level with medium-term support nearby at the recent low. The dollar index was at 96.492 on March 11 after bouncing from the low this week. Below there, the monthly chart has support at 93.395. Coronavirus, carnage in crude oil, and the US election are causing lots of volatility in the currency markets and that could continue over the coming weeks and months. The emergency 50 basis point cut in the Fed Funds rate on March 3 did little to stabilize markets, it was like a gunshot into the ocean. Falling interest rates will do much to address fears associated with the spreading virus. Slashing interest rates and pushing rates lower by buying debt securities, or quantitative easing has become the go-to tool for central banks in the post-2008 financial crisis environment. Since the stock market action since February 24 was the most volatile and bearish since 2008, we are likely to see the Fed and other central banks resort to easing, but there are no guarantees that it will produce the desired effect. Fiscal stimulus from governments will be a necessary factor is risk-off continues as central bank easing can go only so far. President Trump indicated he would address the nation from the Oval Office at 8:00 PM EST on Wednesday.

The euro currency was 1.24% higher against the dollar since March 4 on the March futures contract. The euro versus the dollar currency pair had moved steadily lower throughout February, but it bounced over the past weeks on the back of an unwind of the carry trade. The pound moved 0.22% lower against the US currency after the Bank of England cut interest rates on Wednesday. The ECB is likely to do the same on Thursday, which could push the dollar higher. Short-term technical support in the pound is at the $1.2732 level against the dollar. I continue to believe that the pound below the $1.30 level is in the buy zone against the US dollar, but I would only trade the relationship with a tight stop, given the potential for lots of news from central banks that could move exchange rates.

 

Bitcoin and the digital currency asset class moved lower over the past week. Cryptocurrencies have been falling over the recent weeks in sympathy with risk-off conditions. Bitcoin was trading at the $7,815.35 level as of March 11, as it fell 10.60% compared to the value on March 4 after declines in recent weeks. The cryptocurrency failed at over the $10,000 level, as all asset prices dropped. Ethereum moved lower by 14.72% and was at $189.75 per token on Wednesday. The market cap of the entire asset class moved 11.76% lower as it underperformed the price action in Bitcoin. The number of tokens increased by 22 to 5183 tokens since March 4. The rise in the number of digital currencies over the past year continues to dilute the asset class. In late 2017 the overall market cap was at over $800 billion with a fraction of the number of tokens available today. On Wednesday, the market cap stood at around $220.383 billion. Open interest in the CME Bitcoin futures fell by 10.74% since last week. Open interest had been moving higher during rallies and lower during dips in the Bitcoin futures market, which tends to be a bullish sign in a futures market. However, all logic and tradition relationship can go out the window during periods of turmoil in markets. As I have been writing, “an ETF product in 2020 could cause even more attention and higher prices for the digital currency asset class. The Chinese government cracked down on the asset class over the past months, but these days it has its hands full with Coronavirus.” I would use a trailing stop on long positions raising the level of the stop as the price of the cryptocurrency rises.

The Canadian dollar moved 2.69% lower since last week on the back of weakness in the price of oil. Open interest in C$ futures rose by 9.17% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that also produces significant quantities of energy and agricultural products. Weakness in commodities prices accounted for the decline in the C$ over recent weeks.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ fell by 1.83% since the March 4 report. The geographical proximity to China makes the Australian dollar sensitive to the Coronavirus and accounts for its decline.

The British pound posted a 0.22% loss since the previous report. While Brexit is now in the market’s rearview mirror, the UK will need to establish trade protocols and treaties with nations around the world, which could account for the volatility in the British pound over recent weeks. However, all bets are off during the current global health crisis.

The Brazilian real hit new lows against the dollar, as it fell 3.60% since last week. The Brazilian currency was trading at the $0.210450 level after falling to a new low at $0.20675 during the week. Emerging market currencies have plunged during the risk-off period in markets. 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 likely to move higher or lower with any significant changes in the direction of the Brazilian real over the coming weeks. I continue to believe that the real will eventually appreciate against the US dollar, but so far, I have been wrong, and the currency made another new low over the past week. US President Trump met with Brazilian President Bolsonaro over the past weekend. The US will likely encourage Brazil to lift the value of its currency. The low real versus the dollar has created an unfair advantage for Brazil, according to President Trump.

The low level of the currency makes Brazilian exports more attractive in the global market and has supported the prices of shares of companies in the South American country. US President Trump is likely to put pressure on Brazil to raise the level of its currency based on trade imbalances over the coming months if the real continues to slip lower. While the Brazilian currency looks ugly at new lows, I continue to believe that a recovery will eventually occur. I would only trade the real from the long side with a very tight stop. Emerging market currencies can gap as we witnessed with the Argentine peso in 2019.

 

Precious metals prices moved mostly lower since last week. The Fed rate cut was bullish fuel for the sector, but in risk-off environments, all assets tend to lose value.

 

Precious Metals

The emergency rate cut from the Fed and wild volatility in all markets was initially bullish for precious metals prices over the past week. However, the prices of the four precious metals that trade on the COMEX and NYMEX exchanges all posted losses since March 4. Rhodium was the only metal to post a gain since last week. The action in the stock market weighed heavily on mining shares since March 4.

Gold fell 0.04% since last week even though interest rate declines are bullish fuel for the yellow metal. Silver continued to underperform gold as it fell 2.73% since March 4. April gold futures were at over the $1640 per ounce level on Wednesday, while March silver was just above $16.77 per ounce. Gold made a new high since last week while silver has been unable to keep pace.

April gold futures reached a new peak at $1704.30 on March 9 as fear gripped the oil markets and the energy commodity became a falling knife. May silver rose to $19.005 on February 24 before the price suffered a substantial correction. Silver never challenged the July 2016 high at $21.095, while gold has left the former resistance level at $1377.50 in the dust with a continuation of higher peaks.  Gold continued to outperform silver over the past week. I continue to believe that the current environment is favorable for both precious metals, but risk-off can cause liquidation and sharp corrections. Silver has a long way to go to catch up with gold, but the volatile metal has a history of moving when the market least expects. The price action in silver has caused complacency to rise, which could be fertile ground for an eventual surprise.

The price of April platinum edged 0.64% lower since March 4, after significant declines over past weeks.  Platinum continues to be the laggard in the precious metals sector. April futures were at the $869.60 per ounce level. The level of technical resistance is at $1,021 on the April futures contract as platinum continues to struggle with the $1000 level. Support in platinum is now at $846.20 per ounce. 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 soared over the past week to a midpoint price of $12,050 per ounce on March 11, up $1,300 from the level on March 4, more than erasing last week’s loss. Palladium plunged 5.96% since the previous report. The price traded to a new peak at $2815.50 on February 27 on the nearby futures contract. June palladium settled at the $2259.40 per ounce level on Wednesday. As I had been writing over recent weeks, “The risk of significant volatility in palladium and rhodium rises with the prices of the metals, and we should expect a continuation of wide price ranges over the coming weeks.” We should expect wide ranges in palladium and rhodium markets considering the current price levels and the trajectory of gains.

Open interest in the gold futures market moved 8.46% lower over the past week. The metric moved 7.35% lower in platinum after last week’s significant decline as longs exited positions. The total number of open long and short positions fell 6.47% in the palladium futures market after substantial declines over the past two weeks. Silver open interest declined 5.00% over the period after a 17.6% decline last week. The decline in open interest is a sign that risk-off has impacted the sector.

The silver-gold ratio continued to rise as gold outperformed silver since March 4.

Source: CQG

The daily chart of the price of April gold divided by May silver futures shows that the ratio was at 97.69 on Wednesday, up 2.53 from the level on March 4. The long-term average for the price relationship is around the 55:1 level. The ratio remains at an elevated historical level and near the historical high. Silver remains historically cheap compared to gold, and over the past week, it got more inexpensive. The ratio had dipped to a low at 79.13 on September 4, 2019, on the active month contracts when silver moved to its most recent high. I had written that “The ratio tends to move lower during bull market periods and higher when there is bearish price action in the markets, which is a warning sign that we could be in for a bumpy ride in the gold and silver markets.”

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

Gold moved only fell 0.04%, while the GDX was 13.59% lower since March 4, and GDXJ fell by 16.75% since the previous report. The mining stocks tend to outperform gold on the upside and underperform during corrective periods as it provides a leveraged return. Over recent weeks, GDX and GDXJ underperformed gold, which reflects the risk-off environment in the stock market. I continue to rate both ETFs as a hold, but risk is high on these instruments in the current environment. We are also long SLV, the silver ETF product, which posted a 2.86% loss since March 4, which marginally underperformed the percentage gain in the silver futures market. I continue to believe that both gold and silver prices will head higher over time. However, the potential for significant periodic corrections is very high. In silver, a rally to challenge the 2016 high at $21.095 is necessary to light a bullish fuse under the sleeping silver market. Speculators and trend-following traders would likely flock to the silver market if it can muster the strength to break out to the upside above the $21 level. Intraday price volatility is likely to remain at elevated levels creating trading opportunities for market participants.

Platinum and palladium prices fell since March 4. June Palladium was trading at a premium over April platinum with the differential at the $1389.80 per ounce level on Wednesday, which narrowed since the last report. April platinum was trading at a $772.70 discount to April gold at the settlement prices on March 11, which marginally widened since the previous report.

The price of rhodium, which does not trade on the futures market, was at $12,050 per ounce on Wednesday, up $1,300 per ounce or 12.09% on the week an at a historic high. Rhodium is a byproduct of platinum production. The low price of platinum has caused a decline in output in South African mines, creating a shortage in the rhodium market. The price has moved higher from a low at $575 per ounce in 2016.

We are long the PPLT platinum ETF product, which moved 1.38% lower since March 4 as it underperformed the price action in the futures. Platinum continues to offer the most attractive value proposition in the precious metals sector even after the recent rally. Platinum needs to make a move and take out the $1200 resistance level to break to the upside on a technical basis. Platinum continues to disappoint as it failed again at an attempt above the $1000 level and was sitting just below $870 per ounce on Wednesday.

We are long the ETFMG Prime Junior Silver ETF (SILJ) product at $10.36 per share to diversify risk. SILJ was at $7.58 on March 11, down 19.53% since the last report as mining shares substantially underperformed the silver futures market.

I have been writing, “I continue to be bullish on the prospects for all of the precious metals. The period of consolidation and correction continued over the past week and could go on for a time. I believe that any price weakness in the sector will create excellent buying opportunities.” It is tempting to add to long positions after the recent correction. While I will maintain the core long exposure to the sector, I would continue to put tight stops on any additional purchases over the coming week in this dangerous environment.

Falling rates are bullish fuel for the gold market. I remain bullish on the yellow metal, and silver, gold’s little brother. Meanwhile, risk-off conditions in markets across all asset classes will continue to cause wider intraday trading ranges and could cause downdrafts. I would only trade gold, platinum, and silver from the long side. Each dip in these markets over the past months has been a buying opportunity. When it comes to palladium and rhodium, the prices are at lofty levels, which could set the stage for wild price variance and dangerous trading or investing conditions. I continue to believe that gold is heading to $2000 per ounce or higher, eventually. Meanwhile, all notions of the past may not work in this environment as the world is in the midst of a unique crisis period.

 

Energy Commodities

Crude oil-related commodities tanked over the past week with incredible losses in crude oil and oil products. OPEC dealt the oil market a significant blow when the cartel could not agree to cut output. The market had expected at least a one million barrel per day reduction in production. The Russians balked, and the oil ministers left the meeting with no deal to adjust output policy. The oil cartel failed to address the current risk-off conditions that are weighing on the demand for the energy commodity. Brent fell with WTI futures in the wake of OPEC’s stalemate. Moreover, Saudi Arabia decided to flood the market with oil and abandon all previous quotas creating price carnage on Sunday night as the price oil futures fell to their lowest levels since February 2016. Ethanol, and coal prices moved to the downside since March 4. Natural gas fell to its lowest price of this century, but the price recovered and traded to almost $2 as risk-off caused short covering.

April NYMEX crude oil futures plunged by 29.50% since the previous report adding to losses since early January. After putting in a bearish reversal on the monthly chart in January, the price has made lower lows. If nearby futures settle below the $50.99 per barrel level at the end of March, they will put in a bearish reversal trading pattern on the quarterly chart. The price was below $33 per barrel on Wednesday.

May Brent futures moved 30.08% lower since March 4, adding to losses. April gasoline was 28.62% lower, and the processing spread in March posted a 28.61% loss since the previous report. April heating oil futures moved 19.25% lower from the last report moving the heating oil crack spread 7.13% higher since last week.

Technical resistance in the April NYMEX crude oil futures contract is now at $41.05 per barrel level with support at the February 2016 low at the $26.05 level on the continuous contract. The low over the past week was at $27.34 per barrel. Crude oil open interest rose by 1.13% over the period. The bears have been in control since January 8. Iran remains a potential source of supply concerns that could send the price of oil higher if another round of hostilities breaks out or the theocracy in Teheran undertakes further provocative actions. OPEC slaughtered the price of oil on March 6. Risk-off conditions gripped markets across all asset classes over the past weeks and turned the crude oil futures market into a falling knife.

Oil equities plunged with the price of petroleum. The potential for bankruptcies of debt-laden companies in the oil and oil-related sector continues to send share prices lower. In hindsight, the energy stocks signaled the problems in crude oil in advance of the current price decline. While Coronavirus is creating risk-off conditions, the move in the price of oil exacerbated the situation.

Over half the world’s crude oil reserves are in the Middle East. Political instability in the region always has the potential to impact the price of the energy commodity. Meanwhile, technological advances and regulatory reforms in the US has made the world’s leading economy independent when it comes to energy supplies. With 13.00 million barrels per day of output, the US produces more oil than either Saudi Arabia or Russia. The Trump administration has encouraged oil and gas production over the past four years. However, the 2020 Presidential election will be a referendum on the future of energy policy as the opposition party has embraced the “Green New Deal” that would reduce fracking and energy output when it comes to fossil fuels. The potential for a dramatic shift in US energy policy could cause lots of price volatility in the oil and gas market during the second half of 2020 as the prices could begin to move higher and lower with the political polls in the US. In November, the world’s largest energy-producing nation will decide if it continues to produce or if new regulations cause a sudden decline in output beginning in 2021. Meanwhile, at the new price level in the low $30s, US output is likely to drop as oil companies will lose money. US politics could play a role in the oil market later in the year, but we are now at a price level that creates an emergency for oil producers in the US.

Crude oil has gone through significant price declines over the past years but has always found a way to rebound. If the falling price of oil begins to impact Russia in a meaningful way, we could see a production cut in the coming weeks or months, but as of the end of last week, President Putin and his oil minister Alexander Novak have dug in their heels. If the Saudis and other oil-producing countries view the current environment as an opportunity to flood the market with the energy commodity to force US producers into bankruptcy and reduce US production, we could see prices fall even lower. It is a tense time in the oil business, which could have a significant impact on the US economy and the employment picture over the coming months.  Energy may play a role in the upcoming election if a recession in the US because of job losses in the oil and gas sectors begin to rise. OPEC and Russia may have decided that weakness in US oil companies that sit on a mountain of debt and the spread of Coronavirus causing risk-off conditions in markets across all asset classes is a perfect opportunity to push the oil price to the lowest level in years. If US producers exit the business, it would return power to the oil cartel led by the Saudis and Russians.

The spread between Brent and WTI crude oil futures in May fell to the $2.38 per barrel level for Brent, which was $1.83 below the level on March 4. The May spread moved to a high of $5.40 in early January as tensions between the US and Iran flared in the Middle East. The most recent peak was at $5.15 on February 19. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. Tensions in the Middle East should keep somewhat of a bid under the price of Brent crude oil and the spread between the two benchmarks. However, the latest news from OPEC was highly bearish for the spread between the two benchmarks.

Term structure in the oil market experienced a significant shift as the price of crude oil tanked. The flip from backwardation to contango in the spread reflects the flood of supplies in the crude oil market. We are likely to see oil traders fill 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 are now one of the only profitable areas of the market. The cash and carry trade will lift freight and storage rates. The forward curve in crude oil highlights the current state of contango.

Source: CQG

The chart of the price of crude oil for delivery in June 2021 minus June 2020 shows that a backwardation of $6.03 in early January moved to contango of $5.95, a move of an incredible $11.98 per barrel. At $5.95 contango equates to around 17.5%. With interest rates at almost zero, buying nearby oil, storing and insuring it, and selling forward will be the most popular oil trade. Expect storage around the world to fill up quickly in the current environment pushing freight and storage rates to skyrocket. If Coronavirus continues to weigh on demand, we are likely to see idle ships and tankers become storage facilities for oil. At the same time, contango can continue to move higher, as we witnessed in early 2016, so be cautious with synthetic trades to take advantage of the cash and carry advantages. The plunge in the price of oil turned the fundamentals around. A flood of crude oil from Saudi Arabia, Russia, and other oil-producing nations at a time when demand is falling will continue to push contango in both WTI and Brent futures markets higher. Rising contango is a sign of a glut in the oil market.

US daily production was near the record high with 13 million barrels per day of output as of March 6, according to the Energy Information Administration. The level of output fell 100,000 barrels from the previous week’s record high. As of February 28, the API reported an increase of 1.70 million barrels of crude oil stockpiles, while the EIA said they rose by 800,000 barrels for the same week. The API reported a decline of 3.90 million barrels of gasoline stocks and said distillate inventories fell by 1.70 million barrels as of February 28. The EIA reported a decrease in gasoline stocks of 4.30 million barrels and a drop in distillates of 4.0 million barrels. Rig counts, as reported by Baker Hughes, rose by four last week to 682 rigs in operations as of March 6, which is 152 below the level operating last year at this time. The inventory data from both the API and EIA took a backseat to the OPEC meeting and risk-off conditions in markets over the past week.

OIH and VLO shares plunged with the stock market since March 4, OIH declined by 46.28%, and VLO moved 15.17% to the downside since last week. Eventual strength in crack spreads would be supportive of the price of VLO stock. We are long two units of the OIH ETF product at an average price of around $13.40 per share. OIH was trading at $4.69 per share level on Wednesday. I am holding a small position in OIH. I will not add to it over the coming weeks.

We are short the May $80 put option on VLO at $3.65 per share.

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

 

If the shares are below the $80 level, we will assume a long position in VLO shares at $76.35.

We are short the May $70 put option for the same expiration at $6.28. A link to the option is below:

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

 

If the price of VLO shares is below $70 on May 15, we will be long the stock at $63.72 per share on this position, and an average of $70.04 per share on the two positions. VLO was trading lower at $54.42 per share on Wednesday. As I wrote, “If you are not comfortable assuming this level of risk, please do not follow this recommendation.” We are coming into a time of the year where gasoline demand tends to rise, putting upward pressure on refining spreads. The position in VLO is not a long position on crude oil or gasoline, but on the margin for processing the energy commodity into oil products.
I will add another short put option at the $40 strike for the May expiration if the price of the stock declines below the $45 level over the next week to continue building a long position via collecting premium on a scale-down basis. Please remember that when selling these puts, you must be prepared to purchase the stock on the expiration day at the strike prices of the put options. The net purchase price is the strike price minus the premium received. I suggested starting with a very small position, and will continue to add, but have widened my scale given the price action in the oil sector.

 

I have stayed away from the ERX product over the past week and will continue to only trade on an intraday basis in any oil-related instruments.

April natural gas futures fell to the lowest level in a century on March 9 when the price reached $1.61 per MMBtu, the 1998 low. However, an overabundance of short positions caused short covering that lifted the price to just shy of $2 per MMBtu before falling back below the $1.90 level in Wednesday. Nearby April futures were at $1.878 on March 11, which was 2.79% higher than on March 4. The April futures contract traded to a high of $2.447 on November 5 and has made lower highs and lower lows throughout the winter months. Natural gas traded at its lowest price since 1998, when it hit $1.61 on March 9 on the April contract. Critical support stands at that $1.61 1998 bottom. While technical and fundamental factors continue to favor lower prices, risk-off pressures overwhelmed the bearish forces this week.

Natural gas followed through on the downside after putting in a bearish reversal trading pattern on the weekly chart during the week of January 13. Every attempt at a recovery ran out of buying. There are only around three weeks left until the 2020 injection season begins in late March, and the price has reflected injection season trading conditions throughout the entirety of the peak season. However, risk-off may have changed the tone of the natural gas market.

Source: EIA

The EIA reported a withdrawal of 109 bcf, bringing the total inventories to 2.091 tcf as of February 28. Stocks were 48.2% above last year’s level and 9.2% above the five-year average for this time of the year. Natural gas stocks fell to a low of 1.107 tcf in March 2019. With around three weeks to go until inventories begin to climb, we would need to see an average withdrawal of 328 bcf to reach last year’s low in stockpiles, which is not happening. Stocks will likely wind up at a low of around 1.8 tcf or higher. This week the consensus expectations are that the EIA will report a withdrawal of 68 bcf from storage for the week ending on February 28. The EIA will release its next report on Thursday, March 12, 2020.

Open interest fell by only 0.58% in natural gas over the past week. The metric had been rising as the price declined, which is a bearish sign for the futures market. Technical resistance is at $2.025 per MMBtu level on the April futures contract with support at $1.610 per MMBtu, the low from 1998, which stands as technical support on the continuous futures contract. Price momentum and relative strength on the daily chart were sitting above neutral conditions as of Wednesday after the price recovery. The price action continues to suggest that sellers are lurking above looking to take advantage of any attempts at a price recovery as we move towards the injection season. However, risk-off conditions could cause additional short covering if speculators decide to move to the sidelines. It feels like the specs will attempt to push the price below the support to prices below the 1.60 level, but the longer the price sits above $1.61, the higher the odds we have seen the low for the year.

The GASL ETF product collapsed to $0.14 per share on March 11, 93% lower than on March 4, after weeks of consecutive losses. I have been on the sidelines in products like GASL and ERX. Reverse splits are on the horizon for the leveraged products.

April ethanol prices moved 4.83% lower over the past week on the back of weakness in all energy prices. Open interest in the thinly traded ethanol futures market moved 14.94% lower over the past week. With only 393 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product fell 15.64% compared to its price on March 4. The price of April coal futures in Rotterdam moved 1.95% lower over the past week.

On Tuesday, March 10, the API reported a 6.407-million-barrel rise in crude oil inventories for the week ending on March 6. Gasoline stocks fell by 3.09 million barrels, while distillate stockpiles fell 4.679 million barrels over the period. The EIA said crude oil stocks rose 7.70 million barrels. Gasoline inventories were 5.00 million barrels lower, while distillate stocks fell 6.40 million barrels. The API and EIA inventory reports were bearish for the price of the energy commodity. Inventories took a backseat to a flood of oil from Saudi Arabia and the end of production cuts.

In natural gas, the price touched the 1998 low at $1.610 per MMBtu.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the price at $1.878 in April on the settlement price on March 11, was 5.10 cents per MMBtu higher than on March 4. 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 head into the 2020 injection season.

I have been taking profits quickly and stopping losses looking for a 1:2 risk-reward ratio on forays into the crude oil futures market. UCO and SCO products can be helpful for those who do not trade futures. In natural gas, UGAZ and DGAZ have attracted lots of volume over the past week as the price of natural gas fell to new lows and recovered. 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. We are long two units at an average price of $15.16 per share. PBR shares tanked with oil and the real and were 44.44% lower over the past week at $6.85 per share. I will wait for the dust to settle before averaging down on this small position.

It is an ugly time in the oil patch, and the impulse to move to the sidelines is strong under present conditions. I will only trade on an intraday basis and will hold the current positions looking to add at higher or lower levels when stability returns to the market.

 

Grains                                                             

Grain prices drifted lower over the past week as the commodities that feed the world have been less sensitive to Coronavirus than other sectors of the asset class. While Coronavirus affects the world population, each quarter, there are approximately twenty million more mouths to feed around the globe. Population growth continues to put upward pressure on the demand side of the equation of most agricultural commodities

The USDA released its March WASDE report on Tuesday, March 10, at noon EST.

 

 

May soybean futures fell by 3.75% over the past week and was at $8.7325 per bushel on March 11. Open interest in the soybean futures market rose by 3.02% since last week. Price momentum and relative strength indicators were below neutral readings on Wednesday in the daily chart.

The USDA told the soybean futures market:

U.S. soybean supply and use projections for 2019/20 are mostly unchanged this month. With soybean crush and exports projected at 2.1 billion bushels and 1.8 billion bushels, respectively, ending stocks remain at 425 million bushels, down 484 million from last year’s record. Soybean and soybean oil prices are reduced this month. The U.S. season-average soybean price is projected at $8.70 per bushel, down 5 cents. The soybean oil price is projected at 31.5 cents per pound, down 2 cents. Soybean meal prices are unchanged at $305.00 per ton. This month’s 2019/20 global oilseed outlook includes higher production and stocks relative to last month. Global soybean production is raised 2.4 million tons to 341.8 million, mainly on a 1-million-ton increase for both Argentina (to 54 million) and Brazil (to 126 million). Argentina’s larger crop is due to overall favorable conditions in higheryielding central and northwestern farming areas. Soybean crush is lowered 1 million tons for Argentina on the current pace to date. With higher South American production and lower use, global soybean stocks are increased 3.6 million tons to 102.4 million. Another notable oilseed change includes a 1-million-ton reduction for palm oil production, mainly in Malaysia and Colombia, leading to a 19 percent year-over-year decline in global vegetable oil stocks.

Source: USDA

The USDA said that global soybean production and inventories rose compared to the February report.

The May synthetic soybean crush spread declined over the past week and was at the 93.00 cents per bushel level on March 11, down 6.50 cents since March 4. The crush spread is a real-time indicator of demand for soybean meal and oil. Therefore, price trends in the crush spreads can cause buying or selling in the raw oilseeds at times. Any significant moves in the crush spread are likely to translate into price movement in the soybean futures. The decline in the crush spread since late January was a confirmation of the recent bearish trend. However, the spring planting season is right around the corner now that we are in February, and it is the wrong time of the year to become overly bearish in soybeans or any of the grain markets. As I have written in previous reports, I believe soybean futures are in the buy-zone at prices below $9 per bushel, but risk-off has pushed the price lower.

May corn was trading at $3.7450 per bushel on March 11, which was 2.73% lower on the week on the back of falling energy prices. Open interest in the corn futures market fell by 2.06% since March 4. Technical metrics were just below neutral readings in the corn futures market on the daily chart as of Wednesday. The price of April ethanol futures fell by 4.83% since the previous report on the back of crude oil and gasoline prices. April ethanol futures were at $1.222 per gallon on March 11. The spread between May gasoline and May ethanol futures was lower at 12.91 cents per gallon on March 11, down 11.01 cents since last week as gasoline prices plunged.

The USDA told the corn market:

This month’s 2019/20 U.S. corn supply and use outlook is unchanged relative to last month. The season-average corn price received by producers is lowered 5 cents to $3.80 per bushel based on observed prices to date. Global coarse grain production for 2019/20 is virtually unchanged from last month at 1,402.8 million tons. This month’s foreign coarse grain outlook is for slightly higher production, consumption, and stocks relative to last month. Global corn production is raised 0.4 million tons, as an increase for South Africa is partially offset by reductions for India, Peru, and Russia. For South Africa, production is higher as continued favorable conditions during the month of February boost yield prospects. Major global trade changes for 2019/20 include higher projected corn exports for Ukraine, South Africa, and the EU. For 2018/19, Brazil’s exports for the marketing year ending February 2020 are lowered based on smaller-than-expected late-season shipments. Partly offsetting is an increase for Argentina. Corn imports for 2019/20 are raised for Canada and Peru but lowered for the Philippines. China’s sorghum imports are raised reflecting recent purchases from the United States. Foreign corn ending stocks are raised, as increases for South Africa, Canada, and Russia more than offset a decline for Argentina. Global corn ending stocks, at 297.3 million tons, are up 0.5 million from last month.

Source: USDA

Global corn inventories rose in the March WASDE report, but US supplies were unchanged from February.

 

May CBOT wheat futures were 1.06% lower since last week. The May futures were trading $5.1275 level on March 11. Open interest rose by 1.89% over the past week in CBOT wheat futures. We should expect to see open interest rise in all of the grain markets over the coming weeks as farmers hedge the 2020 crops. However, risk-off in markets may be causing hedging activity to slow. Technical metrics in CBOT wheat were at oversold readings on Wednesday. March wheat traded to a high of $5.925 on January 22, just one-half cent below the technical resistance on the longer-term charts, but the price failed, leading to the correction over the past weeks. The first level of support is now at the $5.0575 per bushel level, the recent low.

The USDA told the wheat market:

The 2019/20 U.S. wheat supply and demand outlook is unchanged this month. The projected season-average farm price is also unchanged at $4.55 per bushel. The 2019/20 global outlook this month for wheat is for higher production, increased consumption and exports, and lower ending stocks. Output is raised on higher production forecasts for India and Argentina more than offsetting reductions for Turkey and Australia. India’s production is raised 1.4 million tons to a record 103.6 million, mainly on an updated government production estimate. World exports are increased by 0.8 million tons to 183.6 million as higher exports by Russia and Argentina more than offset reductions for Canada and Australia. Russia’s exports are increased 1.0 million tons to 35.0 million, primarily on higher projected imports by Turkey as Russia is its leading supplier. Turkey’s wheat imports are raised 2.0 million tons to a record-large 10.5 million on higher consumption, reduced production, and government policies to import additional quantities duty-free to stabilize domestic prices. Turkey’s wheat imports have been rising for the last decade and the country is now projected to be the third-largest importer for 2019/20 behind Egypt and Indonesia. Wheat imports are also higher for Bangladesh as they increased to a record 6.5 million tons on a robust pace. Global consumption is raised 0.7 million tons as increases for Turkey, Bangladesh, and Canada more than offset reductions for the EU, Iraq, and Lebanon. Global ending stocks are projected lower this month but remain record large for the 2019/20 crop year at 287.1 million tons with China comprising 52 percent of the total.

Source: USDA

Global wheat stocks declined on a month-on-month basis but remained at a record level.

As of Wednesday, the KCBT-CBOT spread in May was trading at a 77.25 cents per bushel discount with KCBT lower than CBOT wheat futures in the May contracts. The spread widened by 12.25 cents since March 4. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.”  The spread continues to be at a level that is bearish for the wheat market. Any sudden problem in the wheat market that causes consumer hedging to increase could result in a dramatic change in the spread between the hard and soft winter wheat futures contracts. However, the spread moved away from the long-term average over the past week.

I will continue to build long core positions in futures and the CORN, WEAT, and SOYB ETF products over the coming weeks on price weakness. The trade deal resulting in a de-escalation of the trade war is supportive of the prices of grains. The outbreak of the Coronavirus has been a bearish factor for the grain markets, but less so than in other markets. The uncertainty of the 2020 crop year could add volatility to the market as the spring planting season gets underway. I am a scale-down buyer of beans, corn, and wheat on price weakness, leaving plenty of room to average down by using wide scales in the current environment.

The long-term average for the corn-soybean spread is around the 2.4 bushels of corn value in each bushel of soybean value level. When the spread is higher, farmers tend to plant more beans than corn, and when it is lower than the 2.4:1 average, they tend to plant more corn than soybeans on their acreage.  Farmers are now preparing how best to utilize their acreage during the upcoming 2020 planting season.

Source: CQG

The chart of the November 2020 soybean futures divided by December 2020 corn futures shows that the ratio moved lower over the past week and was at the 2.3566:1 level on March 11, down 0.0221 since last week. The ratio is below the long-term norm. On March 11, the spread was at a level where farmers would likely plant a bit more corn than soybean crops when it comes to the planting season in the early spring at under the 2.4:1 level.

The uncertainty of the 2020 crop year is likely to add price variance to the grain futures markets over the coming weeks. I will look to build long positions during periods of price weakness. The deal with China should limit any downside until the 2020 growing season during the summer months. However, Coronavirus has weighed on the prices over the past weeks. Lower price levels could be creating a buying opportunity in the agricultural products that feed the world for the coming weeks and months. I continue to believe that the demand side of the fundamental equation for grains will limit any selloffs. At the same time, the uncertainty of the weather during the coming crop year could create the ideal conditions for sudden sharp rallies. I believe that any weakness in grains could offer some of the most compelling buying opportunities in the commodities asset class over the coming weeks. Nothing has changed since last week when it comes to my view of the grain markets.

Each year is a new adventure in the agricultural commodities that feed the world. The beginning of spring is the time of the year when uncertainty can lead to increased price variance. I view the current price levels as areas to establish long positions, leaving room to add on further price weakness. The most recent WASDE report from the USDA was mostly benign. The full text of the March WASDE report can be found via this link.

 

Copper, Metals, and Minerals

Base metal prices were calm over the past week compared to the energy sector as the focus over Coronavirus shifted from China to the rest of the world. As the spread of the virus seemed to slow in the world’s most populous nation, base metal prices did not plunge to the extent witnessed in crude oil. Copper, aluminum, and lead prices fell, but nickel, zinc, and tin were higher. The Baltic Dry Index continues to recover, which was more based on seasonal factors than events in markets. Lumber fell sharply as market volatility increased in the United States. Iron ore and uranium prices declined over the past week.

Copper fell 3.17% on COMEX, while the red metal posted a 1.42% loss on the LME since the last report. Open interest in the COMEX futures market moved 6.48% lower since March 3. May copper was trading at $2.5040 per pound level on Wednesday. Copper is a leading barometer for the overall health and wellbeing of the Chinese and global economies. The outbreak of Coronavirus has weighed on Chinese economic growth. Over the past week, LME stockpiles began to decline after recent gains.

Just as in the crude oil market, copper put in a bearish reversal on the monthly chart in January. A close below $2.5150 per pound at the end of March would put in the same bearish price reversal pattern on the quarterly chart. Copper was just below the level that would create bearish reversal on the long-term chart on Wednesday. The target on the downside in the copper market is at the early 2016 low of $1.9355 per pound. As the price of oil declined to a multiyear low, it could weigh on copper and other base metals as energy is a significant input in the production process.

The LME lead price moved lower by 0.60% since March 3. The rise in demand for electric automobiles around the world is supportive of lead in the long term as the metal is a requirement for batteries. The price of nickel moved 1.82% 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 0.60% since the previous report. Aluminum was 0.70% lower since the last report. The price of zinc rose by 0.85% since March 3. Zinc was just above the $2000 level on March 10. Base metals will continue to be highly sensitive to any news and developments on trade between the US and China. The US dollar index fell over the past week, which likely provided some support for the metals.

May lumber futures were at the $349.00 level, down 15.04% since the previous report. Interest rates in the US will influence the price of lumber. The US Fed slashed the Fed Funds rate by 50 basis points on March 3 in an emergency move. Lumber is a requirement for new home construction, which is a function of the level of interest rates. Low rates are likely to support the price of wood in 2020. The current environment forced the Fed’s hand and pushed rates lower despite the election year. Lumber fell on the back of panic conditions in the US as consumers were more interested in stockpiling water, hand sanitizer, canned goods, and toilet paper than buying new homes in the current environment. The price of uranium for April delivery was down 2.22% at $24.20 per pound. The volatile Baltic Dry Index gained 14.21% since March 4 to the 627 level after significant losses throughout the winter months. June iron ore futures were 2.00% lower compared to the price on March 4. Open interest in the thinly traded lumber futures market fell 8.37% after last week’s plunge of 23.26%. Risk-off conditions continued to weigh on the price of lumber futures.

LME copper inventories fell 9.85% higher to 190,425 metric tons since last week. COMEX copper stocks fell by 3.21% from March 3 to 27,822 tons. Lead stockpiles on the LME were up 2.33%, while aluminum stocks were 4.84% lower. Aluminum stocks fell to the 1,010,025-ton level. Zinc stocks fell 0.63% since the last report, after a significant rise in inventories in recent weeks. Tin inventories fell by 2.41% since March 3 to 7,280 tons. Nickel inventories were 0.33% lower compared to the level on March 3.

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

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 21 cents on March 11, down eight cents since last week. I believe this option is an inexpensive way to hold a long-term position in X shares at a low level until early 2021. The details for the call option are here:

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

 

US Steel shares were at $5.99 per share and moved 25.59% lower since last week.

We own two units of FCX shares at an average of $10.56. The stock was trading at $8.12 on Wednesday, $2.33 lower since the previous report. I continue to maintain a small long position in FCX shares.

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

I would widen out any buying scales in the current environment, given the potential for extreme levels of price volatility. The lower price of oil causes output costs to decline, which could take a toll on prices, but the falling dollar is not a bearish factor for the sector. I am concerned that we could see a similar move in copper, so I am sitting on the sidelines aside from some small positions and am only day trading with tight stops.

 

Animal Proteins

Cattle prices fell sharply over the past week, but lean hog futures edged only slightly lower. The USDA released its March WASDE report on March 10 and told the animal protein markets:

The 2020 forecast of total red meat and poultry production is raised from last month. Beef production is raised from the previous month as higher expected steer and heifer slaughter more than offsets lower non-fed cattle slaughter. Heavier carcass weights are also expected to support increased beef production. Pork production is increased on higher first-quarter slaughter.

The 2020 beef import forecast is raised from last month on higher expected imports of processing grade beef, while the export forecast is reduced on weaker anticipated demand in several markets. Pork exports are raised from last month on recent trade data and strong international demand for U.S. pork products. The fed cattle price forecast is reduced from last month on recent price weakness and increased production. The hog price forecast is reduced on pressure from large hog supplies.

Source: USDA

The USDA told the meat markets to expect higher levels of production of both beef and pork.
The grilling season, which is the time of the year for peak demand in the meats, begins at the end of May on the Memorial Day weekend in the US. Beef prices have not reflected the peak season in the current risk-off environment. With grain prices stable to lower, feed prices are under control, so there has been little pressure on the meats. Ranchers are feeding the animals and allowing them to grow to sizes that will allow for average to above-average carcass weights over the coming weeks and months.

April live cattle futures were at $1.03075 per pound level down 7.37% from March 4 as the price of beef continued to decline. Technical resistance is now at $1.1000 per pound. Technical support stands at around $1.0275 per pound level. Price momentum and relative strength indicators were at oversold readings on Wednesday. Open interest in the live cattle futures market moved 3.52% lower since the last report.

April feeder cattle futures underperformed live cattle as they declined by 8.87% since last week. April feeder cattle futures were trading at the $1.23525 per pound level with support at $1.18975 and resistance at $1.372750 per pound level. Open interest in feeder cattle futures fell by 5.62% since last week. While live cattle futures have a delivery mechanism, feeder cattle are a cash-settled futures contract. Sometimes live cattle prices lead feeder cattle prices, while at others, the opposite occurs.

Lean hog futures outperformed the live cattle futures since the previous report. The active month April lean hogs were at 63.875 cents on March 11, which was 0.66% lower from the level on March 4. Price momentum and the relative strength index were on either side of neutral readings on Wednesday. Support is at 61.00 cents with technical resistance on the April futures contract at 68.25 cents per pound level.

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

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

The long-term average for the spread between live cattle and lean hogs is around 1.4 pounds of pork for each pound of beef. Over the past week, the spread between the two in the April futures contracts moved a touch higher as the price of live cattle outperformed lean hogs on a percentage basis.

Source: CQG

Based on settlement prices, the spread was at 1.61370:1 compared to 1.73060:1 in the previous report. The spread decreased by 11.69 cents as live cattle became less expensive than lean hogs over the past week. The spread moved towards the historical norm on the April futures contracts.

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

I continue to believe we will eventually see recoveries in cattle and hog prices, and the COW ETN product, as we move closer to the season of peak demand. The trade agreement between the US and China could boost US exports of beef and pork to China. The WASDE report was not all that bullish for the meat markets, but it did not account for Chinese demand for US exports. Any significant further price weakness could offer an opportunity for some bargains in the beef and pork markets. I would continue to use wide scales for any buying to leave lots of room on the downside. I have the same view of the meat markets as last week. I am on the sidelines waiting for the dust to settle in all markets.

 

Soft Commodities

Risk-off conditions took the prices of all five of the soft commodities lower over the past week. Sugar was the leader on the downside since March 4. Coffee corrected lower after recent gains, and the prices of cocoa, cotton, and FCOJ all moved lower.

May sugar futures declined 8.98% since March 4 after an over 7% decline last week, as the price of the sweet commodity was around the 12.26 cents per pound level on the active month futures contract. Technical resistance is at 15.29 cents with support at 11.89 cents. Sugar made a new high at 15.90 cents on February 12 on the continuous contract. Nearby sugar futures traded to a lower low than the 13.20 cents January 2 previous low for 2020. The value of the January Brazilian real against the US dollar continued to fall over the past week and was at the $0.21045 level against the US dollar on the March contract, 3.60% lower over the period. The Brazilian currency recently fell below its multiyear lows, which is a factor for the price of sugar and other commodities where Brazil is a leading producer and exporter. The currency fell to a new low of $0.20675 as the slow descent continued. Coronavirus has weighed on emerging markets. Anyone with a risk position in sugar should keep an eye on the price action in the Brazilian real. Price momentum and relative strength on the daily sugar chart were in oversold territory as of March 11. The metrics on the monthly chart crossed lower, but the quarterly chart was still trending higher from an oversold condition. Sugar made a new high above its 2019 peak before the recent correction. Risk-off conditions stopped the rally. Open interest in sugar futures was 1.29% lower since last week. Open interest had been rising with the price, which was a bullish technical factor. Sugar rallied to new highs as drought conditions in Thailand created the supply concerns that lifted the price of sugar futures. The recent correction in sympathy with the risk-off conditions came as open interest edged lower, which could be a sign that sugar will find a bottom at a higher low.

May coffee futures moved 5.36% lower since March 3. May futures were trading at the $1.12050 per pound level. The first level to watch on the downside is $1.0255. Below there, support is at around 97.40 cents on the continuous futures contract. Resistance is at $1.2245 on the nearby May contract. I continue to favor coffee on the long side, but coffee can be a highly volatile commodity in the futures market, as we have witnessed over the past weeks and months. Our stop on the long position in JO is at $27.99; we are long two units of the ETN at an average price at $34.92 per share. JO was trading at $35.40 on Wednesday. Open interest in the coffee futures market was 3.57% lower since last week. I am holding a long position in the coffee futures market and the JO ETN product after taking profits scale-up in late 2019. Volatility has increased in the coffee futures market. I began buying as the price fell below the $1 per pound level. I started selling on a scale-up basis at around $1.10 but will continue to hold a very small core long position. I have not added to replace length during the most recent price decline in light of risk-off conditions.

Supply concerns over Brazilian production in the off-year for crops had been supportive of the price of the soft commodity from mid-October through December. The ICO has warned that a deficit between supply and demand could be in the cards for the market because of the 2019/2020 crop year. However, those fears subsided, causing the price of the soft commodity to decline to a level where buying returned to the market. Coffee had made higher lows since reaching 86.35 cents in mid-April. The ultimate upside target is the November 2016, high at $1.76 per pound. Price momentum and relative strength were falling below neutral levels on Wednesday. On the monthly and quarterly charts, the price action was neutral to positive. As I wrote in previous reports, “The risk rises with the price in the volatile coffee futures market. We should expect wide intraday trading ranges in the coffee futures market.”  Coffee can be a wild bucking bronco when it comes to the price volatility of the soft commodity. Last week I warned that risk-off conditions could impact the coffee market if they continue. The decline in the soft commodity is another in a long series of corrective moves.

The price of cocoa futures edged lower over the past week. On Wednesday, May cocoa futures were at the $2625 per ton level, 0.04% lower than on March 4. Open interest fell by 8.18%. Relative strength and price momentum were crossing higher in oversold territory on March 11 as the price correction found a recent bottom at $2509 per ton. The price of cocoa futures rose to a new peak and the highest price since September 2016 at $2998 per ton on the March contract on February 13. We are long the NIB ETN product at $25.76. NIB closed at $30.91 on Wednesday, March 11. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their exports of cocoa beans, it should provide support to the cocoa market on price dips. The level to watch on the upside above the recent high is now at $3000 per ton. On the downside, short-term technical support now stands at $2500 per ton. I would use a tight stop on this position.

May cotton futures fell 2.27% over the past week after recent declines on the back of continued concerns about the Chinese economy. May cotton was trading at 61.55 cents on March 4. On the downside, support is at 60.18 cents per pound. Resistance stands at 65.07 cents per pound. Open interest in the cotton futures market rose by 4.49% since March 3. Price momentum and relative strength metrics were below territory on Wednesday.

In its March WASDE report the USDA told the cotton market:

This month’s 2019/20 U.S. cotton forecasts show lower production, price, and ending stocks relative to last month. Production is reduced 300,000 bales to 19.8 million, based on the March 10 Cotton Ginnings report. The final estimates for this season’s U.S. area, yield, and production will be published in the May 2020 Crop Production report. Domestic mill use and exports are unchanged from last month, and ending stocks are lowered 300,000 bales to 5.1 million. The projected marketing year average price received by upland producers of 60.0 cents per pound is down 2 cents from last month. The global cotton supply and demand estimates show larger production and ending stocks. Consumption is forecast 850,000 bales lower, as a 1-million-bale cut in China’s expected consumption is only partially offset by increases for Bangladesh and Turkey. Production is up about 250,000 bales as larger expected crops in Brazil, Chad, and Tajikistan offset a lower U.S. crop and some smaller declines elsewhere. Ending stocks for 2019/20 are projected 1.3 million bales higher this month and 3.2 million bales higher than in 2018/19.

Source: USDA

The USDA reduces US production and ending stocks, but global inventories rose since the February report.

The “phase one” trade agreement between the US and China was a bullish factor for the price of the fiber futures, but Coronavirus cuts the other way. Cotton is coming into a time of the year when the price tends to peak. However, news out of China will determine the path of the fiber futures over the coming weeks, and that news has been problematic for the cotton market. As the Chinese economy ground to a halt, the demand for cotton suffered. The spread of the virus continued to weigh on the price of the fiber.

May FCOJ futures posted a loss since last week. On Wednesday, the price of May futures was trading around 97.90 cents per pound. FCOJ nearby futures moved 0.51% lower over the past week as OJ continues to struggle with the $1 per pound level. Support is at 92.15 cents level. Technical resistance is at $1.0275 per pound, where there is a double top formation on the daily chart. Open interest was unchanged since March 3. The Brazilian currency weighed on the FCOJ futures. $1 per pound continues to be a critical point for the OJ futures.

Risk-off conditions weighed on the prices of the soft commodities. The falling Brazilian real is also a risk factor for sugar, coffee, and FCOJ prices. Soft commodities can be highly volatile, but the prices cotton and FCOJ remain close to the bottom ends of their respective pricing cycles. Coffee corrected after a recent recovery, but the risk of another trip to test the $1 level remains high. Sugar has corrected and could fall further along with cocoa, as I pointed out last week. However, I would expect the sweet commodity and primary ingredient in chocolate confectionery products to find support at higher lows, which could create buying opportunities.

 

A final note

We should expect unprecedented volatility across all asset classes to continue to grip markets over the coming weeks. The current environment is a lot different than during the 2008 financial crisis, which centered around money and assets. This time, the world faces an outbreak of a disease, which has the potential to take lives and is more like a natural disaster than an economic event. However, the global economy will suffer the effects of Coronavirus, which is a reminder of how markets reflect geopolitical, economic factors as well as acts of God or nature. Keep stops tight on any new positions, and only approach markets with a risk-reward plan. Look for bargains in the current environment when it comes to long-term investments. History has taught us that risk-off periods are the best times to acquire stocks and other assets when they fall to irrational prices. The continuation of monetary policy accommodation by the world’s central banks continues to weigh on the value of all fiat currencies, which is likely to keep the bullish trend in gold going as it moves towards a challenge of the 2011 record peak in US dollars at $1920.70 per ounce.  However, risk-off can cause sudden and violent selloffs.

As I wrote over the past weeks, I plan to increase the price of The Hecht Commodity Report soon. However, all of my current loyal subscribers will never experience an increase in their monthly or annual subscription rates. I will grandfather all subscribers at their current rates for as long as they maintain their subscriptions. Thank you for your support.

 

Please keep safe and healthy in this environment.

 

 

 

Until next week,

 

Andy Hecht

 

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal.  This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.