• The stock market was mostly higher as optimism over the reopening of the US economy continued to support share prices
  • Precious metals were down across the board, except for rhodium which edged higher
  • Energy commodities move lower, except for ethanol
  • Industrial metals mixed and stable since last week- The Baltic Dry Index recovers in a sign of business activity- A buy recommendation in the PICK ETF
  • Grains and soft commodities were stable to lower since May 20


Summary and highlights:

On Thursday, May 21, stocks edged higher with all of the leading indices posting gains of under 1%. The June 30-Year bonds settled at 179-23, and the dollar index was up 0.268 at 99.403. Soybean futures fell 11.75 cents, and corn was 1.75 cents lower. CBOT July wheat gained 2.25 cents per bushel. Crude oil continued to rise as the

July futures contract settled at $33.92 per barrel. Gasoline was higher, and heating oil futures moved to the downside. June natural gas fell 6.1 cents to $1.71 per MMBtu after the EIA reported an injection into storage of 81 bcf for the week ending on May 15. Gold fell around $30 per ounce, and silver moved 66.7 cents lower. Platinum and palladium prices suffered sharp declines, while July copper was 2.8 cents lower to $2.4320 per pound. Live and feeder cattle were on either side of unchanged, while June hogs rallied 2.475. Cotton, coffee, sugar, and cocoa prices moved to the downside, while FCOJ and lumber were higher. Bitcoin fell and was just below the $9100 level.

On Friday, stocks were little changed with a marginal loss in the DJIA and gains of under 0.60% in the S&P500, NASDAQ, and Russell 2000. The June long bond was 0-13 higher to 180-04. The dollar index rose by 0.485 to 99.888 as it drifted back to the 100-pivot point. Corn was one tick higher, while soybeans fell by 1.75 cents per bushel. CBOT July wheat fell 7.25 cents. Crude oil edged lower to the $33.25 level on July futures. The Brent-WTI spread fell to the $1.80 level at the end of the session as Brent underperformed WTI. Baker Hughes said then rig count fell by another 21 for the week ending on May 22.  With 237 rigs pumping oil in the US, production is falling as 560 fewer are operating at the end of May 2020 compared to the same time in 2019. Gasoline and heating oil edged lower. June natural gas was a few cents higher, and ethanol was little changed on the final session of the week. Gold, silver, and platinum prices rose, but palladium moved lower as did copper. Animal protein prices edged lower across the board. Cocoa was higher, but cotton, FCOJ, coffee, sugar, and lumber prices all fell. Bitcoin was $100 higher to $9175 per token.

Monday was the Memorial Day holiday in the US. On Tuesday, optimism over the future continued to take the stock market higher. The DJIA was 2.17% higher, and the S&P 500 was up 1.23%. The NASDAQ gained 0.17%, and the Russell 2000 was 2.77% higher. The S&P 500 was flirting with the 3000 level and the DJIA with 25,000. The June 30-Year long bond futures moved 1-06 lower to 179-02, and the June dollar index fell to below 99 as it settled at 98.906. July grain futures were mostly higher with corn up one cent, soybeans 13.75 cents higher. CBOT wheat fell 2.0 cents per bushel. Crude oil settled $1.10 per barrel high at $34.35, with Brent up around the same level at over $36 per barrel. Heating oil and gasoline futures in July also posted gains, but crack spreads fell as the products underperformed the raw crude oil. The optimism sent gold down to around the $1700 level. Silver and platinum prices slipped, but palladium was marginally higher. Copper was up around 3 cents to over the $2.40 per pound level. Cattle and hog prices posted gains on Tuesday. Lumber futures declined, but cotton, FCOJ, coffee, and sugar all moved higher. Cocoa was unchanged on the July contract. Bitcoin fell below the $9000 level to settle at just over $8900 as it was around $350 per token lower.

On Wednesday, there was a revealing exchange between two anchors on CNBC in the early hours of May 27. You can watch the discussion via this link.  The argument reflects what many market participants on the long and short side believe today as stocks continue to rally over optimism that things will get back to normal. Some believe that the stock market is a mirage, fueled by stimulus that is bound to correct. Time will tell which side of the argument prevails. Stocks continued to power higher with the DJIA up 2.21 % and the S&P 500 adding 1.48%. NASDAQ gained 0.77%, and the Russell 2000 moved 3.11% to the upside. US 30-Year Treasuries were at the 179-11 level, 0-12 higher on Wednesday, with the June dollar index at 99.058 up 0.152. Soybean and corn futures each moved only 1.5 cents per bushel higher, but July CBOT wheat fell 2.25 cents on the session. Crude oil edged lower with losses in both WTI and Brent futures. Gasoline fell along with heating oil. Gas cracks fell, but heating oil cracks were a bit higher as the distillate outperformed both gasoline and crude oil. Natural gas was down as June rolled to July. Ethanol edged lower on the July futures contract. Gold edged higher to above the $1700 level, silver rallied as the price is once again approaching the $18 per ounce level. Platinum was a bit higher, but palladium moved lower and was below the $2000 level. Copper fell with the July futures below the $2.40 per pound level. Hogs edged lower but live and feeder cattle futures posted gains. Coffee, sugar, and cocoa prices fell, but cotton, FCOJ, and lumber were at bout higher. Bitcoin moved back over the $9000 level with around a $395 gain to $9250 per token.

Weekly Spreadsheet:

Copy of Spreadsheets for the The Hecht Commodity Report May 27, 2020

Stocks and Bonds

Over the past week, the number of applications for first-time unemployment benefits in the US rose by another 2.4 million, bringing the total to around 38.4 million since March. At the same time, the Fed minutes told markets that the central bank stands ready to do whatever is necessary to provide stability to markets during the pandemic and in its aftermath. Members of the FOMC expressed concerns that some businesses would no longer be viable due to the shutdown and changes in consumer behavior. The tidal wave of stimulus and government programs that increase the supply of money has helped stabilize the stock market. At the same time, the implied put option under the bond market will keep interest rates at historically low levels for the foreseeable future. Over the past week, stocks moved higher again, and bonds posted a marginal loss.


The S&P 500 rose by 2.17% since last week. The NASDAQ was .39% higher, and the DJIA posted a 3.96% gain.

After the significant recovery in the stock market, it will face the harsh reality of economic data and corporate earnings that will remind the market of the staggering cost of COVID-19 on the US and global economies. Since the direction of the stock market is a function of optimism or pessimism over the future, the coming weeks will be critical. As businesses reopen slowly, optimism is likely to continue. However, any future outbreaks of the virus that cause a slowdown in business activity or the need to close down again have the potential to deal a devastating blow to share prices. We should be prepared for volatility stocks as they continue to face uncertainty.

Chinese stocks underperformed US stocks over the past week. China and US relations have been deteriorating by the day. Placing blame on China will not erase the death and illness caused by Coronavirus, but the economic price tag is becoming an issue that is causing many politicians in the US and Europe to look to the Chinese for compensation. China is sensing an oncoming storm and may begin withdrawing from foreign markets to protect its financial interests. Last week, Baidu, Inc. (BIDU), the Chinese internet search company with a market cap of over $37 billion, was considering delisting on the US market. Chinese shares fell while US stocks were higher over the past week.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $38.13 level on Wednesday, as it fell by 3.74% since the previous report. Chinese stocks could become toxic as the tensions between the Asian nation and the rest of the world rise over the coming weeks and months.

US 30-Year bonds edged marginally lower over the past week.

Interest rates in the US are not moving higher any time soon. Further outbreaks of the virus could drive the bond market higher. Even if optimism continues, Fed policy will put a floor under bond prices. On Wednesday, May 27, the June long bond futures contract was at the 179-11 level, 0.02% lower than on May 20. Short-term support for the long bond at 177-26 with resistance at 182-15. The bonds remained in the middle of the trading range, given the strength in stock prices.

Open interest in the E-Mini S&P 500 futures contracts fell by 0.34% since May 19. Open interest in the long bond futures rose 12.96% over the past week as market participants are likely buying the dip at under the 180 level. The VIX moved edged a touch lower to the 27.62 level on May 27, 1.11 % lower from last week’s level. 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.

At below 30, 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.

Markets should remain nervous throughout the summer months. Many scientists and healthcare professionals believe that the virus will make a return in the fall and winter months during the influenza season. While they have learned a lot about Coronavirus over the past months, there is still a lot that is unknown about the microscopic enemy of humanity. We are likely to see markets react to the news over progress on treatments and vaccines, with periods of optimism and disappointment pushing asset prices higher and lower at times. The markets have come a long way from February and March. The economic data and corporate earnings will be a reminder of the cost of the virus and the price tag that faces the US and world. It will take years to dig out from a deep financial hole. However, it is difficult to fight the trend in the stock market, which has been higher since mid-March.


The dollar and digital currencies

The dollar index and currency markets remained a real snoozer over the past week, which is just fine for governments striving for stability in markets. Bitcoin drifted lower over the previous week after the digital currency ran into resistance at the $10,000 level.

The June dollar index future contract was at 99.058 on May 27, down 0.08% from the level on May 20. The dollar index has been trading on either side of the 100 level since late March. Stability in the foreign exchange arena is critical during challenging periods, and governments and monetary authorities around the world are likely cooperating to control exchange rates. Open interest in the dollar index futures contract moved 10.10% lower since May 19. The dollar index has been trending higher since 2018. The 100 level has been a consolidation area that has become a target for the world’s reserve currency. Daily historical volatility in the dollar index rose to over 21.5% in late March but was at around the 6.47% level on Wednesday, reflecting a narrow trading range in the greenback against other leading world currency instruments. Since late March, the index has been trading between 99 and 101 with few days where it was above or below the band. It was at the bottom end of the range on Wednesday, which has been the buying zone for the index.

The euro currency was 0.03% higher against the dollar. Europe will face the same economic woes as the US in the post-pandemic environment. However, the European economy was in far worse shape before COVID-19 wreaked havoc on the continent’s social and economic fabric. The pound moved 0.20% higher against the dollar since last week. The pound faces both the virus and a total reorganization of its economy after the UK’s official departure from the UK in late January. The euro accounts for almost 58% of the dollar index, so the European currency is the most significant factor when it comes to the path of least resistance of the index. Coordinated intervention is likely to hold the exchange rate between the dollar and euro in a tight band.

When it comes to other economies around the world, Coronavirus is always exacting a high price. However, the data on the number of infections and mortality rates is not robust as tracking, testing, and healthcare is not at the same standard as in the US and Europe. Last Friday, Argentina defaulted on its debt in a sign of financial stress caused by the pandemic. Banks and financial institutions in the US and Europe hold Argentina’s debt securities, which could cause a knock-on effect on earnings over the coming months.


Bitcoin and the digital currency asset moved mostly lower over the past week. Bitcoin was trading at the $9,178.43 level as of May 27, after failing at the $10,000 level recently and falling back to $8200. Bitcoin was in the middle of the short-term trading range as it fell 3.71% since last week. Ethereum posted a 1.17% loss since May 20. Ethereum was at $207.30 per token on Wednesday. The market cap of the entire asset class moved 2.38% lower over the past week. Bitcoin underperformed the whole asset class since the previous report for the second consecutive week. The number of tokens increased by 23 to 5516 tokens since May 20. 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 $256.028 billion, down 2.38% since the prior report. Open interest in the CME Bitcoin futures fell 24.72% since last week, after increasing over recent weeks. The decline was likely because of disappointment over the lack of follow-through buying in the leader of the digital currency pack. I continue to favor the long side of the leading cryptocurrencies. I would only approach the digital currencies with tight and trailing stops because of the potential for massive volatility in these assets. The risk of corrections will rise with the price of the digital currency.

Bitcoin reached my first target at the $10,000 level and corrected and is now consolidating. The next level on the upside stands at $10,220. The trend is your friend in Bitcoin, and it remains higher. Bitcoin’s role as a hedge against inflation received a considerable boost of support from Paul Tudor Jones three weeks ago. The price will need to surpass the $14,000 level to bring excitement and trend-following buying back to the market. I expect we will see a test of the next level of resistance at $10,220 sooner rather than later.

The Canadian dollar moved 0.81% higher since May 20. Open interest in C$ futures fell by 0.19% 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 is not helping the value of the Canadian currency. Meanwhile, the recovery in crude oil is supportive of the looney.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ moved 0.09% higher since last week. The geographical proximity to China makes the Australian dollar sensitive to events in China. Australia has experienced an outbreak of the virus, but the government has sealed the nation and instituted some of the most severe social distancing regulations in the world. Australia has been slowly reopening, but the government continues to restrict travel. 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$ is commodity prices rise because of inflationary pressures caused by the increase in the global money supply.

The British pound rose 0.20% since May 20. 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 recovered by 7.59% against the US dollar. The default by neighboring Argentina reflects the economic travails of the region, but the real ignored the default. The real was near the $0.1900 level against the US dollar. The June Brazilian currency was trading at the $0.189250 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, as well as the spread of the virus, could also cause price volatility in the agricultural products. The Brazilian currency reached a high at over $0.65 against the dollar in 2011 when commodity prices rallied to multiyear highs. A bull market in commodities could end the bearish trend in the Brazilian currency as higher raw material prices increase commercial and tax revenues in South America’s leading economy. In the short-term, a potential for contagion from Argentina’s default could hold the real-dollar currency relationship at low levels.

Currencies are typically static markets because governments cooperate to maintain stability. I expect the low volatility environment to continue in the foreign exchange arena when it comes to the leading reserve currencies that comprise the dollar index.

Precious metals prices fell over the past week. PGMs led the way on the downside, with lower percentage losses in gold and silver. PGMs are commodities, but gold and silver have long histories as currencies as well as metals. Rhodium posted a marginal gain.


Precious Metals

All of the four precious metals that trade in the futures market on the COMEX and NYMEX divisions of the CME posted losses over the past week. The only metal that moved to the upside was the illiquid rhodium market. Platinum and palladium were the worst-performing metals, while goal declined more than silver since May 20.

Gold fell by 2.36% over the past week. Silver was 1.52% higher since May 20. June gold futures were at $1710.70 per ounce level on Wednesday. July silver was at $17.757 per ounce on May 27. 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.

Technical resistance for June gold stands at $1788.80 per ounce, the high from mid-April. Support is at $1666.20. In silver, support is at $14.715, with resistance now at $18.165 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.

Gold mining shares moved lower over the past week with the GDX and GDXJ, both posting 7.92% and 6.42%, respective losses. 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 7.11% lower and 6.38% lower since May 20, after significant gains last week.

Gold 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. 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 6.04% since the previous report after an over 20% gain last week.  Platinum had been a laggard in the precious metals sector in 2020. July futures declined to the $878.10 per ounce level on May 27. 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 $7,000 per ounce on May 27, up $100 or 1.45% over the past week. Palladium fell 8.47% since last week after an over 20% gain last week. The price traded to a new peak at $2815.50 on February 27 on the nearby futures contract. June palladium settled at the $1976.60 per ounce level on Wednesday.

Open interest in the gold futures market moved 1.67% lower over the past week. The metric moved 0.18% lower in platinum after significant declines in recent weeks as longs exited positions. The total number of open long and short positions increased by 0.66% in the palladium futures market after substantial declines. Silver open interest increased by 3.98% over the period. The metals pulled back after recent gains, but the trends remain positive.

The silver-gold ratio edged lower over the past week.

Source: CQG

The daily chart of the price of June gold divided by July silver futures shows that the ratio was at 96.82 on Wednesday, down 0.13 from the level on May 20. The ratio traded to over the 124:4 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 losses over the past week. June Palladium was trading at a premium over July platinum with the differential at the $1098.50 per ounce level on Wednesday, which narrowed since the last report. July platinum was trading at an $832.60 discount to June gold at the settlement prices on May 27, which widened since the previous report.

The price of rhodium, which does not trade on the futures market, was at the $7,000 per ounce level on Wednesday, up $100 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. 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 $878.10 per ounce, a contract on NYMEX has a value of $43,905, 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. Silver’s performance since mid-March has been a sign of demand for precious metals in the current environment. The price rose from below $12 to over $18 in two months. Silver can exhibit wild price volatility, as we witnessed between February and March when the price fell from over $19 to below $12 per ounce. The optimism in the stock market has stopped some of the upward trajectory in the gold market, but the flow of liquidity from central banks and their promise to continue to stimulate economies around the world is a reason to buy gold and silver during periods of price weakness.


Energy Commodities

The energy sector of the commodities ran out of the recent upside steam over the past week. WTI and Brent futures edged lower along with gasoline and heating oil prices. The Brent-WTI spread fell as Brent’s premium continued to decline since May 20. The oil products underperformed the raw crude oil leading to lower crack spreads. Natural gas fell along with the price of coal for delivery in Rotterdam. Ethanol posted a gain since the previous report.

July NYMEX crude oil futures fell 2.03% since May 20 after weeks of successive gains. The July contract settled at $32.81 per barrel on May 27 after trading to a low of $17.27 on April 28. Crude oil appears to have run out of steam at the recent high of $34.81 on the July futures contract. Production cuts by OPEC, Russia, and additional reductions by Saudi Arabia that will begin on June 1 have moved the energy commodity towards a more balanced supply and demand equation. The fall in US output has contributed to the recovery from the lowest prices in history for WTI crude oil futures in late April.

Meanwhile, 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.

July Brent futures underperformed June NYMEX WTI futures, as they fell 2.96% higher since May 20. July gasoline was 3.64% lower, and the processing spread in July was 8.75% lower since last week. The July gasoline crack spread was at $10.01 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.

July heating oil futures moved 2.60% lower from the last report. The heating oil crack spread was 6.44% lower since May 20. Heating oil is a proxy for other distillates such as jet and diesel fuels. 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.

Technical resistance in the July NYMEX crude oil futures contract is at $34.81 per barrel level with support now at the $30.00 level on the July contract. The measure of daily historical volatility was at 73.7.1% on May 27, up from the 68.4% level on May 20.  Demand remains a critical factor when it comes to the price direction of the energy commodity. As I wrote last week, “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 crude oil market has not focused much on the potential for hostilities with Iran in the region over the past months. The Middle East remains the most turbulent political region in the world. Any events that impact production, refining, or logistical routes in the area could cause sudden price spikes in nearby crude oil futures if supply concerns increase. The crude oil market had a quiet week, finally.

Crude oil open interest decreased by 1.07% over the period. Crude oil fell while the energy shares moved higher since May 20. The XLE rise 1.80% for the week as of May 27.

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.

The spread between Brent and WTI crude oil futures in July fell to the $1.92 per barrel level for Brent, which was $0.38 below the level on May 20. The July spread moved to a high of $5.60 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 high in the spread between the two benchmark crude oil prices was the highest level since May 2019. On April 21, the spread moved briefly to an 89 cents per barrel premium for Brent. 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 recent price action in the spread and outright prices for the energy commodity. 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 $3.31 to $4.46, an increase of $1.15 per barrel. In early January, the spread traded to a backwardation of $5.65, $10.11 per barrel tighter than the level on May 27. 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 recent decline in the spread could have triggered some profit-taking and more capacity on the storage front.  Falling production caused the spread to tighten. We could see an unwind of the spreads continue if 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 11.50 million barrels per day of output as of May 15, according to the Energy Information Administration. The level of production fell 100,000 barrels from the previous week. We will have to wait until Thursday, May 28, for the next EIA report because of Monday’s holiday. Meanwhile, the reports on inventory levels from the API and EIA in crude oil showed different results in last week’s reports. As of May 15, the API reported a decrease of 4.80 million barrels of crude oil stockpiles, and the EIA said they declined by 5.0 million barrels for the same week. The API reported a decline of 651,000 barrels of gasoline stocks and said distillate inventories rose by 5.10 million barrels as of May 1. The EIA reported a rise in gasoline stocks of 2.80 million barrels and an increase in distillates of 3.80 million barrels. Rig counts, as published by Baker Hughes, fell by 21 for the week ending on May 22, which is 560 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 237 as of May 22. The inventory data from both the API and EIA had been consistently bearish for the price of crude oil and products over the past weeks, but the latest data has turned neutral to supportive of the price of the energy commodity. Last week’s data marked the first time both API and EIA stockpiles declined in months. Meanwhile, the overall inventory picture is likely to cap the potential for rallies above $40 per barrel on nearby NYMEX futures until it begins to decline to levels that lead to more of a fundamental supply and demand balance to the oil market. The price recovery since late April seems to have run out of steam over the past week.

OIH and VLO shares moved in higher since May 20, OIH rose by 5.71%, while VLO moved 4.22% to the upside over the past week. The level of crack spreads is a reason for short-term caution for VLO. OIH was trading at $121.77 per share level on Wednesday. I am holding a small position in OIH. I will hold the ETF as a long-term position and will look to double it or more if the conditions warrant.  We are long two units of VLO at an average of $70.04 per share. VLO was trading at $70.18 per share on Wednesday.

The June natural gas contract settled at $1.722 on May 27, which was 2.77% lower than on May 20. The June futures contract traded to a high of $2.162 on May 5, where it failed miserably. Support in June stands at $1.595, the recent low on the June contracts, and at $1.519 per MMBtu the low from late March and early April. After making lower highs and lower lows from November 2019 until early April, natural gas shifted to the opposite pattern over the past month, but the price action above $2 failed. The most recent high and level of short-term resistance now stands at $1.889 per MMBtu, the May 20 high. Natural gas is now back at a level that offers more value from a risk-reward perspective. A move above $2.25 on June futures is necessary to validate the end of the bearish price pattern. Be cautious in natural gas as it suffers from the same demand problems as crude oil, as we have seen over the recent sessions. The weekly chart has made higher lows and higher highs since the week of March 23, but the most recent low was just two ticks above the bottom from the week of April 27. I believe natural gas offers upside potential, but a move below the $1.55 level could be dangerous as shorts would look to push the energy commodity to a new twenty-five year low. June natural gas futures are rolling to July.

Last Thursday, natural gas stockpile data from the EIA were a lower than the market had expected.

Source: EIA

The EIA reported an injection of 81 bcf, bringing the total inventories to 2.503 tcf as of May 15. Stocks were 45.2% above last year’s level and 19.4% 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 a 105 bcf injection into storage for the week ending on May 22. The EIA will release its next report on Thursday, May 29, 2020.  Over the past eight 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 45.2% 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. However, the price action over the past few weeks was a sign of fragile demand.

Meanwhile, the decline put natural gas back in the buy zone at below the $1.80 per MMBtu level on the June futures contract. I would use tight stops on any risk positions but prefer the long side over the coming week. The July contract was trading at a significant premium to June futures and was at the $1.886 on Wednesday, 16.4 cents over June. Demand for electricity during the hot summer months is the reason for the higher July price.

Open interest fell by 1.26% in natural gas over the past week. Short-term technical resistance is at $1.889 per MMBtu level on the June futures contract with support now at $1.595 per MMBtu, the recent low. On the upside, $2.255 is the next level of resistance on the weekly chart, but the price moved far away from that level since May 5. The downside target is at the March low of $1.519 per MMBtu. On the July contact, support and resistance are at $1.822 and $2.027 per MMBtu. Price momentum and relative strength on the daily chart were below neutral conditions as of Wednesday because of the recent price failure that took the price back to below the $1.60 level on June futures and to the low $1.80s on July.

July ethanol prices moved 2.48% higher over the past week. Open interest in the thinly traded ethanol futures market moved 9.32% lower over the past week. With only 321 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product rose 1.25% compared to its price on May 20. The price of July coal futures in Rotterdam moved 0.57% lower over the past week.

The Memorial Day weekend caused a one-day delay in inventory data from the API and EIA. On Wednesday, May 27, the API reported an 8.731 million-barrel increase in crude oil inventories for the week ending on May 22. Gasoline stocks rose by 1.12 million barrels, while distillate stockpiles increased 6.907 million barrels over the period. The EIA will release its stockpiles report on May 28. The API report was bearish for the price of the energy commodities. Demand remains a significant factor for the price direction of crude oil, but optimism over reopening parts of the economy has lifted prices. At the same time, 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.

In natural gas, the forward curve continues to be wide, with January 2021 futures trading at a significant premium over natural gas for June 2020 delivery.


As the forward curve over the coming months shows, the settlement prices on May 27, at $1.722 in June was 4.9 cents per MMBtu lower than on May 20.

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 June futures and natural gas for delivery in January was $1.234 per MMBtu or 71.7% higher than the nearby price, reflecting both seasonality and substantial inventory levels. The spread widened by 5.30 cents over the past week.

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. At $7.84 per share, PBR was 12.16% higher than on May 20. The shares of the company remain too low to sell at the current price. I have a small position that I will hold as a long-term investment and look to double up or more when the market conditions warrant. PBR has been weak on the back of the falling value of the Brazilian currency.

As we head into the summer months, the energy markets are typically quiet, but 2020 is anything but an ordinary year. If we learned anything over the recent weeks and months, expect the unexpected in the energy commodities. Crude oil has been on the front lines when it comes to price variance in the commodities asset class. While the price of oil may have run out of upside steam, the Middle East is a part of the world that could cause surprises on the upside after a shocking period on the downside. I expect natural gas to trade in a range within the support and resistance levels over the past weeks. I favor the long side with tight stops with June below $1.75 and July under the $1.90 level. Production is falling in oil and gas, so it will be the demand side of the market that is likely to dictate price direction over the coming weeks. Look out for the EIA data on Thursday morning as the API figures were not supportive of further gains in the crude oil futures market.



Grain futures were on either side of unchanged in lackluster trading over the past week. We are now in the 2020 growing season, where the weather conditions across the fertile plains of the US and other growing regions of the world will determine the path of prices and the size of the crop during the fall harvest. Grain prices remained under pressure in soybeans, corn, and wheat futures markets.

July soybean futures rose by only 0.21% over the past week and was at $8.4850 per bushel on May 27. Open interest in the soybean futures market moved 1.28% higher since last week. Price momentum and relative strength indicators were above neutral territory on Wednesday. Soybean futures were consolidating not far above the bottom end of the longer-term trading range. The potential for tensions between the US and China is problematic for the soybean market as it could wind up dashing optimism over Chinese purchases of oilseeds from American producers in 2020. Absolutely nothing changed in the soybean futures arena since last week.

The July synthetic soybean crush spread moved marginally higher over the past week and was at the 75.5 cents per bushel level on May 27, down 6.75 cents since May 20. 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 is trading close to the lowest level of 2020, which is another bearish factor for the price of soybean futures.

I continue to 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. However, 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. 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. While the prospects for trade between the US and China are bearish, a period of dry weather conditions could cause a short-covering rally.

July corn was trading at $3.2050 per bushel on May 27, which was 0.31% higher on the week. Open interest in the corn futures market rose by 2.03% since May 19. Technical metrics were on either side of 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 at $3.2550, the May 19 high. Corn will continue to be highly sensitive to the price path of gasoline. Ethanol production in the US accounts for approximately 30% of the annual corn crop.

The price of July ethanol futures rose by 2.48% since the previous report. July ethanol futures were at $1.1160 per gallon on May 27. The spread between July gasoline and July ethanol futures was at 9.83 cents per gallon on May 27 with ethanol at a premium to gasoline. The spread was 6.54 cents wider since last week as gasoline 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. While the energy commodities made a significant comeback since April, corn has not, which is a warning sign for the coarse grain. The weak tend to get weaker, but Mother Nature will determine the price path for corn over the coming weeks.

July CBOT wheat futures fell 1.80% since last week. The July futures were trading $5.0450 level on May 27. Open interest rose by 3.39% over the past week in CBOT wheat futures. The support and resistance levels in July CBOT wheat futures stand at $4.9375 and $5.2400 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 52.75 cents per bushel discount with KCBT lower than CBOT wheat futures in the May contracts. The spread narrowed by 7.75 cents since May 20. 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 could mean that wheat is due for a bounce to the upside.

I will continue to hold long core positions in futures and the CORN, WEAT, and SOYB ETF products over the coming weeks, and would add to them on further price weakness.

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.


Copper, Metals, and Minerals

Industrial commodity prices were mixes since last week. LME copper, aluminum, lead, and tin posted marginal gains. Iron and the Baltic Dry Index moved higher. Meanwhile, COMEX copper, nickel, and zinc prices all moved to the downside since May 20. Lumber was lower since the previous report.

Copper fell 3.17% on COMEX over the past week. The red metal posted a 0.59% gain as of May 26 on the LME since the last report. Open interest in the COMEX futures market moved 2.61% higher since May 19. July copper was trading at $2.3820 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 edged lower while COMEX stockpiles grew.

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 stands at $2.3140 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. 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 price of copper rose to a new all-time high at just under $4.65 per pound. Nearby technical resistance is at $2.4680 per barrel on the July futures contract on COMEX, the recent high. 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.

The LME lead price moved higher by 1.21% since May 19. 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 weighed on the price of lead because of falling fuel prices. The price of nickel moved 0.01% lower over the past week. The export ban in Indonesia began on January 1, 2020 but has had little impact on the price of the nonferrous metal so far this year. Tin rose 0.99% since the previous report. Aluminum was 1.00% higher since the last report. The price of zinc posted a 2.01% loss since May 19. Zinc was at below the $1980 level on May 26. Nonferrous metals remained within their respective trading ranges.

July lumber futures were at the $359.90 level, down 2.07% 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 was up 1.78% after recent gains and was at $34.30 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. The volatile Baltic Dry Index rose 11.70% since May 20 to the 506 level. June iron ore futures were 0.49% higher compared to the price on May 20. 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 0.66% since the previous report.

LME copper inventories moved 1.20% lower to 270,925 as of May 26. COMEX copper stocks rose by 10.18% from May 19 to 56,254 tons. Lead stockpiles on the LME were unchanged as of May 26, while aluminum stocks were 2.95% higher. Aluminum stocks rose to the 1,479,000-ton level on May 26. Zinc stocks increased by 8.03% since May 19. Tin inventories fell 8.86% since May 19 to 3,190 tons. Nickel inventories were 0.10% higher compared to the level on May 19.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 29 cents on May 27, up 7.0 cents since the previous report. The details for the call option are here:



US Steel shares were at $8.53 per share and moved 7.70% higher since last week.

FXC was trading at $9.29 on Wednesday, $0.17 higher since the previous report. I continue to maintain a small long position in FCX shares. I will not sell the stock at this level, but I am on the sidelines when it comes to adding to the position.

I remain extremely cautious on the sector and have limited any activity to very short-term risk positions. Brewing tensions between the US and China could cause risk-off conditions to return 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. The most exciting prospects could be in the uranium market as the price broke out of a long-term bearish price trend.

Source: Barchart

The chart shows that the price of uranium gapped higher, moved to the highest price since 2015, and broke out of a long-term consolidation pattern. While price action tends to fill voids on charts, buying uranium assets on price dips could be the optimal approach to the market. Cameco (CCJ) is the world’s leading uranium producing company.

Source: Yahoo Finance

PICK has net assets of $164.89 million, trades an average of 100,290 shares each day, and charges a 0.39% expense ratio.

Source: Yahoo Finance

I recommend buying PICK on the opening on Thursday, May 28 around the $23.38 level, where the ETF closed on May 27. I would leave plenty of room to add to the long position on price weakness in the mining companies over the coming weeks and months. I believe the tidal wave of stimulus makes PICK a compelling investment opportunity for the coming years. I will update the progress of the shares in future reports.


Animal Proteins

The 2020 grilling season, which is the peak time of the year for animal protein consumption in the United States, began last weekend with the Memorial Day holiday. This year is far from ordinary with low meat prices as origination points, and bottlenecks at processing plants leading to shortage and higher consumer prices. Over the past week, the price of cattle and hog prices moved higher. June futures rolled to the next active months.

August live cattle futures were at $1.0080 per pound level up 3.17% from May 20. 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 above neutral readings on Wednesday. Open interest in the live cattle futures market moved 0.84% higher since the last report. Beef shortages are appearing in supermarkets, and prices for consumers are rising across the US. Bottlenecks at processing plants are causing limits for retail customers.

August feeder cattle futures marginally outperformed live cattle as they rose by 3.90% since last week. August feeder cattle futures were trading at the $1.34025 per pound level with support at $1.21350 and resistance at $1.38450 per pound level. Open interest in feeder cattle futures fell by 0.71% 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 57.60 cents on May 20, which was 5.40% higher from last week’s level. Price momentum and the relative strength index were at rising from oversold readings on May 27. Support is at 53.85 cents with technical resistance on the August futures contract at the 67.575 cents per pound level. The hogs rose from the short-term range. 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 in backwardation from June 2020 until August 2020 with contango from August 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 contango from August through November 2020 before it flattens until April 2021. The forward curves did not move much over the past week.

In the lean hog futures arena, there is backwardation from June 2020 until October 2020. Contango exists from October 2020 through July 2021. There is a backwardation from July through October 2021. Futures prices have moved to reflect the potential for shortages for consumers. Some supermarkets are limiting 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 higher as the price of live cattle outperformed lean hogs on a percentage basis.

 Source: CQG

Based on settlement prices, the spread was at 1.7500:1 compared to 1.78770:1 in the previous report. The spread fell by 3.77 cents as live cattle rose less than lean hog futures over the past week. The spread fell to a low of 1.2262 in mid-March, which was below the long-term average making pork more expensive than beef. Beef futures moved over the average and kept going and are now more expensive compared to pork on a historical basis on the August futures contracts.

The price action in the beef and pork futures markets could become highly volatile as supply gluts at origination points have not translated to increased supplies for consumers. Shortages at supermarkets reflect the bottlenecks at processing plants that have lifted prices and limited the amount of purchases to prevent hoarding. The situation in the animal protein arena is an example of how risk-off periods can impact producers and consumers. In the case of the meat markets, ranchers and carnivores are both losers these days. If consumer shortages remain and prices remain low for producers, we could see production decline dramatically, exacerbating the lack of availabilities leading to much higher prices next year. Coronavirus has created a unique divergence in the animal protein sector. At the current price levels, risk-reward continues to favor the upside. However, I would only approach the cattle and hog futures with very tight stops during periods of price weakness as price action could continue to be irrational for the foreseeable future. Supply and demand fundamentals will eventually balance the market, which could lead to price appreciation in the coming months, and perhaps years.


Soft Commodities

FCOJ and cotton futures were the two soft commodities that posted gains since May 20. Sugar, coffee, and cocoa prices all moved lower with sugar and coffee, leading the way on the downside.

July sugar futures fell 3.49% since May 20, with the price settling at 10.80 on May 27. 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 11.32 cents with support at 10.05 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. The Brazilian real rose over the past week.

The value of the January Brazilian real against the US dollar was at the $0.189250 level against the US dollar on the June contract on Wednesday, 7.59% 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. Last Friday, neighboring Argentina defaulted on its debt, which always has the potential to create contagion and a tightening of credit for lenders and those buyers of South American debt.

Price momentum and relative strength on the daily sugar chart were above neutral territory as of May 27 after the recent recovery. 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.

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 0.93% higher since last week. Sugar had rallied to new highs as drought conditions in Thailand created the supply concerns that lifted the price of sugar futures in late 2019 and early 2020. The correction in sympathy with the risk-off conditions in markets across all asset classes chased any speculative longs from the market. The long-term support level for the sweet commodity is now at 9.05 and 8.36 cents per pound. Without any specific fundamental input, sugar is likely to follow moves in the energy sector as well as the currency market when it comes to the exchange rate between the US dollar and the Brazilian real. Over the longer term, the cure for low prices in a commodity market is low prices as production declines, inventories fall, demand rises, and prices recover. We may have seen the start of a significant recovery in the sugar market after the most recent low. Time will tell.

July coffee futures moved 2.98% lower since May 20. July futures were trading at the $1.0250 per pound level. The technical level on the downside is $1.0145, the recent low in July futures. Below there, support is at around 97.40 cents on the continuous futures contract. Short-term resistance is now at $1.1315 on the July 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, but in the current conditions, I would increase the stop and exercise extreme caution. JO was trading at $32.27 on Wednesday. Open interest in the coffee futures market was 2.31% higher since last week. I continue to hold a small core long position in coffee after taking profits during the rally in March. I began buying again with a tight stop at near the $1 level.

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 heading for oversold readings on Wednesday. On the monthly chart, the price action was below neutral. The quarterly picture was 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 upside.

The price of cocoa futures edged lower over the past week. On Wednesday, July cocoa futures were at the $2363 per ton level, 1.58 % lower than on May 20. Open interest rose by 0.75%. Relative strength and price momentum were drifting lower below neutral readings on May 27. 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 $27.22 on Wednesday, May 27. 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 $2487, $2500, 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 $2294 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 0.22% over the past week. The recent declines have been on the back of continued concerns about the Chinese and global economies. July cotton was trading at 58.34 cents on May 27, after falling to the lowest price since 2009 in early April. On the downside, support is at the recent low of 53.20, 52.01 cents, and then at 48.15 cents per pound. Resistance stands at the 59.85 cents per pound level. Open interest in the cotton futures market rose by 3.97% since May 19. Daily price momentum and relative strength metrics were slightly above neutral territory on Wednesday. The weather in cotton-growing regions will determine the price over the coming weeks, but tensions between the US and China and falling consumer demand for clothing and other cotton products are not bullish for the price of the fiber.

I remain slightly 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.

July FCOJ futures moved to the upside since the last report. On Wednesday, the price of July futures was trading around $1.2940 per pound, 3.56% higher than on May 20. Support is at the $1.1425 level. Technical resistance is at $1.3100 per pound. Open interest rose 4.23% since May 19. The Brazilian currency had weighed on the FCOJ futures, but bottlenecks at the ports could work in the opposite direction. FCOJ broke out to the upside over the past week. The rise in open interest over the past two weeks is a bullish sign for the FCOJ market.

Soft commodity prices did not move much over the past week. I continue to favor the long side in most of the products. In 2011, the liquidity from the 2008 financial crisis pushed the price of sugar to over 36 cents per pound. Coffee rose to over $3 per pound, and cocoa peaked at over $3800 per ton. Cotton rose to over $2 per pound in 2011, and OJ futures moved to over $2.25 per pound. All of the softs are at significantly lower levels as of May 27. While prices could move lower, the environment favors higher levels over the long-term.


A final note

This week marks the beginning of the 2020 summer season. As social distancing guidelines ease, people will venture back outside, and some sense of normalcy will return to life in the US and around the world. We are months away from knowing if the worst of COVID-19 is behind us. Meanwhile, economic data will continue to be the ugliest in almost a century. While fortunate workers will return to their jobs, a significant percentage of those furloughed or terminated from positions will have a rough time finding work over the coming months. The stimulus from central banks and bailout programs for businesses and helicopter money for individuals from governments will continue to flow. The price tag for Coronavirus is high, and the tensions between the US and China could exacerbate the financial costs. The Presidential election in November is right around the corner now that summer is arriving. The potential for substantial policy shifts hangs in the balance. Volatility is likely to remain the norm rather than the exception in markets for the rest of 2020, an atypical year by any measure.


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,


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.