• The dollar continues to trade either side of the 100 level
  • Precious metals decline across the board
  • Energy commodities rally led by crude oil
  • Gains post marginal moves, soft commodities were mostly higher
  • Copper and base metals edge lower, lumber, uranium, and iron ore post gains


Summary and highlights:

On Thursday, April 30, stocks ran into selling as the US unemployment claims rose by 3.84 million to over 30 million since mid-March. The DJIA was 1.17% lower, with a loss of 0.92% in the S&P 500 index. The NASDAQ fell 0.28%, but the most significant loss was in the Russell 2000, which fell by 3.68%. US 30-Year Treasury bond futures were 0-26 lower to 180-18, and the June dollar index was 0.616 lower to 99.028. July soybeans were the big gainer in the grain sector as they moved 18 cents higher. July corn was up 5,50 cents, and July wheat futures rose by 7 cents. Crude oil finished April with a bullish run to settle at $18.84 on the NYMEX June futures contract. Brent futures rolled from June to July with the June contract settling at $25.27 per barrel. Heating oil outperformed gasoline on the session, but both processing spreads declined. The EIA reported that natural gas inventories moved 70 bcf higher for the week ending on April 24, and June futures settled at $1.949 per MMBtu. Ethanol in June was 2.2 cents lower to the $1.009 per gallon level. Gold futures fell sharply to below the $1700 level as they were around $20 lower on the session. Silver declined to below $15, but platinum and palladium posted gains. Copper drifted back to below the $2.35 per pound level on the July futures contract. June live cattle were 1.675 cents higher, August feeder cattle futures fell 1.95 cents, but lean hogs in June settled 3.425 cents higher on Thursday. FCOJ fell 2.75 cents on the July contract, but cotton, coffee, sugar, cocoa, and lumber all posted gains. Bitcoin was $105 higher to $8930 per token.

On Friday, selling continued in the stock market. Comments from the Mayor of NYC that the city is months away from ending social distancing guidelines and getting back to some semblance of normalcy could have weighed on the stock market. A week when GDP fell by 4.8%, and over three million more Americans filed for unemployment insurance benefits likely caught up with stocks that had been rallying on what now seems to be a bit of over-enthusiasm. With the Trump administration blaming China for Coronavirus and suggesting that they are considering measures to punish the Chinese, the market fell sharply on the final day of the week. The DJIA was 2.55% lower, the S&P 500 fell by 2.81%, and NASDAQ shed 3.2% of its value. The Russell 2000 declined 3.83%. June US 30-Year Treasury bonds were 0-11 higher to 181-12, while the June dollar index moved 0.072 higher to 99.100. July corn futures fell 1.5 cents, soybeans were 5.75 cents lower, and CBOT wheat dropped 7.75 cents per bushel. June crude oil added another 94 cents to settle at $19.78 on the June NYMEX contract. July Brent was higher and settled at over $26.60 per barrel. Meanwhile, gasoline and heating oil futures declined sending crack spreads lower. Natural gas ran out of upside fuel above the $1.90 level, and the June contract closed the week at $1.89 per MMBtu. Ethanol was 1.4 cents lower to 99.5 cents per gallon. Gold closed at the $1700 level, but silver settled below $15 per ounce. Platinum and palladium both moved lower on the session. Copper also fell, and the July contract settled at $2.3120 per pound. Live cattle were up 1.3 cents in June. August feeder cattle gained 1.15 cents, and lean hogs were up the 3.75 cents limit to 62.70 cents per pound on the June contract. July lumber was higher, and FCOJ posted a gain on the session. Sugar had the most significant percentage move on the upside as the July contract settled just below the 11 cents per pound level. July cotton fell by 1.49 cents, coffee edged 0.20 cents lower, and cocoa fell $12 per ton. Bitcoin was $90 lower on the session to settle at $8840 per token in the futures market. The recent recoveries in markets could turn out to be a mirage as the virus continues to cause fear and uncertainty and a continuation of shutdowns of broad areas of the economy.

On Monday, stocks were quiet. The DJIA gained only 0.11%, the S&P 500 was 0.42% higher, and the Russell 2000 moved 0.28% to the upside. The big gain on the day came in the tech-heavy NASDAQ, which was 1.23% higher on the session. News that Warren Buffett sold all of his airline holdings weighed on the sector. The US Treasury said it needs to borrow $3 trillion to fund stimulus programs, which is miles above the previous record at $530 billion from July-September 2008. June 30-Year US Treasury bond futures rose 0-08 to 180-27 on the session. The June dollar index futures were 0.467 higher to settle at 99.567. Wheat futures in July were 3 cents higher, but corn and soybean futures fell by 3 cents and 13 cents, respectively. NYMEX June crude oil moved 61 cents higher to $20.39 per barrel, and July Brent futures were up 76 cents to $27.20 per barrel. Gasoline outperformed heating oil, but both products posted gains. The gasoline crack spread was higher, but the heating oil refining margin fell. Gold was high, but silver moved lower. Platinum was up a bit, but palladium fell by over $50 per ounce. July copper was virtually unchanged at $2.3125 per pound. June cattle and August feeder cattle futures moved higher on the session, but the significant gain came in lean hogs as the rally continued and took the June futures to 65.50 cents per pound, 14 cents above the low from April 14. Cotton, sugar, and cocoa prices declined, while FCOJ, coffee, and lumber posted gains. Bitcoin edged $95 high to the $8935 per token level as the cryptocurrency works its way towards technical resistance at $10,000 per token.

On Tuesday, the leading indices continued to move to the upside, with a 1.13% gain in the NASDAQ, a 0.90% increase in the S&P 500, and a 0.56% rise in the DJIA. The Russell 2000 was 0.75% higher. The June long bond futures contract fell 0-12 to 180-11, and the June dollar index edged higher to 99.762. Corn, soybean, and wheat futures in July all posted marginal gains. Crude oil exploded higher to over $24 per barrel on the June contract. The energy commodity settled near the high of the session at $24.56, up $4.17. July Brent futures were at over $31 per barrel. Gasoline and heating oil futures rose as crack spreads remained stable on the bullish session. June natural has reached a higher high of $2.162 and settled at $2.134 per MMBtu. Ethanol in June gained 4.9 cents to the $1.059 per gallon level. Gold and platinum were on either side of unchanged. Silver recovered by over 30 cents per ounce, but palladium continued to decline as the June futures settled $78.80 lower on the session. Copper moved two cents higher to $2.3325 per pound. June live cattle and August feeder cattle futures fell by 1.6 and 1.40 cents, respectively. June lean hogs moved 1.225 cents lower after the recent gains. Cotton and cocoa posted small losses, but FCOJ, coffee, sugar, and lumber futures all moved to the upside. Bitcoin rose by $50 to $8,985 per token.

On Wednesday, stocks edged mostly lower with the only gain coming in the tech-heavy NASDAQ, which was 0.51% higher. The S&P 500 lost 0.70%, the DJIA was down 0.91%, and the Russell 2000 fell 0.82%. June 30-Year Treasury bonds fell 1-07 to the 179-02 level, and the June dollar index moved back over the 100 level to settle at 100.136. Grains fell, with losses in soybeans, corn, and wheat futures markets on the July contracts. Crude oil edged lower after recent gains. Heating oil and gasoline both fell, with the distillate fuel leading the way on the downside. Gold, platinum, sand silver declined, but palladium posted a marginal gain after losses earlier in the week. Copper was 1.45 cents higher to settle at $2.3470 on the July contract. Live and cattle and lean hog futures posted gains, with cattle leading the way on the upside. Live and feeder cattle futures moved up the daily limit. Cotton and FCOJ were higher on Wednesday, but coffee, sugar, cocoa, and lumber prices fell. Bitcoin was $355 per token higher to $9,340.

Weekly Spreadsheet:

Copy of Spreadsheets for the The Hecht Commodity Report May 6, 2020

Stocks and Bonds

Last week I wrote that “The stock market remains vulnerable to downdrafts as the US economy remains in a self-induced coma.” Over the past week, selling returned to the equity arena. Stocks had moved higher on optimism that was more than a bit of a mirage.

The S&P 500 fell 3.10% since last week. The NASDAQ was 0.68% lower, and the DJIA posted a 3.93% loss.

Q2 earnings will not be pretty. The upcoming Presidential election will have significant tax and regulatory ramifications. At the same time, the price tag for the global pandemic will remain long after scientists find the answers for effective treatments and a vaccine that ends the nightmare of Coronavirus.

Chinese stocks fell with US stocks over the past week. China was the origination point of the virus. The rest of the world will likely blame the world’s most populous nation for the infections that continue to take lives and cause unprecedented economic harm.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $38.10 level on Wednesday, as it fell by 3.86% since the previous report. China may not be able to escape the retribution from other nations in the aftermath of the pandemic, which is likely to weigh on its economy.

US 30-Year bonds fell over the past week. The April Fed meeting told markets that the central bank in the US is prepared to do everything within its power to continue to stabilize markets. The Fed has an unlimited potential to provide liquidity to the financial system. Betting against the Fed is typically a mistake, but the long-term impact of the dovish monetary policy will be significant. On Wednesday, May 6, the June long bond futures contract was at the 179-02 level, the same level 1.28% lower than on April 29. The US Fed’s stimulus creates an implied put option on the bond market. Support for the long bond has not changed over the past week and stands at 177-14 with resistance at 183-02, the low and high levels in the June futures contract in April. The bonds moved towards the bottom end of the trading range.

Open interest in the E-Mini S&P 500 futures contracts fell by 2.54% since April 21. Open interest in the long bond futures rose 0.85% over the past week. Declines in the open interest metrics over the past weeks is a sign of declining market participation as the overall appetite for risk has fallen. The VIX moved higher to the 34.12 level on May 6, 8.15% above last week’s level. The VIX traded to a high of 85.47 on March 18, the highest level since 2008. During the height of the 2008 crisis, the VIX reached 89.53. As I wrote last week, “The longer significant parts of the economy remain closed, the higher the chances of another downdraft in stocks and updraft in the VIX.” The virus, social distancing policies, and the self-induced coma in parts of the economy make the base level for the VIX a lot higher than in past months and years.

At the 34.12 level, the VIX remains at a level that is 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 2:1 reward over risk on any long positions in the VIX or VIX-related products.

I expect that optimism and pessimism will continue to trade places often when it comes to the sentiment in the stock market. Each week that the virus continues to impact the US and global economies has an exponential effect when it comes to debt levels and the lack of corporate earnings. Be prepared for a continuation of challenging economic data and periods of wide price variance in stock and bond markets. The cost of the Coronavirus from both a human and financial perspective is massive.


The dollar and digital currencies

The dollar experienced selling over the past week that took the dollar index below the 100 level, but it recovered and was back above the century market on Wednesday. Meanwhile, in the world of Cryptocurrencies, Bitcoin moved to new a short-term high over the past week.

The June dollar index future contract was at 100.138 on May 6, up 0.50% from the level on April 29. The dollar index has been trading on either side of the 100 level over the past weeks, which is a sign of heightened government intervention in the currency market. The index slipped to the bottom end of its recent trading range over the past week before recovering. Open interest in the dollar index futures contract moved 3.27% lower as market participants in the foreign exchange market exited risk positions in the index. The dollar index has been trending higher since 2018. The drop in the value of the index and falling open interest was not a technical validation of an emerging bearish trend in the US currency, and the index recovered.

The euro currency was 0.63% lower against the dollar. Europe’s economy limped into the crisis, and Coronavirus has been more than a challenge for the EU and ECB, which could limit any gains in the euro versus the dollar currency pair over the coming weeks. The pound moved 0.86% lower against the dollar since last week. 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. Europe and the US remain the regions of the world most impacted by Coronavirus. US multinational companies benefit from a weaker dollar. The US Treasury could be pushing the dollar lower each time it ventures above the 100 level on the dollar index. Foreign exchange markets are always subject to manipulation by governments in the interest of stability.

While reporting on the number of cases of Coronavirus and mortality rates in the US and Europe is robust, the same does not hold for other parts of the world. The pandemic is likely exacting a significant toll on other lesser-developed nations in the world that are not prepared to handle the rising number of infections and deaths from the virus. The data from those countries is probably many times the levels reported over the past weeks. International borders do not stop the spread of Coronavirus.  The Brazilian real versus the US dollar currency relationship remained near the recent low and below the $0.18 level over the past week. Brazil was reporting over 8,000 deaths, the highest in South America, but the actual number is likely far higher. The rest of South America, Africa, and other areas of the world face the same problems with the pandemic. Medical technology in those areas of the world is not at the standards in the US and Europe.


Bitcoin and the digital currency asset class moved mostly higher over the past week. Bitcoin was trading at the $9,305.66 level as of May 6, as it added to the recent gains and moved 7.56% higher. Ethereum posted a 3.25% loss since April 29. Ethereum was at $209.00 per token on Wednesday. The market cap of the entire asset class moved 4.45% higher over the past week. Bitcoin outperformed the whole asset class since the previous report. The number of tokens increased by 24 to 5429 tokens since April 29. 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 $256.186 billion, up 4.45% since the prior report. Open interest in the CME Bitcoin futures rose 21.49% since last week. As I wrote over the past two weeks, “I continue to believe that Bitcoin will attract buying during periods of price weakness but would only dip a toe into the market on the long side with a very tight stop. I would rather trade from long than short in the digital currencies. In a germophobic world, the attraction of digital currencies is likely to rise. Other factors that could support digital currencies are a rise of germaphobia, the stops people from holding cash, and the falling value of all foreign exchange instruments on the back of massive stimulus measures from central banks.” While I continue to favor the long side for 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. Bitcoin is heading for a test of the $10,000 level. The increase in open interest is a sign of speculative buying and is bullish for the price of the cryptocurrency and many of the others in the asset class.

The Canadian dollar moved 1.59% lower since April 29. Open interest in C$ futures rose by 1.39% 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. 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 another factor that could be weighing on the value of the Canadian currency.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ moved 1.93% lower since last week after a gain of almost 3.5% in the previous report. 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. 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 weakness in China is likely to have a significant impact on the Australian economy. In the long-term the stimulus is bullish for commodities prices and for the Australian and Canadian currencies.

The British pound fell 0.86% after a wild ride to the downside in mid-March. The UK faces challenges after its divorce from the EU, but the move may have insulated the nation from the massive price tag for Coronavirus in Europe. The UK has also experienced more than its fair share of cases, but members of the EU will be sharing the costs of the toll the virus has taken on Spain, Italy, and France while the UK is on its own after Brexit. The pound remains at a depressed level against the US dollar. The Prime Minister recovered from a severe case of Coronavirus. Boris Johnson’s first-hand experience could prolong measures to stop the spread of infections in the UK, which would weigh on the economy.

Over the past week, the Brazilian real fell 5.59% to below the $0.1800 level against the US dollar. The June Brazilian currency was trading at the $0.175600 level and was moving towards the April 24 low at $0.17350. 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 could move higher or lower with any significant changes in the direction of the Brazilian real over the coming weeks. 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. 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 100 level on the dollar index is a pivot point that should continue to have a magnetic influence on the greenback against the other leading reserve currencies of the world. Unless there are any significant surprises in markets over the coming weeks, I expect that the dollar index will remain on either side of the 100 level. In the current environment, the dollar should be higher, but that is not in the best interest of the United States, which is the reason why the US Treasury could be managing the greenback and preventing it from moving higher against other currencies around the world. The Trump administration has not been shy about its desire for a weaker US currency because of the trade advantages. Over the past week, it would not be a surprise if the Treasury sold the dollar to keep it below the 100 level and allow for natural buying to emerge over the coming weeks. The dollar snapped back, so we could see more intervention if the index attempts to move higher over the coming week.

All precious metals prices fell over the past week as risk-off conditions returned to the stock market, and many of the other asset classes. However, gold fell below the $1700 per ounce level and was down under 1.50% since the previous week. The other precious metals fell more than the yellow metal on a percentage basis.


Precious Metals

Gold and silver moved lower over the past week. Platinum and palladium prices also fell. Gold was sitting just under the $1690 level with silver at just above $15.00 on the July contract. Platinum was just north of $765, and palladium was under the $1760 per ounce level. The illiquid rhodium market declined since April 29.

Gold fell 1.45% over the past week. Silver was 1.96% lower since April 29. June gold futures were at $1688.50 per ounce level on Wednesday. July silver was at $15.015 per ounce on May 6. Central bank monetary policy continues to be supportive of gold and silver prices. Markets rarely move in a straight-line during bull markets. Pullbacks and corrections are the norms rather than the exception. Gold has offered market participants buying opportunities on every dip since 2018, and I expect that trend to continue. Silver has underperformed gold, but the volatile metal has a history of shocking markets when it decides to move higher or lower. I expect that silver will catchup with gold at some point in the not too distant future.

June gold futures reached a new peak of $1788.80 on April 14. The yellow metal came storming back from a low of $1453 on March 16. July silver rose to $19.075 on February 24 before the price suffered a substantial correction sending it to a low of $11.68 per ounce on March 18 before recovering to the $16.505 level on April 14. The stimulative monetary and fiscal programs continue to be highly supportive of the prices of the two metals that have long histories as currencies. Significant price dips have been buying opportunities in gold since 2018. In silver, the wild volatility that took the price from over $19 to below $12 is an example of the kind of action we could expect to witness in the metal that moves on the market’s sentiment. I remain bullish on both gold and silver. I believe that gold is heading to $2000 to $3000 per ounce over the coming months and that silver will eventually follow the yellow metal. Gold and silver prices did not move outside of their respective trading ranges over the past week, as the prices of the two leading precious metals have entered a consolidation phase.

Gold mining shares moved lower over the past week with the GDX and GDXJ, both posting 1.00% and 3.85%, respective losses after last week’s gains. Mining stocks reflected the action in the metals and the overall stock market.

Gold outperformed 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 only trade leveraged derivatives and mining stocks on a short-term basis with tight stops in the current environment. While gold mining stocks and derivatives follow the price of gold, they are not the metal and could experience significant periods of price deviation.

July platinum fell 4.27% since the previous report moving almost 4.5% higher last week.  Platinum had been a laggard in the precious metals sector in 2020. July futures moved to the $765.50 per ounce level on May 6. The level of technical resistance is at $838.20 on the July futures contract. Support in platinum is currently at $716.80 per ounce, the most recent low in 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 $5,000 per ounce on May 6, down $300 over the past week. Palladium fell 8.27% since 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 $1758.90 per ounce level on Wednesday.

Open interest in the gold futures market moved 2.09% lower over the past week. The metric moved 1.29% lower in platinum after significant declines in recent weeks as longs exited positions. The total number of open long and short positions decreased by 3.05% in the palladium futures market after substantial declines. Silver open interest decreased by 4.18% over the period after significant decreases over the past weeks. Precious metals prices did not move outside their technical ranges over the past week. The declines in open interest is not necessarily a bearish sign for the metals.

The silver-gold ratio moved higher 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 112.86 on Wednesday, up 1.51 from the level on April 29. 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.

Platinum and palladium prices fell over the past week. June Palladium was trading at a premium over July platinum with the differential at the $993.40 per ounce level on Wednesday, which narrowed since the last report. July platinum was trading at a $923.00 discount to June gold at the settlement prices on April 22, which slightly widened since the previous report. The spread is $157.50 above the nominal price of platinum, which is incredible considering platinum traded at over an $1100 premium to gold in 2008. At over 2.2 times the price of platinum, the rare metal has not been “rich person’s gold” in many years.

The price of rhodium, which does not trade on the futures market, was at the $5,000 per ounce level on Wednesday, down $300 or 5.66% 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. Illiquid markets can become untradeable. The price action in rhodium is somewhat like what has been going on with some illiquid issues in the bond market these days. The Fed is providing a backstop to eliminate the lack of liquidity, but in rhodium, there is no backstop. 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 periods of extreme weakness. Dealers are experiencing physical shortages as miners and refiners shut down. We had seen substantial dislocations in the price of gold in London versus the COMEX futures prices over the past weeks. 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 $765.50 per ounce, a contract on NYMEX has a value of $38,275, after falling to the lowest level just under two decades in March.

My advice has not changed when it comes to precious metals Falling rates are bullish fuel for the gold and silver markets. Risk-off threatens to send the price of the precious metals significantly lower, as we witnessed in 2008. I will be using wide scales on bullion and coin purchases as well as unleveraged ETFs that hold bullion. I remain bullish on gold, silver, and platinum, but protecting capital during an unprecedented risk-off period is now the prudent approach. I would only buy the metals on price weakness and leave scales wide until the situation calms. Only trade leveraged products and mining shares on a short-term basis using tight stops. A choppy road continues to be on the horizon. Hold the physical and trade the derivatives in the current environment. Make sure each purchase has a clear plan for risk versus reward when it comes to precious metal derivatives and mining shares. There is no change from the previous report. When it comes to gold, it continues to be the monarch of money. The oil market taught us to expect the unexpected in markets in the current environment. Gold could provide shock and awe on the upside as global central bank policy remains highly supportive of the price of the yellow metal. The report has not changed from last week as the markets remained within their respective trading ranges. The trend continues to support gold. I view all corrections in the yellow metal as buying opportunities. The Fed’s put option on the bond market is also a put option on the price of gold.


Energy Commodities

The wild ride in the crude oil futures market on NYMEX continued over the past week. After falling to a low of negative $40.32 per barrel on April 20 on the expiring May contract, and $6.50 on the June WTI futures the next day, crude oil was trading back at the $24 level on the active month futures on May 6. Coronavirus caused the demand for oil and gasoline to evaporate in March and April, and market participants filled storage facilities around the world with the energy commodity. Inventories continued to rise in the oil market, but production has slowed. OPEC, Russia, and other producing countries agreed to cut output by 9.7 million barrels per day, which was a drop in the bucket considering the demand-based pressure on prices. At the same time, the number of rigs operating in the US has dropped precipitously over the past weeks, which should lead to a significant decline in output. The rise in the price of the energy commodity over the past week could be on the back of some optimism that easing social distancing guidelines will return some of the lost demand to the market. At the same time, May is a time of the year that marks the beginning of the driving season in the US, which is the peak period for gasoline demand as the weather conditions support more road trips and mileage on automobiles.

Meanwhile, China paid $1.3 billion for oil-producing assets in the US Permian basin. The purchase was “approved by the US Committee on Foreign Investment.” China is following through on its long-term strategy to buy commodity assets when they are under pressure. The Chinese also acquired oil assets in Mozambique and Kazakhstan. Time will tell if there is any backlash against the Chinese purchases.

June NYMEX crude oil futures rose 59.30% since April 29 and settled at just under $24 per barrel on May 6 after trading to a low of $6.50 on April 21. Even after more than tripling in price, the NYMEX futures were still less than half the price in early January when the nearby futures contract reached its high for 2020 at $65.65 per barrel.

June Brent futures rolled to July and underperformed NYMEX WTI futures as they moved 22.82% higher since April 29. June gasoline rose 16.22%, and the processing spread in June posted a 21.61% loss since last week. The June gasoline crack spread was at $12.99 per barrel. The price path of gasoline depends on reopening the US economy so that people begin commuting to work and venture out in automobiles again. Wild swings in energy prices have caused wide price ranges in the crack spreads the reflect refining margins. Gasoline underperformed the price action in crude oil since last week.

June heating oil futures moved 6.05% higher from the last report. The heating oil crack spread was 38.94% lower since April 29. Heating oil is a proxy for other distillates such as jet and diesel fuels. Heating oil also trailed the raw crude oil over the past week, sending distillate crack spreads lower.

Technical resistance in the June NYMEX crude oil futures contract is at $33.15 per barrel level with support at the $6.50 level. The wide range is a function of the massive volatility in the crude oil market. The measure of daily historical volatility was at over the 227% level on May 6.  Demand remains the most critical factor when it comes to the price direction of the energy commodity. So long as the pandemic continues to cause a halt in global economic activity, the wide contango will continue to dominate the forward curve.

Meanwhile, the Middle East continues to stand as a region that could create a bottleneck for Brent supplies. Hostilities in the region that impact the production, refining, or logistics of crude oil could send the significantly higher in the nearby delivery months. At the current low price, the potential for a shock on the upside is not out of the question. On January 8, the price of WTI futures rose to $65.65 per barrel and Brent to $71.99 as hostilities between the US and Iran in Iraq reached a boiling point. Iran and the US continue to trade threats, which could lead to provocative actions and volatility in the oil futures markets.

Crude oil open interest decreased by 0.77% over the period. The bears had been in control since January 8, but the price action since April 20 has been on the upside. The shares of companies in the crude oil business outperformed the price of the energy commodity in April. The XLE posted an over 30% gain for the month, but it moved higher from the lowest level in many years. Oil-related shares had been significant laggards when it comes to both the price of oil and the overall level of the stock market in 2019 and the early months of 2020. They may have played a little catchup last month but have a long way to go to recoup the losses over the past year and one-half.

Meanwhile, many of the debt-laden companies in the energy sector are on the verge of bankruptcy, and a government bailout could be the only thing that saves them from extinction. I expect the US government to provide aid to ailing companies as a matter of national security. I do not believe that any financial assistance will in any way help equity holders, who are likely to be left holding an empty bag of valueless shares. I would only look towards the top companies in the world that dominate the business when it comes to any potential investment. However, even the oil companies in the strongest position may not be able to compete with China for production assets around the world. China has freedom to invest in other nations, but the government does not reciprocate and allow investment in China. We could see a renewed trade war between China, the US and other countries. On Wednesday, President Trump made comments about a continuation of the trade war, which contributed to some selling in the stock market. I expect objections to Chinese purchases of US oil properties to rise.

The spread between Brent and WTI crude oil futures in July fell to the $4.14 per barrel level for Brent, which was $0.90 below the level on April 29 as June rolled to July in the Brent futures. 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 1, the spread moved briefly to a 78 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.

While Brent has traded at a premium to WTI since the Arab Spring in 2010, the low price that could lead to US production declines as the Saudis and Russians increase output could lead to a premium for WTI. Before 2010, WTI had traded at an average of a $2 to $4 premium to the Brent benchmark. The move in the Brent-WTI spread could be a sign that some stability may return to the oil market. A rising Brent premium tends to be a bullish sign for the price of crude oil. The Brent premium moved to the most recent high on the day that crude oil futures in May hit bottom at $40.32 per barrel below zero. I do not read too much into the move in the spread as the price volatility had become so violent that all bets were off when it came to historical price and trading relationships.

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. 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. And, the contango caused the price of May futures to plunge to an incredible low of negative $40.32 per barrel.

Over the past week, June 2021, minus June 2020, moved from a contango of $15.99 to $8.83, a decline of $7.16 per barrel. In early January, the spread traded to a backwardation of $6.03, $13.19 per barrel tighter than the level on May 6. The spread hit a high of $18.78 per barrel on April 21, the day that June futures reached a low of $6.50 per barrel. Rising contango is a sign of a glut in the oil market. However, it is also a sign that the market expects production to fall significantly. The well-capitalized market participants that build cash and carry positions will receive a massive bonus if the market shifts back to backwardation during the life of their trades. A return of any tightness would allow them to sell their nearby oil in storage at a higher price than it costs to cover deferred short positions. With Iran lurking in the background as a hostile agitator in the Middle East, that scenario is possible. The decline in the spread is a function of the rebound in the price of crude oil. Spreads between months can be more volatile than outright prices at times, as the action over the past week shows. The number of rigs operating in the US is declining significantly, and production should follow in response to the lowest price levels in years over the coming weeks and months.

US daily production fell to 11.90 million barrels per day of output as of May 1, according to the Energy Information Administration. The level of production fell 200,000 barrels from the previous week. Meanwhile, inventory levels moved significantly higher, which reflects the demand destruction as many people continue to shelter in place. As of April 24, the API reported an increase of 9.978 million barrels of crude oil stockpiles, while the EIA said they rose by 9.0 million barrels for the same week. The API reported a decline of 1.108 million barrels of gasoline stocks and said distillate inventories rose by 5.462 million barrels as of April 24. The EIA reported a decrease in gasoline stocks of 3.70 million barrels and an increase in distillates of 5.10 million barrels. Rig counts, as published by Baker Hughes, fell by 53 for the week ending on May 1, which is 482 below the level operating last year at this time. Expect the rig count to continue to drop. The number of rigs operating stood at 325 as of May 1. The inventory data from both the API and EIA has been very bearish for the price of crude oil and products over the past weeks. The demand for energy will decline for as long as the economy continues to falter, but the falling output should eventually begin to bring some fundamental balance to the oil market.

OIH and VLO shares moved lower since April 29, OIH fell by 14.38%, while VLO moved 8.10% to the downside over the past week. VLO delivered a bullish earnings report on April 29. OIH was trading at $97.54 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 short the May $80 put option on VLO at $3.65 per share.



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:



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 at $60.91 per share on Wednesday. As I wrote, “If you are not comfortable assuming this level of risk, please do not follow this recommendation.” VLO shares have been highly volatile. The options will expire on Friday, May 15. The puts are in-the-money, which will result in a long position in the refining stock after May 15.


The June natural gas contract settled at $1.944 on May 6, which was 4.01% higher than on April 29. The June futures contract traded to a high of $2.162 on May 5, where it failed. Support in June stands at $1.765 per MMBtu. After making lower highs and lower lows from November 2019 until early April, natural gas shifted to the opposite pattern over the past month. A move above $2.25 on June futures is necessary to validate the end of the bearish price pattern and keep the bullish party going. Be cautious in natural gas as it suffers from the same demand problems as crude oil.

Last Thursday, natural gas stockpiles rose, according to the EIA.

Source: EIA

The EIA reported an injection of 70 bcf, bringing the total inventories to 2.210 tcf as of April 24. Stocks were 54.9% above last year’s level and 19.5% 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 98 bcf injection into storage for the week ending on May 1. The EIA will release its next report on Thursday, May 7, 2020.  While stockpiles of the energy commodity remain substantially above last year’s level and the five-year average, the percentage has been declining over the past weeks, which is a sign of a slower rate of production in the natural gas futures market. The low price and problems at debt-laden energy-producing companies should continue to cause the flow of natural gas into storage to be lower than last year over the coming weeks and months, which could support the price.

Open interest fell by 0.13% in natural gas over the past week. Short-term technical resistance is at $2.162 per MMBtu level on the June futures contract with support at $1.765 per MMBtu, the low from April 27. The level to watch on the downside is $1.519 when it comes to the continuous futures contract on a long-term basis. On the upside, $2.255 is the next level of resistance on the weekly chart. Price momentum and relative strength on the daily chart were just above neutral conditions as of Wednesday. The price put in a bullish reversal on April 16 and followed through on the upside. The low from that day was at $1.705, which is another level of technical support in the June futures contract.

June ethanol prices moved 2.33% higher over the past week. Open interest in the thinly traded ethanol futures market moved 10.74% lower over the past week. With only 532 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product fell by 3.38% compared to its price on April 29. The price of July coal futures in Rotterdam moved 5.36% higher over the past week.

On Tuesday, May 5, the API reported an 8.44-million-barrel rise in crude oil inventories for the week ending on May 1. Gasoline stocks fell by 2.237 million barrels, while distillate stockpiles increased 6.143 million barrels over the period. On May 6, the EIA said crude oil stocks rose 4.60 million barrels for the previous week. Gasoline inventories were 3.20 million barrels lower, while distillate stocks rose 9.50 million barrels. The API and EIA inventory reports were bearish for the price of the energy commodities, but prices recovered dramatically from last week. The slowdown in the US and global economy should cause inventories to continue to rise, but lower US output in the face of falling prices will slow the flow of the energy commodity into storage. Demand remains the critical issue facing the oil market. At the current price levels, all the bad news is already in the market. Goldman Sachs said they were bullish on the price of crude oil at the end of last week, and so far, they have been correct.

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, at $1.944 in June on the settlement price on May 6, it was 7.50 cents per MMBtu higher than on April 29.

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 leadup to the winter of 2020/2021. However, production could grind to a halt given the lack of workers during the shutdown period in many states and because of the low level of prices that make output uneconomic. The debt-laden oil and gas businesses in the US could receive support from the government to keep energy output flowing, but demand destruction will continue. The US government is likely to support the energy sector as a matter of national security.  Meanwhile, the differential between nearby June futures and natural gas for delivery in January was $1.117 per MMBtu or 57.5% higher than the nearby price, reflecting both seasonality and substantial inventory levels. The spread narrowed slightly 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 $6.33 per share, PBR was 11.35% lower than on April 29. 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 fell on the back of the falling value of the Brazilian currency.

The prices of oil-related shares rebounded significantly in April and outperformed the price action in the oil market by a long shot. However, oil shares remain at low levels, and the uncertainty over the futures of the debt-laden companies that could be lining up for government bailouts should keep lots of volatility in energy stocks. Meanwhile, a Chinese investment firm bought “giant” oil fields in Texas for $1.3 billion over the past years. The US House Committee on Foreign Investment approved the purchase. Chinese ownership of US resources could become a significant debate topic as China is free to purchase US assets, but US companies do not have the same privilege in the Asia nation. China’s strategy to dominate commodity assets around the globe is likely to cause more than a little concern and pushback in the US and Europe.



Grain prices did not move much over the past week. Then planting season in the US and the northern hemisphere is in full spring and the growing season is beginning. Time will tell if Coronavirus is impacting the 2020 crop. Corn and soybean prices edged marginally lower since April 29, and wheat was slightly higher since the previous report. The US Department of Agriculture will release its May World Agricultural Supply and Demand Estimates report on Tuesday, May 12. The WASDE report should provide a window into the early planting activities and levels of demand during the spread of the global pandemic.

July soybean futures fell by 0.60% over the past week and was at $8.3250 per bushel on May 6. Open interest in the soybean futures market fell by 1.43% since last week. Price momentum and relative strength indicators were falling below neutral readings on Wednesday.

The July synthetic soybean crush spread moved marginally higher over the past week and was at the 85.50 cents per bushel level on May 6, up 0.25 cents since April 29. The crush spread fell to a low of 81.5 cents on April 14, fell to the same low on April 27 and April 30, which could mark a triple bottom and low at that level. The crush spread traded to a high of $1.2375 on March 24 and is a real-time indicator of demand for soybean meal and oil. The crush moved higher on the back of demand for soybean meal in March. Bean futures peaked around that time. Price trends in the crush spreads can signal changes in the path of the price of the raw oilseed futures at times.

I continue to believe soybean futures are in the buy-zone at prices below $9 per bushel, but risk-off has pushed the price lower. Coronavirus will not lower the demand for food as over 7.6 billion people all over the planet require daily nutrition. I would use tight stops on any long positions. If the price falls, I will look to reestablish at lower levels on the long side of the market.

July corn was trading at $3.1425 per bushel on May 6, which was 0.08% lower on the week. Open interest in the corn futures market fell by 1.82% since April 28. Technical metrics remained below neutral readings in the corn futures market on the daily chart as of Wednesday. The double bottom on the continuous contract at $3.01 gave way to a slightly lower low of $3.0025. Long positions should have stops below the $3 per bushel level. Corn will continue to be highly sensitive to the price path of gasoline. Ethanol production in the US accounts for approximately 30% of the annual corn crop.

The price of June ethanol futures rose by 2.33% since the previous report. June ethanol futures were at $1.055 per gallon on May 6. The spread between July gasoline and July ethanol futures was at 16.68 cents per gallon on May 6 with ethanol at a premium to gasoline. The spread was 10.09 cents narrower since last week as gasoline outperformed the biofuel in July.

July CBOT wheat futures were up 0.19% since last week. The July futures were trading $5.1750 level on May 6. Open interest rose by 2.05% over the past week in CBOT wheat futures. The support and resistance levels in July CBOT wheat futures were at $5.0575 and $5.6150 per bushel. Price momentum and relative strength were below neutral readings on Wednesday on the daily chart.

As of Wednesday, the KCBT-CBOT spread in July was trading at a 40.00 cents per bushel discount with KCBT lower than CBOT wheat futures in the May contracts. The spread widened by 0.50 cents since April 29. 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 has been moving towards the long-term average over the past weeks, which could mean wheat futures will find support at a higher low.

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.

We are at the time of the year when uncertainty over the 2020 crop will peak, and prices will begin to move higher and lower with the weather forecasts. I believe grains have the best upside potential over the coming weeks and months as the growing world demand for food limits the downside. I will take profits on rallies in the current environment and raise stop levels on long core positions to protect capital. Mother Nature and the weather will be the critical factor for the path of least resistance of all grain prices over the coming weeks and months. I continue to believe we will see at least one significant rally during the coming weeks and months that will present an opportunity to take profits and lower the size of risk positions.

Weakness in corn compared to soybeans will likely lead many farmers to plant slightly more beans than corn on their acreage this year. The number of bushels of corn value in each bushel of soybean value has been running above the long-term norm. Therefore, slightly more beans and less corn could impact prices over the coming weeks and months, depending on both the crop and demand levels.

Coronavirus and its impact on the world may continue to cause deflationary pressures. When it comes to grains, over 7.6 billion people will continue to require daily nutrition. Corn, soybeans, and wheat are staples. We are at a time of the year where the weather conditions in growing areas of the world are the most significant factor for prices. Little changed from last week as the market now awaits the May WASDE report from the USDA.


Copper, Metals, and Minerals

Iron ore, lumber, and uranium posted price gains over the past week, while the Baltic Dry Index fell. Copper, aluminum, nickel, lead, zinc, and tin prices all moved to the downside as all of the nonferrous metals that trade on the London Metals Exchange declined. Base metals moved lower along with the US stock market since April 29.

Copper fell 0.99% on COMEX over the past week. The red metal posted a 1.06% loss as of May 5 on the LME since the last report. Open interest in the COMEX futures market moved 2.63% lower since April 28. July copper was trading at $2.3470 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 and COMEX stockpiles moved in opposite directions after weeks of steady gains. Some mine closures in the US and South America could be providing some support to copper and other base metals prices.

Support for the copper markets below the most recent low is at the early 2016 low of $1.9355 per pound. From a short-term perspective, the first level on the downside stands at $2.2170 per pound on July futures. 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. However, the price of the red metal only briefly probed below the $2 level and has been steadily moving away from the level on the downside. Technical resistance is at the recent high of $2.3950 per barrel on the July futures contract on COMEX.

The LME lead price moved lower by 0.94% since April 28. 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 3.84% 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 fell by 1.28% since the previous report. Aluminum was 1.60% lower since the last report. The price of zinc posted a 0.81% loss since April 28. Zinc was at just below the $1910 level on May 5. The impact of Coronavirus on the global economy is the most significant of our lifetime, which is a concern for the prices of the nonferrous metals.

July lumber futures were at the $341.50 level, up 9.28% since the previous report. Interest rates in the US will eventually influence the price of lumber. The current environment does not support new home and infrastructure building as the US and world deal with the crisis. However, lumber had signaled some optimism over the past few weeks. Lumber can be a leading economic indicator, at times. The price of uranium for June delivery moved 2.25% higher and was at $34.15 per pound. Uranium has been moving steadily higher over the past weeks as the world’s leading producer, Kazakhstan, suspended production nationwide for three months to slow the spread of COVID-19. The volatile Baltic Dry Index fell 12.21% since April 29 to the 575 level as the global economy remains in a coma. June iron ore futures were 2.82% higher compared to the price on April 29. Open interest in the thinly traded lumber futures market fell by 3.11% since the previous report.

LME copper inventories moved 4.22% lower to 245,350 since the last report. COMEX copper stocks rose by 2.80% from April 28 to 43,228 tons. Lead stockpiles on the LME were up 0.48%, while aluminum stocks were 0.60% higher. Aluminum stocks rose to the 1,355,025-ton level. Zinc stocks increased by 3.95% since April 28, adding to the recent explosive gains. Tin inventories fell 12.52% since April 28 to 5,100 tons. Nickel inventories were 0.94% higher compared to the level on April 28.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 25 cents on March 25, up six cents since the previous report. The details for the call option are here:



US Steel shares were at $7.99 per share and moved 0.13% lower since last week.

FXC was trading at $8.59 on Wednesday, $0.67 lower 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.

As I wrote last week, “The base metals remain at levels where there is a danger of selling if the global economy continues to contract.” Continue to exercise caution in the current environment, and only trade on a short-term basis with very tight stop levels. Any positions on the long side in the base metals or industrial commodities are a wager that the Chinese economy experiences growth, and the global pandemic’s impact on the world declines over the coming weeks. Selling in the stock market in the US could lead to lower prices. Low interest rates and stimulus provide support for industrial commodity prices, and mine closures could lead to shortages. The first sign of any market deficits will be if stockpiles of the nonferrous metals on the LME begin to decline.

I remain extremely cautious on the sector and have limited any activity to very short-term risk positions.


Animal Proteins

Live and feeder cattle prices moved higher since last week. Lean hog prices continued to recover as the price of pork exploded back above the 65 cents per pound level after trading below 42 cents in mid-April. The USDA WASDE report on May 12 will provide the latest data on supply and demand fundamentals for the animal protein markets. Supply concerns continue to plague the meat sector as ranchers have had problems sending animals to processing plants. The summer grilling season, the peak time of the year for demand, begins at the end of this month during the Memorial Day weekend in the United States.

June live cattle futures were at 89.475 cents per pound level up 6.17% from April 29. Technical resistance is at 90.00 cents per pound. Technical support stands at around 76.60 cents per pound level. Price momentum and relative strength indicators were rising above neutral readings on Wednesday. Open interest in the live cattle futures market moved 2.32% higher since the last report.

August feeder cattle futures underperformed live cattle as they rose by 3.35% since last week. August feeder cattle futures were trading at the $1.32750 per pound level with support at $1.10025 and resistance at $1.3900 per pound level. Open interest in feeder cattle futures fell by 3.78% 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. Both live and feeder cattle futures moved up the daily limit on Wednesday, May 6.

Lean hog futures continued higher since the previous report. The active month June lean hogs were at 65.575 cents on May 6, which was 18.10% higher since last week. Price momentum and the relative strength index were in overbought territory on the daily chart on Wednesday. Support is at 50.00 cents with technical resistance on the June futures contract at the 70.00 cents per pound level.

The forward curve in live cattle is in contango from June 2020 through April 2021. There is backwardation from April 2021 until August 2021 when contango returns until October 2021. The Feeder cattle forward curve is in contango from May through November 2020 before it becomes backwardated and flattens until April 2021. The forward curves did not experience any significant changes over the past week in the cattle futures market. As the nearby contracts expired, the term structure added the next month on the forward curve in the beef futures markets.

In the lean hog futures arena, there is backwardation from May 2020 until December 2020. Contango returns from December 2020 through June 2021. The curve flattens from June through August 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 forward curve in the hog market tightened over the past week as the price of pork continued to rise.

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

 Source: CQG

Based on settlement prices, the spread was at 1.36450:1 compared to 1.5178:1 in the previous report. The spread fell by 15.33 cents as live cattle rose, but lean hog futures rallied a lot more over the past week in a continuation of last week’s price activity. The spread fell by almost 67.50 cents per pound since mid-April. The spread moved below the historical norm on the June futures contracts. The differential narrowed dramatically over the past weeks. The spread was at its highest level since 2015 in mid-April, but it turned lower as hogs recovered from multiyear lows pushing the differential to the long-term average. Pork is now slightly expensive compared to beef on a historical basis. The move in the spread is an example of how valuable these inter-commodity spreads can be when it comes to assessing the relative value of one commodity versus another.

The peak season for demand is now only a few short weeks away. Pork prices have made a dramatic recovery, and cattle have moved higher. The WASDE report next Tuesday will provide data on supply and demand as well as a forecast for the coming peak season as consumers barbecue animal proteins during the summer months.


Soft Commodities

Cotton prices retreated over the past week, and cocoa edged lower. Coffee was the leader on the upside and sugar moved higher as the recovery in the price of crude oil caused the sweet commodity to recover. FCOJ prices moved to the upside since April 29.

July sugar futures rose 3.53% since April 29, with the price settling at 10.27 on May 6. 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 11.01 cents with support at the most recent low of 9.21 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. The value of the January Brazilian real against the US dollar was at the $0.17560 level against the US dollar on the June contract, 5.59% lower over the period after trading to a new low of $0.1735 on April 24. The Brazilian currency has 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. Over the past week, sugar followed oil rather than the Brazilian currency. Price momentum and relative strength on the daily sugar chart were on either side of neutral territory as of May 6. The metrics on the monthly chart crossed lower, and the quarterly chart was still at an oversold condition. 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.

Risk-off conditions stopped the rally. Sugar found at least a temporary bottom at a lower low of 9.05 cents per pound. Open interest in sugar futures was 2.86% lower since last week. Sugar had rallied to new highs as drought conditions in Thailand created the supply concerns that lifted the price of sugar futures. 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.  As I wrote last week, “A sustained rebound in gasoline prices could spark a recovery in the sugar futures market. Sugar is at the bottom end of its pricing cycle.” Sugar recovered and could continue to work its way high so long as gasoline and oil prices remain at or near recent levels.

July coffee futures moved 5.03% higher since April 29. July futures were trading at the $1.1060 per pound level. The technical level on the downside is $1.0380, the recent low. Below there, support is at around 97.40 cents on the continuous futures contract. Resistance is at $1.2260 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 $34.41 on Wednesday. Open interest in the coffee futures market was 3.97% higher since last week. I continue to hold a small core long position in coffee after taking profits during the rally in March.

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 remained at oversold levels on Wednesday. On the monthly and quarterly charts, the price action was neutral. 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. Bottlenecks on South American ports could prove highly supportive of coffee prices as they could create a shortage of the beans. At the same time, recent hoarding could lead to declining demand over the coming weeks and months. I expect volatility in coffee to continue, and I will look to trade on a short-term basis with a bias to the upside. I increased the long position slightly over the past week but will keep a tight stop at just below the $1 per pound level on futures and ETN products.

The price of cocoa futures edged lower over the past week. On Wednesday, July cocoa futures were at the $2363 per ton level, 0.59% lower than on April 29. Open interest rose by 1.13%. Relative strength and price momentum were above neutral readings on May 6. 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. We are long the NIB ETN product. NIB closed at $27.41 on Wednesday, May 6. 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. The level to watch on the upside is the recent high of $2425 per ton. On the downside, technical support now stands at $2215 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. I will likely remain on the sidelines over the coming week with a small core long position.

July cotton futures fell 4.57% 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 54.51 cents on May 6, after falling to the lowest price since 2009 in early April. On the downside, support is at the recent low of 52.01 cents and then at 48.15 cents per pound. Resistance stands at 57.98 cents per pound, the April 30 high. Open interest in the cotton futures market rose by 1.25% since April 28. Price momentum and relative strength metrics were below neutral territory on Wednesday.

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. The USDA WASDE report on May 12 will provide the next fundamental guidance for the cotton futures market.

July FCOJ futures moved to the upside since the last report. On Wednesday, the price of July futures was trading around $1.1935 per pound, 4.69% higher than on April 22. Support is at the $1.1035 level. Technical resistance is at $1.2100 per pound, the high from March 31. Open interest fell 9.90% since April 28. The Brazilian currency is weighing on the FCOJ futures, but bottlenecks at the ports could work in the opposite direction. $1.0460 per pound is the first level of minor support for the soft commodity below the $1.1035 level.

Soft commodities can be one of the most volatile sectors of the asset class. Sugar, coffee, and cotton remain near close to the bottom end of their multiyear pricing cycles. Cocoa could become compelling on the upside because of supplies from West Africa. FCOJ is illiquid, but it has displayed some signs of bullish life.


A final note

The stock market mirage after the dramatic recovery gave way to some selling over the past week. Even though the government is easing some of the social distancing restrictions, the virus continues to spread and claim victims. The price tag for putting the US and global economies into a self-induced coma will be unprecedented. The potential for a continuation of periods of deflationary pressures is high over the coming weeks and perhaps months. Any further outbreaks that cause a return to severe restrictions would be disastrous for markets. However, the record levels of stimulus from central banks and governments could spark a period of inflationary pressures down the road in 2021 and 2022. Food prices for consumers are beginning to rise. I believe that there are many bargains in the commodities asset classes at current price levels and suggest trading from the long side with tight stops. I do not expect runaway bull markets in the short-term, but we could see lots of price action to the upside over time. Buying dips and taking profits on rallies using at lease a 2:1 reward versus risk ratio could be the optimal approach to the commodities sector over the coming weeks.

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.