- The Fed cuts interest rates by 25 points and will remain data-dependent
- An attack in Saudi Arabia sends oil and oil products higher
- Natural gas remains above the $2.60 per MMBtu level
- The September WASDE and positive news on trade support grain prices
- Trade, Iran, Brexit, and more will keep markets volatile
The summary of trade recommendations for the coming week are as follows:
Summary and highlights:
On Thursday, September 12, the ECB told markets that would cut its interest rate for deposits by ten basis points to negative 50 basis points. At his final meeting as ECB President Mario Draghi said the ECB would begin printing money again as it promised to buy 20 billion euros in bonds and other financial assets per month starting in November. The euro fell against the dollar after the announcement but came back at the end of the day. The move put more pressure on the Fed as the US central bank meets next week to decide on the path of US interest rates. President Trump chimed in following the ECB announcement:
Source: Twitter
The USDA released its September WASDE report on Thursday, and the price action in the aftermath of the report was the opposite from last month as the prices of agricultural commodities move higher across the board.
Stocks rose modestly on Thursday as optimism continues to prevail in markets. Crude oil moved lower with oil products, but natural gas was higher after the EIA reported a slightly lower injection than the market had expected. Precious metals edged mostly higher, but palladium rose to a new record high at over the $1600 per ounce level. Copper gained on the back of optimism over trade. Cattle and hogs posted gains led by a limit up move in the nearby lean hog futures contract. China is suffering from a shortage of pork, which could lead to US exports if the two sides make progress on trade over the coming weeks. Cotton moved above 62 cents per pound and broke out to the upside after the September WASDE report. FCOJ and sugar futures edged lower, with sugar falling to a new low at 10.68 cents per pound. Coffee and cocoa posted marginal gains. Lumber edged lower on the session. Bitcoin futures moved $285 higher to the $10,410 level.
On Friday, stocks were either side of unchanged with a small gain in the DJIA and marginal losses in the S&P 500 and NASDAQ. The Russell 2000 posted a small gain on the final session of last week. The dollar index and Bitcoin edged lower as grains held Thursday’s post WASDE gains. Crude oil was a bit lower, but both WTI and Brent nearby futures closed the week in the middle of their respective trading ranges. Oil products did slightly better boosting refining margins. Natural gas was four cents higher and closed at over the $2.60 per MMBtu level. Gold continued to fall with the December contract settling below $1500. Silver took it on the chin as the price fell by just over 60 cents per ounce to under $17.60 on the December contract. Platinum and palladium edged a bit lower, but the palladium futures market settled the week at just over the $1600 per ounce level. Cattle were little changed after gains earlier in the week, but lean hogs were up over 3 cents per pound on the optimism over trade between the US and China. A shortage of pork in China because African swine fever killed off a significant percentage of the hog population could lead to US exports as the oversupply could help with Chinese requirements. Cotton, sugar, and cocoa were higher while coffee and FCOJ edged lower. The price of lumber was down marginally but closed the week at just under the $380 per 1,000 board feet level.
On Monday, the markets were reeling from the weekend attacks on Saudi Arabian oil production. The coordinated drone attacks took out half of Aramco’s daily output, which accounts for around 5% of the world’s daily demand. Stocks fell across the board with the DJIA down around 143 points, the S&P 500 falling 9.43 points, and the NASDAQ shedding 23.17 points. The VIX rose 1.12 to the 14.86 level. The most significant action came in the oil market. Nearby NYMEX crude oil rose by $8 per barrel on the nearby October futures contract at the settlement price. Brent, the pricing benchmark for Middle Eastern crude rose even more as it was around $9 per barrel higher. Oil products followed, and crack spreads moved to the upside. Many market participants holding short positions found themselves scurrying for an exit to their risk positions. Natural gas also moved higher to a new peak at $2.70 per MMBtu and settled at the $2.681 per MMBtu level on Monday. The dollar index edged higher, but gold and silver moved higher with the most significant move coming in the silver market after Friday’s losses. Platinum and palladium moved to the downside. Grains posted marginal gains, while cattle and hog prices drifted lower. All of the soft commodities moved higher on the session, but lumber fell by around $10 per 1,000 board feet. Bitcoin was $125 lower at the $10,240 level. On Monday, the DOJ indicted three current and former JP Morgan traders on a host of charges including a RICO charge for spoofing and manipulating the prices of precious metals.
On Tuesday, stocks edged higher across the board, and the dollar index slipped by 0.356 points on the December contract. Crude oil turned lower on the session as the Saudis said that production would return to normal levels by the end of this month. Oil products moved lower while crack spreads were stable. Natural gas fell marginally but remained above the $2.65 per MMBtu level on the October futures contract. Grain prices moved a bit lower across the board after the recent gains. Gold and silver remained above the $1500 and $18 per ounce levels respectively. Platinum group metals did not move much, but the strike at GM has weighed on the PGMs because of their use in catalytic converters. Cattle prices rallied while lean hog futures moved to the downside. Cocoa and lumber posted gains, but coffee, sugar, cotton, and FCOJ futures all posted losses on the session. The long bond was hovering around the 159-18 level, and Bitcoin gained $150 to close at the $10,390 level.
On Wednesday, we heard from the Federal Open Market Committee of the US central bank. As expected, the Fed lowered the short-term Fed Fund rate by 25 basis points to a range of 1.75%-2.00%. The Fed’s job is to maintain maximum growth, stability, and use monetary policy to achieve those goals. The Fed cited uncertainties abroad as the reason for the rate cut. The vote was 7-3 against the interest rate cut. Members of the Fed Rosengren and George voted against the rate cut as they believe the strong economy does to warrant lower rates at this time. James Bullard voted against the cut because he favored a 50-basis point move lower in the short-term rate. The Fed remains divided when it comes to the use of monetary policy in the current environment. In his press conference, Chairman Powell cited that both trade with China and Brexit pose the risks that are creating uncertainty. The plurality suggests there could be one more rate cut of 25 basis points before the end of 2019. However, that is not certain as the Fed will exercise monetary policy based on the economic data over the coming weeks and months. The Fed told markets the US economy was upbeat with solid job growth, low unemployment, and rising household spending. Meanwhile, exports and business investments have weakened, providing another reason for the second rate cut of 2019. Chairman Powell said that the latest rate cut is insurance. Also as expected, the President was not pleased with the latest move by the Fed and Chairman he appointed to run the central bank. The President tweeted:
Source: Twitter
Markets expressed disappointment after the Fed announcement as the dollar rose, stocks fell along with precious metals prices and bonds.
On Wednesday, stocks fell after the Fed cut rates, but rebounded to close on either side of unchanged on all of the leading indices. Grains were mixed on Wednesday with gains in wheat and corn and a small loss in soybeans. Crude oil continued to correct to the downside as product prices followed, but crack spreads edged higher as the products outperformed the crude oil. Natural gas edged lower but remained above the $2.60 per MMBtu level. Gold and silver prices fell with silver leading the way on the downside. The losses intensified after the Fed rate cut as the market had wanted to see the central bank moved 50 basis points lower. Platinum group metals also fell on the session along with the price of copper. The meats all moved to the upside, and sugar, cocoa, and lumber posted marginal gains. Cotton and FCOJ moved lower, and coffee was unchanged on the session. Bitcoin edged lower and bonds were a bit higher in the aftermath of the rate cut. The bottom line on the rate cut was that both the markets and the President were not pleased that the Fed only cut by 25 points.
Stocks and Bonds
Stocks posted marginal gains over the past week. The trade war between the US and China is undergoing a period of de-escalation. However, the weekend drone attracts on Saudi Arabia oil production was a reminder that Iran poses a massive threat to any hopes for peace the Middle East. At the same time, Brexit continues to stand as a challenge for Europe. Last week, the ECB cut interest rates by ten basis points to negative 50 basis points and reinstituted quantitative easing to the tune of twenty billion euros per month starting in November. On September 18, the US Fed cut its short-term rate by 25 basis points, the second move by the world’s leading central bank since July 31. Falling rates around the world continue to support the stocks market, but also are a signal of fears over recessionary pressures.
The S&P 500 rose by 0.19% over the past week, while the NASDAQ moved 0.09% higher. The DJIA posted a 0.04% gain since the previous report. Trade and Brexit will remain two issues at the forefront of the minds of traders and investors over the coming week. However, after a period of calm in the Middle East, the latest attack on Saudi Arabia was a sign that tensions in the region could continue to upset markets across all asset classes.
Chinese large-cap stocks underperformed US stocks again over the past week.
Source: Barchart
As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $40.98 level on Wednesday, which was 0.85% lower than the closing level on September 11. Technical support is at the recent low at $37.66 per share from August 14. Resistance stands at the July 1 high at $44.02 per share. If the US and China show progress on trade, the path of least resistance for Chinese stocks should be higher.
US 30-Year bonds continued to move lower as the US Fed is behind the rest of the world when it comes to loosening credit. The 25-basis point cut in the Fed Funds rate was not enough to reverse the recent correction in the bond market. The nearby long-bond futures contract traded to a new high at 167-18 in late August. The December contract rose to a high at 166-25 and was at the 159-28 level on Wednesday as they moved 0.47% lower since the previous report. However, the long bond bounced from a low at 157-17 on September 13.
Open interest in the E-Mini S&P 500 futures contracts rose by 8.56% since September 11 as money continued it flow into the stock market. As we approach the all-time highs, there appears to be less trepidation on the part of market participants when it comes to buying stocks. Open interest in the long bond rose by 1.22% over the past week. The VIX moved lower as stocks rose over the past week. The volatility index was at the 13.95 level on September 18, a decline of 4.52% since last week. The most recent high was at 24.81 on August 5. The VIX moved lower as stocks rose and calm returned to markets over the past week when it comes to trade.
As I have been writing, “I have been buying the VIXY and other VIX related products and was stopping out for small losses until Wednesday. I will continue to look for buying opportunities on dips with at least a 1:2 risk-reward ratio on trades. The many issues facing markets could cause sudden bouts of volatility in the stock market as we witnessed following the July Fed meeting. The VIX and products like VIXY can capture short-term price corrections as they typically move in an inverse direction to the stock market.” Nothing has changed since the previous report when it comes to my strategy for buying volatility on dips and taking profits during corrective periods. I believe that the VIX, VIXY, and volatility-related products are in the buying zone once again at the current levels. I would be a buyer looking for at least a 2:1 payoff on long volatility positions over the coming week. Iran is likely to remain a significant issue over the coming days and weeks.
The dollar and digital currencies
The dollar index posted only a marginal decline over the past week despite the Fed rate cut. The move by the ECB was a sign that the US central bank remains behind the curve when it comes to cutting rates in the current environment. The December dollar index futures contract posted a 0.04% loss since September 11. The index made a new and higher high at 99.33 on September 4 on the continuous contract and corrected to the downside. The new peak was a continuation of the bullish trend in the dollar that started in February 2018 and now stands as the critical technical resistance level for the index. The dollar will continue to be a bone of contention for President Trump, who has not been shy about expressing his disgust with Fed policy. The outcome of the latest Fed meeting on September 18 is likely to continue the barrage of tweets aimed at Chairman Jerome Powell and voting members of the FOMC. Last week, the President said that the Fed should cut rates to zero percent and restart quantitative easing. From President Trump’s perspective, the Fed is working against his administration’s initiatives when it comes to trade, tax, and regulatory reforms. The war of words from the oval office is likely to continue as the Fed struggles to maintain its independence from the executive branch.
The euro currency was 0.16% higher against the dollar since last week’s report despite the latest moves by the ECB. However, the upside in the currency is likely limited, given the dovish approach to monetary policy in Europe.
The one-quarter of a one-percent rate cut in the US and move by the ECB have kept the volatility between the euro and the dollar stable, but Brexit could cause volatility over the coming weeks. The pound-dollar and euro-dollar currency relationships are likely to see an increase in price variance based on negotiations between Boris Johnson and the EU leadership and the next move by the UK Parliament when they return from a five-week suspension of legislative activities could cause political fireworks.
The leader of the digital currency asset class moved marginally higher and was trading at the $10,217.24 level as of September 18. Bitcoin and other digital currencies have been trading in a range. Bitcoin remains near the bottom of the $9000-$12,500 trading range.
Bitcoin moved only 0.84% higher since last week while Ethereum diverged and posted a 19.22% gain as it was at around $212.11 per token. The market cap of the entire asset class moved 4.77% higher as it outperformed Bitcoin and underperformed Ethereum. The number of tokens rose by 153 since September 11 to 2871 tokens. The consistent rise in the number of digital currencies continues to dilute the asset class. In late 2017 the overall market cap was at over $800 billion with far fewer tokens. Open interest in the CME Bitcoin futures rose by 1.11% since last week in the cash-settled futures product as the price continues to consolidate at around the $10,000 level.
Bitcoin and the other cryptocurrencies are waiting for the next event that will either spur buying or selling. SEC approval of an ETF product would be bullish for the market, but custody and manipulation issues continue to be roadblocks to regulatory approval. Blockchain technology continues to be widely accepted, but the tokens are a different story. A continue to believe that the asset class is waiting for a government-issued token before gaining wider acceptance by the market.
The Canadian dollar moved 0.76% lower since last week. Open interest in C$ futures rose by 2.52% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that also produces significant quantities of agricultural products. The Australian dollar is also a commodity-based currency with sensitivity to the Chinese economy. The increased optimism over trade did not prevent the A$ from falling by 0.48% since last week’s report.
The British pound continued to move higher and posted a 1.08% gain since the previous report after falling to a new low below the $1.20 level on September 3. We are likely to see a wide range in the pound over the coming weeks. The significant move higher came after the UK Parliament took a hard Brexit off the table before going on its hiatus. A general election, which will be another referendum on the departure from the EU, will cause an increase in volatility. Since the June 2016 referendum, the price action in the pound has told us that a hard Brexit is bearish for the currency while a divorce with a deal or remaining within the EU is bullish for the British pound against both the US dollar and the euro currencies.
The Brazilian real moved lower over the past week falling 0.92% since September 11. The Bolsonaro government has had its hands full with fires in the Amazon and economic woes in neighboring Argentina over the past weeks. The real remains not far above its lows. The Brazilian currency is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets are likely to move higher or lower with the direction of the Brazilian real over the coming weeks. The real-dollar relationship continues to trade not far above its low.
Gold continued to correct over the past week, but the moves by the ECB and US Fed to reduce interest rates is fundamentally bullish for the yellow metal. When gold rose to its latest high earlier this month, it traded at new all-time peaks in almost all of the leading currencies of the world except for the Swiss franc and US dollar. However, gold did appreciate significantly in both franc and dollar terms. Falling interest rates continue to support the price of gold, which could lead to a higher low during the current corrective period. As I have been writing, the dollar may be the king of the currencies, but gold is the monarch of money. The precious metal has been around as a means of exchange for far longer than any of the fiat currencies in circulation around the world today.
Precious Metals
Gold and silver prices continued to correct over the past week, but the yellow metal posted a marginal gain and silver was down by around 1.4% compared to the previous report. Platinum lost ground, and palladium rose to a new record higher while rhodium posted the most significant percentage gain of the week. The strike at GM could be weighing on the prices of the platinum group metals as they are the critical inputs in catalytic converters.
Gold was 0.84% higher since last week while silver fell 1.38%. Both metals fell in the aftermarket on Wednesday after the Fed announcement. The price of December gold was just above the $1500 per ounce level on Wednesday while silver was around $17.80 late in the session. December gold rose to a new high at $1566.20 on September 4, and December silver moved to the highest level since 2016 at $19.75 on the same day before both metals turned lower. Gold and silver corrected in the leadup to the September 18 Fed meeting. The Fed had lit the initial bullish fuse under the gold and silver markets in June. On July 31, the first interest rate cut in years and the end to quantitative tightening kept the bullish price action going. After the September meeting, the kneejerk reaction was bearish because the market had wanted a move of 50 points, but time will tell if the two precious metals are heading for higher highs.
The price of platinum decreased by 0.60% since last week after reaching a new short-term high at $1000.80 on September 5. October platinum futures were around the $935 level on Wednesday. Rhodium is a byproduct of platinum, and the price of the metal has been in a bull market since early 2016. After last week’s correction, the price of rhodium rose by 5.56% since the previous report. The midpoint price of the metal rallied to $4750 per ounce. Palladium was 1.63% higher on the week as the price traded to a new peak at $1616.50 on the December futures contract and was over the $1580 per ounce level on Wednesday.,
Open interest in the gold futures market moved 2.64% higher. The metric moved 4.03% higher in platinum while it was 2.13% higher in the palladium futures market. Silver open interest fell by 2.62% over the period.
Technical resistance on the December gold futures contract is at the recent high at $1566.20 and at just over the $1600 per ounce level. Gold is now waiting for fresh news on global interest rates and the trade war between the US and China. While fears of a hard Brexit subsided, the risk of volatility on the back of the UK’s departure from the EU remains a factor that could cause a return of buying into gold and perhaps the silver market over the coming weeks and months. Wednesday’s Fed rate cut was supportive of the price of the yellow metal.
The silver-gold ratio moved higher over the past week as silver underperformed gold on the downside.
Source: CQG
The daily chart of the price of December gold divided by December silver futures shows that the ratio was at 84.20 on Wednesday 1.43 higher than the level on September 11. The long-term average for the price relationship is around the 55:1 level. The ratio remains at an elevated historical level. Silver remains historically cheap compared to gold, but it had been playing catchup over recent weeks. The ratio had declined to a low at 79.30 on September 4 when both gold and silver were on the recent highs. The ratio tends to move lower during bull market periods and higher when there is bearish price action in the markets
We are long the gold mining stock ETF products GDX and GDXJ, which underperformed the price of gold since the last report. While gold moved 0.84% higher, the GDX was 0.58% lower since September 11 and GDXJ was 2.50% below last week’s level. The mining stocks tend to outperform gold on the upside and underperform during corrective periods as it provides a leveraged return. The price action over the past week was typical of the relationship between the metal and the mining stocks. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product which posted a 2.36% loss since September 11 underperformed the price action in the silver futures market. I believe that both gold and silver will find short-term lows at higher levels and will continue to appreciate given the path of global interest rates.
Platinum group metals all posted gains since September 11. October platinum futures fell by 0.60% to the $934.60 per ounce level. Palladium posted a 1.63% gain as of the close of business on September 18 and was at the $1582.20 per ounce level. Palladium was trading at a premium over platinum with the differential at the $647.60 per ounce level on Wednesday, which widened over the past week. October platinum was trading at a $581.20 discount to December gold at the settlement prices on September 4 which also widened since the previous report. The price of rhodium, which does not trade on the futures market moved $250 higher over the past week and was at $4,750 per ounce on Wednesday after trading down to the $4000 level. Rhodium is a byproduct of platinum production. The low price of platinum has caused a decline in output in South African mines, creating a shortage in the rhodium market. Rhodium is part of the reason that platinum is finally making a move on the upside. Some analysts are now projecting that the price of the rare metal could make a move to the $10,000 per ounce level, which is around double the current price. However, markets rarely move in a straight line.
We are long the PPLT platinum ETF product which moved 1.59% lower since September 11. Platinum continues to offer the most attractive value proposition in the precious metals sector even after the recent rally. Platinum needs to make a move above the $1000 and $1200 resistance levels to break to the upside on a technical basis.
Over the past week, interest rates fell in both the US and Europe, which should be supportive of the prices of gold and silver. Optimism over trade between the US and China may have removed some fears from the markets. Meanwhile, last weekend’s drone attack on Saudi Arabia was a reminder that the Middle East is a potential powder keg. The attack had Iran’s fingerprints and increases tensions in the region. At the same time, Brexit is likely to create an environment of uncertainty in Europe over the coming weeks. The bottom line is that the political and economic landscapes seem supportive of the price of gold and silver. Meanwhile, a new record high in palladium with rhodium knocking on the door at $5000 per ounce, should provide support for the price of platinum once the GM strike is out of the way.
Energy Commodities
Crude oil closed last Friday right smack in the middle of its trading range on both WTI NYMEX and Brent futures on the Intercontinental exchange. At the end of last week, it had seemed that the bullish and bearish factors pulling the price of oil in opposite directions had exchanged places. A degree of optimism returned to the trade negotiations between the US and China reviving hopes of increased demand for the energy commodity. The departure of John Bolton from the Trump administration caused many to believe that the President and the Iranians could be on the verge of sitting down to discuss terms for a new and improved nuclear nonproliferation agreement. Bolton had been an outspoken hardliner in the administration. However, a drone attack on an Aramco facility in Saudi Arabia on September 14 had Iran’s fingerprints all over the provocative action. The attack cut Aramco’s production in half on a short-term basis, which amounts to around 5% of the world’s daily requirements.
The attack on Saudi Arabian production was another reminder of the volatile nature of the Middle East and caused buying in the market when it opened late Sunday in the US. Iran will now keep the bid under the oil market as the US and Saudis are not likely to take the drone attack without an eventual response. Natural gas, and ethanol prices moved higher since last week’s report while coal posted a marginal decline.
October NYMEX crude oil futures rose by 4.23% since last week. October futures are rolling to November on NYMEX. November Brent futures moved 4.61% higher since September 11. October gasoline was 5.59% higher, and the processing spread in October posted a 12.61% gain since last week as gasoline outperformed the price of crude oil over the period. Last week, the gasoline crack spread moved over 25% higher even though it is now in a seasonally weak period of the year as the driving season ended with the summer. October heating oil futures moved 3.68% higher since the previous report, and the heating oil crack spread rose by 2.52% since last week.
Technical resistance in the October NYMEX crude oil futures contract is now at $63.38 per barrel level, the high from September 16, with support at the $54 level. Crude oil open interest fell by 0.38% since last week. More positive news on trade was supportive of the price of crude oil, as was the recent economic data from China. At the same time, the attack which impacted 5% of the world’s daily supplies is a reason why I had been warning that any surprises when it comes to price spikes were likely to come on the upside of the oil market. We could be entering a period where provocative incidents and responses cause increased hostilities that impact output, refining, and logistical routes in the Middle East. The region is the home to over half the world’s oil reserves and is now back on the center of the stage in the oil futures market after a few weeks of calm. The price of oil moved lower after the fireworks on Sunday night and Monday, but the issues with Iran are not going away any time soon.
The spread between Brent and WTI crude oil futures in November rose to the $5.53 per barrel level for Brent, which was $0.42 above the September 11 level. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. The Brent premium traded as high as $11.59 per barrel in late May, but the November contract reached a high at a lower level at $7.41 on the high when it comes to the spread. The spread found what looks like a significant bottom at $3.46 on August 20. Last weekend’s attack in Saudi Arabia is likely to keep a bid under the price of Brent crude oil and the spread between the two benchmarks.
US daily production stood at 12.4 million barrels per day as of September 13 according to the Energy Information Administration, which was unchanged and only 0.10 million below a record peak for daily output. As of September 6, the API reported a decline of 7.227 million barrels of crude oil stockpiles while the EIA said they fell by 6.90 million barrels for the same week. The API reported a decline of 4.46 million barrels of gasoline stocks and said distillate inventories rose by 618,000 barrels as of September 6. The EIA reported a drop in gasoline stocks of 700,000 barrels and an increase in distillates of 2.70 million barrels. Rig counts, as reported by Baker Hughes, fell by 5 last week to 733 rigs in operations as of September 13, which is 134 below the level operating last year at this time. The decrease in the number of rigs with daily output at 12.4 million barrel per day level is a sign of the efficiency of the oil business in the US. However, if the rig count continues to drop, it could weigh on production and provide some degree of support for the price of oil. Record US production will likely ease the blow when it comes to the loss of output from Saudi Arabia. However, 5% of the world’s daily requirements is a significant amount that impacted the price action in what was a range-bound market until last weekend. President Trump said that he would release oil from the US strategic stockpiles to offset the impact of lost Saudi output.
OIH and VLO shares moved in opposite directions since last week. OIH fell by 0.91%, and VLO moved 1.13% higher since September 11. We are long two units of the OIH ETF product at an average price of around $13.40 per share. I believe the ETF that reflects the price of oil service company shares is far too low at its current price level. I intend to add to the position on further price weakness. Oil services stocks have done much worse than other oil-related equities over the past weeks.
October natural gas futures hit a low so far in 2019 on August 5 at $2.045 per MMBtu while the continuous contract fell to $2.029. Over the past week, the price continued to move higher, adding to gains after breaking above the technical resistance level at $2.53 per MMBtu. The October futures were at $2.637 on September 18, which was 3.33% higher than on September 4. Last week, the EIA reported an injection of 78 bcf into storage, bringing the total amount of gas in storage to 3.019 tcf as of September 6. The low for the 2018/2019 withdrawal season was at 1.107 tcf in March. Last year stocks rose to a high at 3.247 before the start of the withdrawal season in November. At the current rate of injections, the amount of natural gas in storage at the end of the injection season in November will be above last year’s level, but below a record level for stockpiles in the US.
Source: EIA
As the chart shows, stockpiles of natural gas are 15.0% above last year’s level but were still 2.5% under the five-year average as of September 6. The inject was a bit below the level the market had expected. This week, I expect the EIA to report an injection of around 84 bcf as the flow into storage begins to increase over the coming weeks as cooler weather arrives. Open interest fell by 1.97% over the past week. Technical resistance stood at $2.53 per MMBtu level on the continuous futures contract. $2.53 and $2.522 were the lows from 2018 and 2017 respectively. The price traded to a high at $2.710 per MMBtu on September 17. The peak season for demand tends to begin in mid-November, but the futures market has a habit of reflecting the shift from injections to withdrawals from storage a lot earlier. The break to the upside likely attracted both technical and speculative buying and short covering. The price action has been constructive, but as I wrote last week, it may be too early for the price to continue to make strides on the upside.
With approximately 9 weeks to go before the beginning of the withdrawal season in November, stocks will need to climb by an average of 25.4 bcf each week to reach last year’s peak at 3.247 tcf in storage around the US. An average of 109 bcf per week is needed to push the supplies over the four tcf level at the start of the 2019/2020 peak season for demand. We are likely to see stocks peak somewhere around the 3.7 tcf level at the beginning of the withdrawal season in November. Over recent years, stocks rose to record levels at over 4 tcf before the start of winter.
As I reported over the past weeks, I began buying some call options with strike prices at the $2.80 per MMBtu for expiration in December 2019 through February 2020 in the natural gas futures options market over the recent weeks. The January $2.80 call at 35 cents was 3.1 cents higher over the past week; I began purchasing these calls at the 16 cents level. I had also been buying the leveraged GASL product at prices below $9 per share. In GASL, I will work tight stops and look to take profits and re-establish long positions at a lower level if selling in natural gas, the stock market, or both weigh on the leveraged ETF. GASL was at the $12.41 level on Wednesday. I will not work any stops on the call option positions as I will at least hold them into the early winter months at the end of 2019. The natural gas market has likely seen the lows for 2019 in early August. I did not add any new call positions over the past week.
October ethanol prices moved 3.98% higher on the October futures over the past week. Open interest in the thinly traded ethanol futures market fell by 7.43% over the past week. However, with only 486 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product fell by 3.24% compared to its price on September 11, and the price of October coal futures in Rotterdam decreased by 0.32% over the past week after an almost 8% rise last week as the market shifts to winter trading mode.
On Wednesday, the API reported that oil inventories rose by 592,000 barrels for the week ending on September 13. The EIA said that stocks were 1.1 million barrels higher as of the end of last week. Analysts had expected a decline of 2.889 million barrels for the API report. When it comes to products, the API reported an increase in gasoline inventories of 1.599 million barrels and a rise in distillate stocks of 1.998 million barrels. The EIA said that gasoline stockpiles rose by 800,000 barrels and distillate inventories moved 400,000 barrels higher for the week ending on September 13. The overall inventory data was bearish for the price of crude oil and products. Meanwhile, as I have been writing over the past weeks, “the situation in the Middle East and any further incidents involving Iran could cause an increase in price volatility over the coming weeks.” The events of last weekend in Saudis Arabia are a reminder of why the Middle East is the world’s most turbulent political region.
In natural gas, the price remained near the recent high over the past week. Support is now at around the $2.50 level on a short-term basis.
Source: NYMEX/RMB
As the forward curve over the coming months shows, the peak price for this coming winter was at $2.906 in January, which was 5.50 cents per MMBtu higher than last week. I am sitting on small positions in December through February call options with strike prices below the $2.80 per MMBtu level and the GASL product. I will continue to look to purchase call options on price dips with a time stop in early winter rather than a price stop. My stops on GASL will be tight, given the volatile nature of the product. I will take profits on rallies and trade around the current long position over the coming week. Nothing has changed in natural gas since the previous report.
I have been tracking the price action in BG shares. Since September 4, the price of BG shares moved 1.71% lower to $56.98 per share on September 18. We are working a stop on close in BG at $49.49 per share on the downside. Our average cost of the shares is at $54.82. I will continue to post weekly updates on this position.
Aside from rig count, inventories, and trade, the Middle East now is on the center of the stage in the oil market. The potential for more incidents will keep a bid under the price of oil. Moreover, the loss of half of Aramco’s production is supportive of the price of the energy commodity. At the same time, Saudi hopes for an IPO of the state oil company have dimmed as the attack is a reminder of the high level of risk for the production in the region. 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. Iran remains a significant factor that could change the pricing dynamics for crude oil at any time.
I continue to favor a long position in PBR, Petroleo Brasileiro SA. We are long two units at an average price of $15.16 per share. PBR shares were 0.34% higher over the past week at $14.62 per share. I will add another unit at a much lower price to lower the average cost of the long position. While I remain bullish on Brazil, contagion from Argentina and selling in the overall stock market pushed the price of the shares lower over the recent weeks.
A I wrote last week, and could be the most significant thing to remember, “Iran continues to pose the greatest threat to the oil market when it comes to supplies and could cause short-term price spikes.”
Natural gas is now above the $2.50 level and should move higher and lower with the weekly inventory data. Ethanol will be watching corn as the biofuel moved to the upside after the September WASDE report and on more optimism over trade, which pushed the price of corn higher. Oil had been trading back and forth in a range. If last weekend’s attack in Saudi Arabia leads to more hostilities, we could see some wide price variance in the energy commodity over the coming days and weeks.
Grains
The USDA published its September World Agricultural Supply and Demand Estimates report last week on, September 12. The prices of all of the grain markets moved higher in the aftermath of the release. The report was supportive of the prices of many agricultural products. China stole the show from the USDA as the progress on trade caused the Chinese to buy 10-20 cargos of soybean in Q4 from the US. Trade and the WASDE lifted prices of all three of the leading grain markets over the past week.
New-crop November soybean futures moved 2.57% higher over the past week. Open interest in the soybean futures market rose by 0.04% since last week. The USDA told the soybean market:
“U.S. oilseed production for 2019/20 is projected at 110.2 million tons, down 1.3 million from last month with lower soybean and cottonseed production partly offset by a higher peanut forecast. Soybean production is projected at 3.6 billion bushels, down 47 million on a lower yield forecast of 47.9 bushels per acre. Soybean supplies are reduced 2 percent on lower production and beginning stocks. With soybean crush and exports unchanged, ending stocks are projected at 640 million bushels, down 115 million from last month. The U.S. season-average soybean price for 2019/20 is forecast at $8.50 per bushel, up 10 cents. The soybean meal price is projected at $305 per short ton, up $5.00. The soybean oil price forecast is unchanged at 29.5 cents per pound. Changes for 2018/19 include higher U.S. soybean exports, higher crush, and lower ending stocks. Exports are increased 45 million bushels based on official trade data through July and indications from August export inspections, which were record high for the month. With crush raised 20 million bushels, ending stocks for 2018/19 are projected at 1.0 billion bushels, down 65 million. This month’s 2019/20 global oilseed outlook includes lower production, increased trade, and reduced stocks relative to last month. Global rapeseed production is at a 3-year low, mainly reflecting lower production for the EU on both area and yield. Australia’s production is also lowered this month due to dry weather conditions in New South Wales and Queensland. Soybean production is down slightly this month as lower U.S. production is mostly offset by higher output for India, Canada, and China. Major global oilseed export changes for 2019/20 include higher rapeseed and soybean exports for Canada. For 2018/19, soybean exports for Brazil are lowered based on lower than-expected shipments during the past few months. However, higher-than-expected exports by Argentina and the United States, particularly to China, are offsetting. Global soybean ending stocks for 2019/20 are lower as reduced stocks for Argentina and the United States are partly offset by higher stocks for Brazil, Iran, and India.”
Source: USDA
Lower global ending stocks were bullish for the soybean market as was lower US production. Chinese purchases of soybean cargos trumped the WASDE, which was not bearish for the price of the oilseed.
The December synthetic soybean crush spread moved higher and was at the $0.9125 per bushel level on September 11, down 7.75 since September 11. The crush spread is a real-time indicator of demand for soybean meal and oil. Therefore, price trends in the crush spreads can cause buying or selling in the raw oilseeds at times. Any significant moves in the crush spread are likely to translate into price movement in the soybean futures. The price action in the December crush spread is a bearish sign for the price of the oilseed futures.
New-crop December corn was trading at $3.7125 per bushel on September 18, which was 3.13% higher on the week. The August WASDE report was highly bearish for the price of corn and pushed the price to a low at $3.5225 on the December futures contract on September 9. On September 12, the USDA told the corn market:
“This month’s 2019/20 U.S. corn outlook is for reduced production, lower corn used for ethanol, and slightly higher ending stocks. Corn production is forecast at 13.799 billion bushels, down 102 million from last month on a lower yield forecast. Corn supplies are down from last month, as a smaller crop more than offsets larger beginning stocks due to lower estimated exports and corn used for ethanol for 2018/19. Corn used for ethanol for 2019/20 is lowered 25 million bushels. With use falling more than supply, corn ending stocks are up 9 million bushels from last month. The season-average corn price received by producers is unchanged at $3.60 per bushel. This month’s 2019/20 foreign coarse grain outlook is for virtually unchanged production, with fractionally lower trade and stocks relative to last month. Ukraine corn production is lowered, as dry conditions during the month of August reduce yield prospects for filling corn. EU corn production is unchanged, as reductions for France and Germany offset increases for Bulgaria and Romania. Barley production is raised for Russia, Ukraine, the EU, and Kazakhstan, but lowered for Australia and Canada. Major global coarse grain trade changes for 2019/20 include barley export increases for Ukraine, Kazakhstan, and Russia, with a partly offsetting reduction for Australia. For 2018/19, corn exports for Brazil are raised for the local marketing year beginning March 2019, based on record large shipments during the month of August. Foreign corn ending stocks for 2019/20 are lower relative to last month, mostly reflecting declines for Brazil, Ukraine, Mexico, Paraguay, and Chile.”
Source: USDA
While US ending stocks moved slightly higher, foreign stockpiles fell. However, the optimism over trade sent the price of the grain higher at the end of last week.
Open interest in the corn futures market rose by 0.03% since September 10. The price of ethanol rose by 3.98% with energy prices since the previous report. October ethanol futures were at $1.3860 per gallon on Wednesday. The spread between October gasoline and ethanol futures widened to 27.17 cents per gallon on September 18, up 3.48 cents since the prior week on strength in gasoline futures.
December CBOT wheat futures rose 2.51% since last week. The December futures were trading $4.8950 level on September 18. Open interest fell by 2.97% over the past week in CBOT wheat futures. The USDA told the wheat market:
“The 2019/20 U.S. wheat supply and demand outlook is unchanged this month but there were offsetting by-class changes for wheat exports. The projected season-average farm price is $4.80 per bushel, down $0.20 on NASS monthly prices reported to date and expectations for cash and futures prices for the remainder of the marketing year (MY). Global wheat prices are expected to be restrained for the rest of the MY on greater 2019/20 exportable supplies for several major U.S. competitors compared to last year. The global outlook for wheat this month is for lower supplies, reduced consumption and exports, and higher ending stocks. Supplies are reduced primarily on lower production forecasts for Australia and Kazakhstan on continued dry conditions. Australia’s production is lowered 2 million tons to 19.0 million, mainly on the second consecutive year of drought in New South Wales and Queensland. Kazakhstan’s wheat production is lowered 1.5 million tons to 11.5 million on further deteriorating conditions, and this would be its lowest output since 2012/13. This reduction in global production is tempered by higher carry-in stocks, which results in global supplies less than 1 million tons lower this month. World exports are decreased by 1.8 million tons to 180.8 million on reductions for Australia and Kazakhstan. Global consumption is lowered 1.9 million tons, led by declines for Indonesia, Russia, Uzbekistan, and Ukraine. Despite a reduction this month in global supplies, 2019/20 ending stocks are projected record large at 286.5 million tons with China comprising 51 percent of the total.”
Source: USDA
Even though global supplies declined, ending stocks rose to a record level. The price of wheat rose in sympathy with corn and bean prices on the back of optimism over trade.
As of Wednesday, the KCBT-CBOT spread in December was trading at a 79.75 cents per bushel discount with KCBT lower than CBOT wheat futures in the December contracts. The spread widened by 0.75 cents since September 11. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.” The spread continues to be at a level that I view as highly bearish for the wheat market.
My positions in the grain markets continue to be minimal, given the time of the year and the recent price volatility. I have minimal long core positions in futures and the CORN, WEAT, and SOYB ETF products. The further we move towards the harvest season, the less active I will be when it comes to trading. The trade dispute between the US and China remains one of the most significant factors for prices of soybeans and corn. For the coming week, the price volatility is likely to be a function of the September WASDE report. However, any news from the trade front between the US and China could cause increased volatility as we witnessed last week. The bottom line is that optimism over trade is bullish for the prices of agricultural commodities while pessimism would continue to weigh on prices. A full September WASDE report is available via this link:
https://www.usda.gov/oce/commodity/wasde/wasde0919.pdf
As I wrote last week, “We need to keep in mind that, politics aside, the global population continues to move higher as the world adds approximately 20 million new mouths to feed each quarter. More people around the world require more food each day. Agricultural output must keep pace with the demand side of the fundamental equation in the grain and other markets. During bear market periods, prices are likely to find bottoms at higher levels than in the past. During bull markets, we could witness explosive price moves. Therefore, buying weakness in the three leading grains, even during the offseason months, could be the optimal approach for nimble traders and investors prepared to take profits when prices recover.” The harvest season is now underway in the grain markets, and the focus will soon shift to the planting and growing seasons in the southern hemisphere.
Copper, Metals, and Minerals
The recent optimism over the trade war between the US and China kept the prices of many of the industrial commodities steady over the past week. However, the weekend attacks on Saudi oil production was a reminder that fear, and uncertainty can always return to markets in the blink of an eye. Risk-off periods tend to appear without much warning causing extreme volatility in markets across all asset classes. During the 2008 financial crisis, the price of copper fell from over $4 to under $1.25 per pound over seven months with the bulk over the move coming in three months. The Middle East has now pushed trade from the center of the world stage as the threat of military hostilities takes precedence over the economic dispute between the US and China.
Base metals prices turned in a mixed performance over the past week with gains in LME copper and zinc. Aluminum, nickel, lead, tin and COMEX copper prices moved lower since the previous report. Meanwhile, the price of lumber moved a touch higher while the Baltic Dry Index fell. The price of iron ore edged lower since last week. Uranium futures posted a gain since the previous report.
Copper moved 0.06% lower on COMEX, while the red metal posted a 0.54% gain on the LME since the previous report. Open interest in the COMEX futures market moved 3.03% lower on the week. Copper was trading at $2.6130 per pound level on the nearby December futures contract. Copper is one of the leading barometers when it comes to the trade dispute between the US and China, which is now a trade war. Copper fell to a new low below the $2.50 level on September 3 but turned higher and probed over the $2.70 level over the past week for the first time since July. Over the past week, copper inventories on both the LME and COMEX stocks fell.
LME lead moved lower by 1.48% since September 11, while the price of nickel declined by 5.87% over the past week after significant gains on the back of the acceleration of the export ban in Indonesia that will start on the first day of 2020. Tin posted a 3.04% loss since the previous report. Aluminum was 1.39% lower on the week. The price of zinc rose by 2.14% since September 11. Optimism over trade provided some support for the prices of base metals over the past week. However, the attack on Saudi oil production threw some cold water on the optimism.
November lumber futures were at the $382.00 level, 0.45% higher since the previous report. The price of uranium for December delivery was a touch higher at $25.75 per pound level up 1.58%. The Baltic Dry Index was 4.60% lower since last week. October iron ore futures posted a 0.32% loss compared to the price on September 4. Open interest in the thinly traded lumber futures market fell by 0.74% over the past week.
LME copper inventories fell by 3.58% to 299,325 metric tons since last week. COMEX copper stocks decreased 0.71% since last week to 43,901 tons. Lead stockpiles on the LME fell by 1.11%, while aluminum stocks fell by 1.21%. Aluminum stocks were at under the 906,000-ton level. Zinc stocks moved 2.89% lower since the previous report. Tin inventories moved 5.54% lower since last week to 6,570 tons. Nickel inventories were 4.75% higher compared to the level on September 10. The dollar, US interest rates, trade, and the overall direction of the global economy are the primary factors when it comes to base metal prices. Trade and the Chinese economy are bound to have the most significant impact on the path of least resistance for the nonferrous metals. The prices have stabilized after the recent developments that have returned at least some optimism to the markets. However, the fear of war in the Middle East could cause some risk-off behavior in markets, which could weigh on base metal prices.
We own two units of Energy Fuels Inc. (UUUU), a US producer of uranium and vanadium, at an average of $2.55 per share. We are working a stop at $1.19 and have an initial profit target at $6 per share. There is a double bottom on the long-term chart at the $1.29 level. I am giving this position plenty of room and plenty of time. If the shares continue to fall, I will add another one and possibly two units to this trade to average down the price on the long position. UUUU was trading at $2.03 per share on Wednesday unchanged since last week.
We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $2.41 on September 18. I believe this option is an inexpensive way to hold a long-term position in X shares at a low level. The details for the call option are here:
https://finance.yahoo.com/quote/X210115C00015000?p=X210115C00015000
US Steel warned on Q3 earnings after the close on Wednesday on weakness in the European economy and rising input costs. The dip could provide an opportunity to purchase more call options as X shares have suffered under the weight of the trade war between the US and China.
We own two units of FCX shares at an average of $10.56. The stock was trading at $10.36 on September 18, 28 cents higher over the past week. I will maintain a small long position in FCX shares and would only add if the price drops from the current level.
Trade war with China and the potential of military hostilities with Iran should continue to be the leading factors that determine the path of least resistance of base metal and industrial commodities prices over the coming week.
Animal Proteins
Last Thursday, the USDA released its September World Agricultural Supply and Demand Estimates report. The USDA told the cattle and hog markets:
“The forecast for 2019 total red meat and poultry production is lowered from last month as reduced beef, pork, and turkey production forecasts more than offset higher broiler production. Beef production is reduced from the previous month primarily on slower expected pace of fed cattle slaughter and lighter carcass weights in the fourth quarter. The pork production forecast is reduced on the current rate of slaughter in the third quarter and slightly lighter carcass weights. USDA’s Quarterly Hogs and Pigs report will be released on September 27 and provide information on producer farrowing intentions into early 2020.
For 2020, the total red meat and poultry forecast is raised from the previous month on higher expected beef and broiler production. Beef production is raised from last month as higher expected first-half 2020 marketings support higher fed cattle slaughter in 2020. First-half carcass weights are also expected to support increased beef production. The broiler production forecast is raised from the previous month on expectations of a higher proportion of heavy bird weights. Pork, turkey, and egg production forecasts are unchanged from the previous month. Beef import and export forecasts for 2019 are reduced, reflecting recent trade data; however, no changes are made to the forecasts for 2020. The 2019 and 2020 pork export forecasts are raised from the previous month on recent trade data and expectations of continued strong global demand for U.S. pork products.
The cattle price forecast for 2019 is lowered on current prices and expectations of continued price weakness; the 2020 forecast is also reduced. Hog price forecasts are reduced slightly for 2019 and first-half 2020.”
Source: USDA
Meanwhile, the thaw in relations between the US and China on trade and the potential for meat exports from the US to the world’s most populous nation stabilized meat prices. Last week’s news on trade was very bullish for the price of lean hogs as China is suffering from a severe pork shortage because of the African swine fever outbreak. A continuation of buying in the lean hog futures market if the US begins to export pork to China would likely cause support for cattle futures prices. Lean hogs moved higher from last week’s report while live cattle were only marginally lower and feeder cattle posted a minimal gain.
October live cattle futures moved just over the $1 per pound and were at $1.00375 per pound level up 1.90% from last week. Technical resistance is at $1.0485, which is the upper end of a gap on the October contract. Technical support stands at 93.40 cents per pound level, as the market continues to make new and lower lows. Price momentum and relative strength indicators are in neutral territory as the price is consolidating at under the $1 per pound level. Open interest in the live cattle futures market moved 5.83% lower since the last report.
October feeder cattle futures outperformed live cattle as they rose by 0.13% since last week. October feeder cattle futures were trading at the $1.38400 per pound level with support at $1.27325 and resistance at $1.44425 per pound. Open interest in feeder cattle futures fell by 2.22% since last week. While live cattle futures have a delivery mechanism, feeder cattle are a cash-settled futures contract. Sometimes live cattle prices lead feeder cattle prices, while at others the opposite occurs.
Lean hog futures made a comeback over the past week erasing some of last week’s losses. October lean hogs were at 62.925 cents on September 18, which was 4.57% higher on the week. The open interest metric fell by 6.68% from last week’s level. Price momentum and the relative strength index are in neutral territory. Support is at 59.30 cents with technical resistance on the October futures contract at just below the 70 cents per pound level.
The forward curve in live cattle is in contango from October 2019 until April 2020. From April 2020 until August 2020 a backwardation or tight market returns to the forward curve for live cattle, but it shifts back to contango until from this August 2020 through February 2021. The Feeder cattle forward curve is in a backwardation from September through March 2020. From March 2020 through August 2020 a contango returns.
In the lean hog futures arena, there is contango from October 2019 until June 2020. From June 2020 through December 2021 the curve is in backwardation, but contango returns from December 2020 through February 2021. The forward curves reflect the seasonal trading patterns in the meat markets. The curves shifted to reflect the recent selling in the animal protein futures markets.
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 October 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 1.5952:1 compared to 1.6369:1 in the previous report. The spread decreased by 4.17 cents as hogs became more expensive compared to live cattle on a historical basis. The spread moved towards the historical norm.
News on trade will be the primary driver of hog prices over the coming week. Even though the animal protein sector is at the start of the offseason, the selling seems to have run out of steam in the beef and pork markets. I would not be surprised if prices hold or work higher over the coming week, but any long positions require tight stops from a risk perspective.
Soft Commodities
The prices of three of the five soft commodities posted gains over the past week except for FCOJ, which fell by almost 6% and coffee which was down almost 3% since the last report. Cocoa was the best performing member of the sector and cotton was higher as the price caught a bid on the back of positive news on the trade front and the September WASDE report. Sugar rebounded after the recent losses whole coffee edged higher. Cocoa added to recent gains after the correction took the price of the primary ingredient in chocolate to below $2200 per ton.
October sugar futures rose 1.76% since last week as the price of the sweet commodity moved back to the 11 cents per pound level. Technical resistance is at the August 12 peak at 11.96 cents. Nearby sugar futures traded to a low at 10.68 cents on September 12 which is now the level of short-term support. October futures are now rolling to the next active month, which is March. The value of the December Brazilian real against the US dollar moved lower over the last week and was at the $0.24225 level against the US dollar, which was $0.00225 or 0.92% lower. The recent decline in the Brazilian currency likely contributed to the weakness in the price of sugar.
Price momentum and relative strength on the daily sugar chart declined into oversold territory and crossed higher over the past week. The metrics on the weekly and monthly charts still reflect oversold conditions. If sugar suffers a substantial decline, I will look to add to long positions. Sugar open interest fell by 7.48% over the past week after rising to a new all-time high. I will be looking to add to the long position in CANE at lower levels but expect the recovery to continue.
December coffee futures fell by 2.95% since last week’s report and were trading at the $1.0035 per pound level. Short-term support is at the August 20 low at 93.40 cents on the December futures contract. I continue to favor coffee on the long side, but it has been a bumpy ride in the soft commodity. Our stop on the long position in JO is at $27.99; we are long two units of the ETN at an average price at $34.92 per share. JO was trading at $33.40 on Wednesday. Open interest in the coffee futures market fell by 5.52% since last week. I continue to believe the soft commodity is near the bottom end of its long-term pricing cycle. I have been a scale-down buyer leaving room to add on further weakness over the coming days and weeks. Last year, October was a bullish month for both coffee and sugar futures, and the rallies began during the second half of September.
Cocoa futures continued to recover over the past week after the recent losses. On Wednesday, December cocoa futures were at the $2401 per ton level, 4.21% higher than last week. Open interest fell by 3.18%. Relative strength and price momentum are rising to overbought conditions. The price of cocoa futures rose to a new peak and the highest price since May 2018 with cash prices at a high at $2602 per ton in early July, which is now the technical resistance level for cocoa futures. We are long the NIB ETN product at $25.76. NIB closed at $27.43 on Wednesday, September 18.
December cotton futures rebounded from the recent low and moved 1.90% higher over the past week. Cotton came close to the March 2016 low at 55.66 cents per pound. On August 26, the price fell to a low at 56.59 cents, less than one cent above the critical low. The first target on the upside was technical resistance at 60.25 cents, the August 19 high. December cotton was trading at 60.50 cents on September 18 after rising to a high at 63.39 on September 13. The next level on the upside above the recent high is at the 64.68 cents per pound level on the December contract, the July 25 peak. On the downside, support is at 56.59, 56.19, and 55.66 cents per pound. Open interest in the cotton futures market rose by 0.56% since September 3. Last week, the USDA told the cotton market:
“The 2019/20 U.S. cotton estimates include lower beginning stocks, production, exports, and consumption, while ending stocks are unchanged. Beginning stocks are reduced 400,000 bales this month, reflecting 2018/19 reported ending stocks data from the WASDE-592-5 Farm Service Agency and the NASS Cotton System Consumption and Stocks report. Production is lowered 654,000 bales to 21.9 million, largely due to a decline for the Southwest, while consumption is lowered 100,000 bales reflecting recent activity. Exports are projected 700,000 bales lower due to reduced U.S. production and a lower projected U.S. share of world trade. The 2019/20 season-average price for upland cotton is forecast at 58 cents per pound, down 2 cents from last month. In both the 2017/18 and 2018/19 U.S. cotton balance sheets, the estimate for unaccounted cotton is revised downwards and exports are revised upwards. The unaccounted element of the U.S. cotton balance sheet has been growing in recent years, indicating an imbalance in the sum of the other components. The estimates for production, consumption, and stocks have maintained their consistency over this time, but a growing difference has occurred between the sources available for estimating U.S. exports. For 2017/18, exports are raised 432,000 bales, and unaccounted is reduced 332,000 bales. For 2018/19, exports are raised 546,000 bales, and unaccounted is 546,000 bales lower than the result based on the methodology used in past years. In each marketing year, revised exports are estimated as the average of the export levels reported by the Bureau of the Census and USDA’s Export Sales Reporting System. See the Foreign Agricultural Service’s Cotton: World Markets and Trade for more details on the export change and the Economic Research Service’s Cotton and Wool Outlook for a detailed explanation of the stocks calculation. The 2019/20 world estimates this month show higher beginning stocks, but lower production, consumption, and world trade. Production is forecast 709,000 bales lower as reductions for the United States and Australia offset an increase for India. Consumption is forecast 1.3 million bales lower than in August, with lower estimates for China, India, Brazil, Thailand, Vietnam, and the United States offsetting an increase for Turkey. World trade is lower as lower imports are forecast for China, Vietnam, and Thailand. World ending stocks for 2019/20 are forecast 1.3 million bales higher this month, at 83.7 million bales, 2.9 million bales above the revised 2018/19 estimate.”
Source: USDA
The trade news last week trumped the USDA report, which was not all that bearish as the market had expected higher global stock level. We are long two units at $37.90 per share. BAL was at $36.74 on September 18.
Price momentum and relative strength metrics were rising towards overbought conditions and crossing lower on the daily chart on Wednesday. The metrics remain in oversold conditions on the weekly and monthly charts but are crossing higher. As I wrote last week, “I continue to believe cotton is in the buying zone and that a correction to the upside will eventually occur from around the 55.66 cents per pound level.” Cotton could have some room to run higher if the news on trade remains positive.
November FCOJ moved lower over the past week. On Wednesday, the price of November futures was trading around 99.10 cents per pound. FCOJ nearby futures moved 5.84% lower over the past week. Support is at the 97.10 cents level, the September 3 low. Technical resistance at the late August high at around $1.10 per pound. Open interest fell by 0.56% since September 10.
The Brazilian real should continue to have some influence over the price direction of sugar, coffee, and FCOJ futures. Cocoa seems to have found a bottom, and cotton turned higher from the bottom end of its pricing cycle and multiyear lows. Time will tell if coffee and sugar futures do a repeat performance from September through October 2018. I continue to favor the upside in both markets over the coming weeks. Soft commodities can be extremely volatile at times. I continue to be bullish on most of the soft commodities for the medium to long-term.
A final note
Last weekend, trade between the US and China moved off the center stage as the attacks on Saudi Arabian oil fields is now the central issue facing markets. Brexit will become another factor facing markets over the coming weeks. Market volatility poses problems for investors, but it can be a paradise for nimble traders with their fingers on the pulse of markets across all asset classes. The price action in the oil market following last weekend’s attack is another in a long series of examples of how markets can shift in the blink of an eye. The Fed’s 25 basis point cut on Wednesday came as no surprise to markets. However, falling interest rates around the world could be bullish for gold and silver prices regardless of the direction of the dollar. Commodities are global assets that flow around the world from points of production to areas of consumption. The bottom line is that commodities are essentials as they provide food, shelter, and energy to an expanding global population.
Keep stops tight and take profits when they are on the table when it comes to short-term forays into markets across all asset classes. Volatile markets create opportunities each day.
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.
