Hecht Commodity Report

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  • Markets recover even though cases of Coronavirus mount
  • Stocks and the dollar continue to rally
  • Gold and rhodium steady, other precious metals decline
  • Energy prices stabilize
  • WASDE was a non-event as the agricultural markets get ready for uncertainty over the 2020 crops

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

A more detailed picture is available on the spreadsheet that is linked below.

 

Summary and highlights:

 

On Thursday, February 6, the stock market continued to move higher to record levels as it awaited Friday’s job data. March 30-Year Treasury bond futures moved a bit lower, while the dollar index continued to climb. Cron and wheat prices slipped, but soybeans posted a marginal gain. Crude oil remained above the $50 per barrel level with oil products also higher. Natural gas only gained one tick after the EIA reported that stocks fell by 137 bcf for the week ending on January 31. Gold and silver prices were higher, but platinum and palladium declined. Copper moved to the $2.60 level on the session. Live and feeder cattle prices edged higher, but lean hogs were up the three cents daily limit on the session. All of the soft commodities, including cotton, FCOJ, coffee, sugar, cocoa, and even lumber, moved higher with cocoa, leading the way in the upside. Bitcoin was little changes, but the price of the cryptocurrency was sitting at just below the $10,000 level after probing above during the session.

On Friday, employment data was bullish for the market as the number of jobs grew by 225,000 compared to estimates of a 158,000 gain. Average hourly earnings rose by 3.1% compared to estimates of 3%. At the same time, the devil was in the details as manufacturing, and retail jobs fell. Economic data out of Germany was at the weakest level years. At the same time, the number of confirmed cases of Coronavirus rose along with fatalities. All of the leading stock indexes posted declines on the final session of the week. Grain prices edged higher across the board as the sector awaits the USDA’s monthly WASDE report on Tuesday, February 11. Crude oil declined but remained just above the $50 per barrel level. Gasoline moved higher, while heating oil posted a loss on the session. Natural gas edged lower as the price remained below the $1.90 per MMBtu level. Gold and platinum edged higher, but silver and palladium prices declined. Copper fell to the $2.5530 per pound level on March futures after a volatile week. Live cattle and feeder cattle prices were on either side of unchanged, but lean hogs moved higher. Cotton edged lower, while FCOJ, coffee, sugar, cocoa, and lumber all moved to the upside. Cocoa moved to its highest price since 2016, when the futures peaked at $2935 per ton. Cocoa could be heading for a test of the $3000 level. Bitcoin was $50 lower to $9845 per token.

On Monday, stocks moved higher across all of the leading indices with the NASDAQ leading the way with a 1.13% gain on the session to new highs. The DJIA is approaching the 30,000 level with the NASDAQ closing in on 10,000. US 30-Year Treasury bond futures rose 0-07 to the 162-26 level. The March dollar index futures contract was at 98.714, posting a gain of 0.143 as they move towards technical resistance at 99.330. Corn and wheat prices were lower on Monday, while soybeans posted a marginal increase. Crude oil fell and closed below the $50 per barrel level on March NYMEX futures. Heating oil was lower, but gasoline was around unchanged, and the gasoline crack spread moved to the upside. March natural gas futures fell to a new low at $1.759, the lowest price since 2016, and closed the session at 1.766 per MMBtu as the energy commodity continues to drift towards long-term support at the $1.611 and $1.61 levels. Gold, silver, and palladium moved higher, but platinum prices slipped a bit lower. Live cattle and lean hogs moved over one cent lower, but the price of feeder cattle futures was a touch higher. The soft commodities sector moved higher across the board. Cocoa continued to post gains and closed at the highest price since 2016. Cotton, FCOJ, coffee, and sugar prices were all higher, and lumber joined to bullish party closing at $446 per 1,000 board feet. Bitcoin futures probed above the $10,000 level but closed at $9,935 with a gain of $90 per token.

On Tuesday, Fed Chairman Jerome Powell testified before the House Banking Committee. President Trump took to Twitter to advocate for lower rates during the testimony. Stocks declined as the Fed Chairman spoke, but they moved back to around unchanged by the end of the session. The S&P 500, NASDAQ, and the Russell 2000 posted small gains, while the DJIA was basically unchanged. March long bond futures declined by 0-30 to 162-07, and the March dollar index edged 0.120 lower to 98.594. The USDA released its February WASDE report, which sent wheat and corn lower, but soybeans were around unchanged in the aftermath of the release. Crude oil posted a small gain, but March futures settled at just under the $50 per barrel level. Heating oil moved higher while gasoline edged lower. Natural gas finished up a few pennies, but the price settled below the $1.80 level and made a new and lower low at $1.753 per MMBtu. Gold and silver prices moved lower as bonds fell, but platinum and palladium posted gains. Copper rallied to over the $2.58 level and probed above $2.60 during the session. Cattle and hog futures prices moved lower on February 11 after the release of the USDA’s latest report. Cocoa corrected but remained over the $2900 per ton level. All of the other soft commodity prices posted gains. Sugar rose to a new high of 15.46 cents; coffee moved back over the $1 level, OJ was closing in on $1 per pound, while cotton was a touch higher. Lumber moved $5.40 higher, but it probed above its technical resistance level and put in a higher high. Bitcoin rose above the $10,000 level and settled at $10,405 up $470 per token.

On Wednesday, stocks continued to power higher as the DJIA approaches the 30,000 level, and the NASDAQ is on a path to rise to 10,000. All of the leading indices posted impressive gains. The dollar index rose to just under the 99 level on the March futures contract. US 30-Year Treasury bonds moved around 0-26 lower to the 161-21 level. Grain prices moved higher across the board on the day following the February WASDE report. Energy commodities finally bounced, with gains in oil and oil products, natural gas, and even ethanol. Gold and silver edged lower during the risk-on period on markets. Platinum was lower, but palladium moved to the upside. Copper moved to the $2.60 per pound level. Meat prices did not move much, as cattle and hog futures were on either side of unchanged. Sugar powered higher to a new peak at 15.90 cents per pound on the session. Coffee posted a marginal gain closing just above the $1 per pound level. Cotton was a bit higher, and lumber edged to a higher high. FCOJ and cocoa prices moved a bit lower on the session. Bitcoin futures moved higher to the $10,500 level up around $100 per token.

 

Weekly Spreadsheet:

Copy of Spreadsheets for The Hecht Commodity Report February 12, 2020

 

Stocks and Bonds

The stock market had been pulled in opposite directions by positive US economic news and the mounting number of cases of Coronavirus. Over the past week, the leading indices exploded higher and moved to new record levels. All posted gains from the levels on February 5. We should expect a continuation of volatility in the stock market if fears of a pandemic rise over the coming weeks. The virus is causing economic activity in China to grind to a halt and could do the same in other parts of the world if it spreads. However, the market moved back into a risk-on environment since last week.

 

The S&P 500 moved 1.34% higher since the previous report, while the NASDAQ rose 2.29% since last week and seems on a path to the 10,000 level. The DJIA posted a 0.89% gain since the last report and is close to the 30,000 level.

Chinese stocks outperformed US indices even though China is ground zero for Coronavirus.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $42.87 level on Wednesday, which was 3.68% higher than the closing level on February 5. Technical support is at $37.66 per share from August 14. FXI traded to a new high of $45.29 on January 13, which now stands as technical resistance. Above the most recent peak, the next level of resistance is at the early April high of $45.96 per share. The FXI is likely to move lower or higher depending on developments on the spread of the virus. As the number of cases increases, the pressure on Chinese stocks could intensify. However, there seemed to be some signs of an improvement in the situation, which led to gains.

US 30-Year bonds moved a touch higher over the past week. On Wednesday, February 12, the March long bond futures contract was at the 162-23 level, up 0.33%, after last week’s gain. The odds of any changes in Fed monetary policy in 2020 are low as it is an election year in the US. At its January meeting, the Fed left rates unchanged. The central bank is not likely to increase interest rates before the November 2020 election. If a risk-off period intensifies, the Fed is more likely to cut than increase short-term rates. A flight to quality during risk-off periods puts upward pressure on the long bond.

Open interest in the E-Mini S&P 500 futures contracts rose by 2.94% since February 4. Open interest in the long bond futures rose by 2.42% over the past week on a flight to quality buying. The VIX moved lower as the volatility index was at the 13.75 level on February 12, 9.24% lower over the period.

I had advocated for buying the VIX and VIX-related products when volatility was low, and the stock market was making new highs. Buying volatility on dips and taking profits on rallies has been the optimal approach over the past months. I would only trade these products from the long-side and maintain a small core long core position in case risk-off conditions reach a peak, and we see an explosive move in the VIX. At the 13.75 level, the VIX is approaching the buy zone again given the recent trading range. However, the risk remains on the upside if risk-off conditions return over the coming days and weeks.

 

The dollar and digital currencies

The March dollar index futures contract continued its slow and steady trek higher since February 5. The contract posted a 0.78% gain since last week. The index settled at 98.922 on Wednesday. Interest rate differentials between the US currency and the euro continue to provide support for the dollar index. The dollar index traded to its lowest level since July 2019 when it fell to 96.02 on December 31, which is now the technical support level, there is some support at 97.165. Technical resistance is at 98.925, the February 12 high on the March futures. Continuous contract support stands at 95.365 with resistance at the 99.33 level. The dollar index moved to the bottom end of its range at the end of 2019 and has been recovering so far in 2020 as it heads for levels of technical resistance at above 99. While interest rate differentials are bullish for the greenback, Brexit and trade agreements could eventually weigh on the dollar index. At the same time, the 2020 US election is likely to inject mounting uncertainty over the future of US policy into currency markets. A highly contentious election season in the US is now underway, and the contest could cause volatility in the dollar. I expect a wider trading range in the dollar index in 2020 compared to the previous year.

The euro currency was 1.22% lower against the dollar since February 5 on the March futures contract. Weak economic data out of Germany weighed on the euro. Over the past week, the pound moved 0.25% lower against the US currency. Short-term technical support is at the $1.2885 level against the dollar. I believe the pound is close to a bottom and will rebound over the $1.30 level.

 

Bitcoin powered higher since February 5. Bitcoin was trading at the $10,354.64 level as of February 12, as it moved 7.35% higher than the value on February 5. The cryptocurrency moved above the $10,000 level, which was a significant psychological level of resistance. Ethereum rose by 32.53% and was at $268.28 per token on Wednesday. The market cap of the entire asset class moved 12.02% higher as it outperformed the price action in Bitcoin. The number of tokens increased by 17 to 5110 tokens since February 5. The 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 a fraction of the number of tokens available today. On Wednesday, the market cap stood at around $303.587 billion. Open interest in the CME Bitcoin futures rose by 39.82% since last week. Open interest had been moving higher during rallies and lower during dips in the Bitcoin futures market, which tends to be a bullish sign. Over the past week, the significant move higher in open interest is a sign that higher prices could be on the horizon. As I have been writing, an ETF product in 2020 could cause even more attention and higher prices for the digital currency asset class. The Chinese government cracked down on the asset class over the past months, but these days it has its hands full with Coronavirus.

The Canadian dollar moved 0.24% higher since last week. Open interest in C$ futures fell by 4.07% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that also produces significant quantities of energy and agricultural products. Weakness in commodities prices accounted for the lower level of the C$ over recent weeks. The support level for the Canadian currency is at just above $0.75 against the US dollar on the active month March futures contract, and it was just above that level on February 12.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ fell by 0.18% since the February 5 report. The geographical proximity to China makes the Australian dollar sensitive to the Coronavirus and accounts for its decline.

The British pound posted a 0.25% loss since the previous report. The pound rose to just over $1.35 after the December 12 election, the highest level since May 2018, but pulled back to below the $1.30 level. As I wrote last week, “I continue to believe the pound could be heading for higher levels and would be a buyer against the dollar and the euro on any dips.” While the price action has taken the pound lower, I believe the British currency presents a scale-down buying opportunity against the dollar below the $1.30 level.

The Brazilian real continued to decline against the US dollar since February 5, as it moved 2.36% lower and below the 2015 low at $0.23040. The low over the past week was under $0.23 level. 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 any significant changes in the direction of the Brazilian real over the coming weeks. I continue to believe that the real will eventually appreciate against the US dollar. Risk-off conditions had weighed on emerging market currencies. Since the Brazilian economy has significant exposure to commodity prices, the currency has been weak. While a lower low has occurred, I continue to believe that the upside potential for the Brazilian currency is far greater than the downside risk at the current exchange rate. Meanwhile, the low level of the currency makes Brazilian exports more attractive in the global market and has supported the prices of shares of companies in the South American country. However, US President Trump is likely to put pressure on Brazil to raise the level of its currency based on trade imbalances over the coming months if the real continues to slip lower.

 

Precious metals prices were mixed over the past week a marginal gain in gold and a loss in silver, platinum, and palladium.

 

Precious Metals

Gold and rhodium moved marginally higher since February 5, while silver and palladium fell, and platinum experienced a more significant percentage decline. Silver underperformed gold since the previous report. Rhodium continues to be the star performer as the price of the metal moved above the $10,000 per ounce level.

Gold rose by 0.56% since last week, while silver was 0.60% lower. April gold futures were just over the $1570 per ounce level on Wednesday, while March silver was just below $17.50 per ounce. Open interest in the gold market rose by 0.53% after a significant decline of over 8% last week.

April gold futures reached a peak at $1619.60 on January 8, and March silver climbed to $18.895 on the same day at the height of the Iranian missile attack on Iraqi airbases. Gold made a new multiyear high, but silver did not reach the September 2019 peak of $19.54 on the continuous futures contract during the rally earlier this month. The price action and trends in both gold and silver markets remained bullish over the past week.

The price of April platinum fell by 2.01% since February 5. April futures were at the $967.20 per ounce level. The level of technical resistance is at $991.70 on the April futures contract. Support in platinum is nearby at $954.30 per ounce. Rhodium is a byproduct of platinum, and the price of the metal has been in a bull market since early 2016. The price of rhodium surged higher since the end of 2019. The midpoint price of the metal was at $10,050 per ounce on February 12, up $50 from the level of February 5. Palladium fell by 0.18% since the previous report after a more than 5% rise last week. The price traded to a new peak at $2427 on January 23 on the March futures contract and settled at the $2322.50 per ounce level on Wednesday. The risk of significant volatility in palladium and rhodium rises with the prices of the metals, and we should expect wide price ranges over the coming weeks.

Open interest in the gold futures market moved 0.53% lower over the past week, after the over 8% decline last week. I view the drop in the total number of open long and short positions as the price corrected lower as a healthy event for the gold market. Falling open interest has made room for buyers to return when the price turns higher. The metric moved 0.64% lower in platinum while it was 6.61% lower in the palladium futures market. Silver open interest fell 1.37% over the period. The bullish trend in the precious metals sector remains mostly intact as of February 12.

The silver-gold ratio rose since February 5, as gold outperformed silver.

Source: CQG

The daily chart of the price of April gold divided by March silver futures shows that the ratio was at 89.90 on Wednesday, up 1.21 from the level on February 5. 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, and over the past week, it got more inexpensive. The ratio had dipped to a low at 79.13 on September 4, 2019, on the active month contracts when silver moved to its most recent high. 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 action in gold since the last report.

Gold moved up by 0.56%, while the GDX was 0.25% higher since February 5, and GDXJ rose by 0.32% since the previous report. The mining stocks tend to outperform gold on the upside and underperform during corrective periods as it provides a leveraged return. Over recent weeks, GDX and GDXJ underperformed gold. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 0.79% loss since February 5, which slightly underperformed the percentage loss in the silver futures market. I continue to believe that both gold and silver prices will head higher over time. However, the potential for periodic corrections will rise with prices. Silver volatility increased as the price fell sharply to a low of $17.28 and bounced back to the $18 level before returning to just under $17.50 on Wednesday.

Platinum and palladium prices posted losses since February 5. March Palladium was trading at a premium over April platinum with the differential at the $1355.20 per ounce level on Wednesday, which slightly widened since February 5. April platinum was trading at a $604.30 discount to April gold at the settlement prices on February 12, which widened since the previous report as platinum underperformed gold since last week.

The price of rhodium, which does not trade on the futures market was at $10,050 per ounce on Wednesday, up $50 per ounce on the week. 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. As I wrote since late 2019, when the price of rhodium was below $5500 per ounce, “Some analysts projected that the price of the rare metal was heading for the $10,000 per ounce level.” Rhodium reached the $10,000 mark over the past week. The spread widened to $1000 per ounce at times in a sign of the wild price action in the illiquid metal. Markets rarely move in a straight line, and we could see an increase in volatility in the rhodium market, which is in a deficit condition. Rhodium has been then best-performing precious metal since 2016. The price has moved higher from a low at $575 per ounce. Rhodium experience a wild January as the price almost doubled since the end of 2019. The price of rhodium did not move much since February 5 but it continued to rise to new highs.

We are long the PPLT platinum ETF product, which moved 2.18% lower since February 5 as it slightly underperformed the price action in the futures. Platinum continues to offer the most attractive value proposition in the precious metals sector even after the recent rally. Platinum needs to make a move and take out the $1200 resistance level to break to the upside on a technical basis. After the recent price action, the price needs to get back above the $1000 level, which has been a problem area over the past years.

We are long the ETFMG Prime Junior Silver ETF (SILJ) product at $10.36 per share to diversify risk. SILJ was at $10.53 on February 12, down 1.68% since the last report as mining shares underperformed the silver futures market.

I have been writing, “I continue to be bullish on the prospects for all of the precious metals. The period of consolidation and correction continued over the past week and could go on for a time. I believe that any price weakness in the sector will create excellent buying opportunities.” My outlook has not changed over the past week.

Central bank accommodation around the world in the form of historically low interest rates and asset purchases to stimulate economies have flooded the world with paper currency. The massive amounts of dollars, euros, yen, and other foreign exchange instruments have caused a wholesale devaluation of the currency market. I believe that the trend of debasement is going to continue, which is bullish for the prices of gold and other precious metals. Central banks continue to be net buyers of gold, which validates the significance of the yellow metal’s role in the global financial system. As the price of gold appreciates and works its way $2000 per ounce, and perhaps higher in dollar terms, silver will become highly attractive to many market participants. When it comes to platinum, gravitation pull from substitution for palladium and rhodium should provide support for the price of the weakest precious metal. I remain bullish on gold, silver, and platinum, and believe any price weakness will continue to present golden buying opportunities.

 

Energy Commodities

Over the past week, selling pushed the price of nearby NYMEX crude oil futures below $50 per barrel for the first time since the early days of 2019. The price bounced back over the $50 level on Wednesday as both WTI and Brent futures posted marginal gains since February 5. Brent outperformed the WTI futures as the spread between the two benchmark oil markets bounced from below $4 per barrel during the week. Gasoline prices and heating oil prices posted gains and outperformed crude oil over the past week sending crack spreads higher. Natural gas fell to a new low since last week and posted another loss. Ethanol and coal prices slipped.

March NYMEX crude oil futures rose 0.83% since the previous report. After the bearish reversal on the monthly chart in January, the price probed below $50 per barrel. The price action over the past week indicates that the energy commodity could now be in a period of price consolidation around the $50, which appears to be at least a temporary pivot point. If the price of NYMEX futures settles below the $50.99 per barrel level at the end of March, they will put in a bearish reversal trading pattern on the quarterly chart.

April Brent futures moved 0.96% higher since February 5. March gasoline was 6.37% higher, and the processing spread in March posted a 29.01% gain since the previous report as gasoline outperformed the price of crude oil over the period. March heating oil futures moved 1.84% higher from the last report, and the heating oil crack spread rose 3.42% higher since February 5.

Technical resistance in the March NYMEX crude oil futures contract is at $52.20 per barrel level, with support at the February 4 low at the $49.31 level. Crude oil open interest fell by 2.56% over the period. Crude oil continues to face bullish and bearish factors, but the bears have been in control since January 8. Iran remains a potential source of supply concerns that could send the price of oil higher if another round of hostilities breaks out or the theocracy in Teheran undertakes further provocative actions. OPEC will meet in early March with some members currently advocating for deeper production cuts, which could lift the price of the energy commodity. However, economic weakness in China because of Coronavirus has increased fears of a global slowdown, which is weighing the price of crude oil futures. At the same time, US production continues to be at record levels, with inventories increasing. Crude oil is at a significant level just above $50 per barrel on the nearby NYMEX futures contract. The price could hang around the level and enter a period of consolidation at the low end of its range over the past year. Crude oil has been failing to push through on the upside above $65 or on the downside below $50. Overall, the odds favor the upside at the current price with a tight stop based on the trading range.

Oil equities continue to lag the price of petroleum. With stocks at record levels, there are few sectors offering investors and traders value in the current market. Energy companies have low price to earnings multiples and high dividend levels compared to the rest of the market. However, shares of energy-related companies continue to underperform the market in a trend that was in place throughout 2019 and over the first six weeks of 2020.

Crude oil can be a highly political commodity, as over half the world’s reserves are in the Middle East. Political instability in the region always has the potential to impact the price of the energy commodity. Meanwhile, technological advances and regulatory reforms in the US has made the world’s leading economy independent when it comes to energy supplies. With 13 million barrels per day of output, the US produces more oil than either Saudi Arabia or Russia. The Trump administration has encouraged oil and gas production over the past four years. However, the 2020 Presidential election will be a referendum on the future of energy policy as the opposition party has embraced the “Green New Deal” that would reduce fracking and energy output when it comes to fossil fuels. The potential for a dramatic shift in US energy policy could cause lots of price volatility in the oil and gas market during the second half of 2020 as the prices could begin to move higher and lower with the political polls in the US. In November, the world’s largest energy-producing nation will decide if it continues to produce or if new regulations cause a sudden decline in output beginning in 2021.

The spread between Brent and WTI crude oil futures in April rose to the $4.35 per barrel level for Brent, which was only $0.04 above the level on February 5 after probing below the $4 level during the week as oil was near the low. The spread moved to a high of $6.23 on January 8 as Iranian missiles attacked Iraqi airbases that house US troops. 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. The level to watch in the spread at $3.48, the low from August 2019. Tensions in the Middle East should keep somewhat of a bid under the price of Brent crude oil and the spread between the two benchmarks. We are currently sitting around the critical level on the downside in crude oil at $50 per barrel, with $66.60 the resistance area on the upside. After testing the upside and falling just 95 cents short of the 2019 high on January 8, crude oil flirted with the downside at $50 per barrel over recent sessions.

US daily production rose to the record high 13 million barrels per day level as of January 31, according to the Energy Information Administration. The level of output was up 100,000 barrels from the previous week. As of January 31, the API reported an increase of 4.18 million barrels of crude oil stockpiles, while the EIA said they rose by 3.540 million barrels for the same week. The API reported a rise of 1.96 million barrels of gasoline stocks and said distillate inventories fell by 1.78 million barrels as of January 31. The EIA reported a decline in gasoline stocks of 100,000 barrels and a decline in distillates of 1.50 million barrels. Rig counts, as reported by Baker Hughes, rose by one last week to 676 rigs in operations as of February 7, which is 178 below the level operating last year at this time. The decline in the number of rigs with daily output at 13 million barrels per day level is a sign of the efficiency of the oil business in the US, which is a significant factor for the oil market. The inventory data from both the API and EIA continued to be mostly bearish for the price of oil as stocks have been trending higher since October.

OIH and VLO shares moved in opposite directions since February 5. OIH declined by 1.13%, but VLO moved 1.49% higher since last week. Strength in crack spreads was supportive of the price of VLO stock. We are long two units of the OIH ETF product at an average price of around $13.40 per share. OIH was trading at $11.41 per share level on Wednesday. I believe the ETF that reflects the price of oil service company shares remains too low at its current price level. I will consider adding to the position on further price weakness. Oil services stocks continue to underperform the other oil-related equities. I will wait before adding any more shares to the position in OIH. I believe that crude oil-related equities are far too inexpensive at current levels and could experience a rebound as sector rotation in the strong stock market occurs. As I mentioned in the report over the past weeks, “I have been trading the Direxion Daily Energy Bull 3X Shares (ERX) from the long side of the market. ERX is a triple-leveraged product, so time and price stops are significant for managing risk. ERX holds leveraged positions in the leading energy companies.”

ERX was 0.53% higher since last week’s report after falling to lower levels during the week. I continue to buy dips and use tight stops on long positions in the ERX product. Oil-related equities were volatile over the past week. I have been buying ERX with very tight stops. I will continue to stop out of the leveraged product in the quest to catch an updraft. I do not view ERX as an investment position, so I would use a trailing stop and take profits on a scale-up basis if I can catch a rally.

March natural gas futures were at $1.844 on February 12, which was only 0.91% lower than on February 5. The futures contract traded to a high of $2.778 on November 5. Natural gas traded at its lowest price since 2016, when it hit $1.753 on February 11 on the March contract. In January, natural gas fell to its lowest price in twenty-one years since 1999. Natural gas bounce on Wednesday, but any attempt at rallies has encouraged selling throughout the winter.

Natural gas followed through on the downside after putting in a bearish reversal trading pattern on the weekly chart during the week of January 13. A recovery in natural gas is overdue, but there are only around seven weeks left until the 2020 injection season begins in late March, and the price is already reflecting injection season trading conditions.

Source: EIA

The EIA reported a withdrawal of 137 bcf, bringing the total inventories to 2.609 tcf as of January 31. Stocks were 30.8% above last year’s level and 8.3% above the five-year average for this time of the year. Natural gas stocks fell to a low of 1.107 tcf in March 2019. With around eight weeks to go until inventories begin to climb, we would need to see an average withdrawal of 214.57 bcf to reach last year’s low in stockpiles. This week the consensus expectations are that the EIA will report a withdrawal of 118 bcf from storage for the week ending on February 7. The EIA will release its next report on Thursday, February 13, 2020.

Open interest fell by 3.55% in natural gas over the past week. The metric had been rising over the past weeks as the price declined. The price action likely attracted trend-following and technical shorts to the natural gas futures market. Technical resistance is at $1.977 per MMBtu level on the March futures contract with support at $1.753. The $1.611 per MMBtu level from March 2016 stands as technical support on the continuous futures contract. Price momentum and relative strength on the daily chart are in deeply oversold conditions, but turned higher with the price action on Tuesday and Wednesday after the new low. The price action suggests that sellers are lurking above looking to take advantage of any attempts at a price recovery.

The GASL ETF product was trading at $4.49 per share on February 12, 14.96% lower than on February 5, after steady losses over the past weeks. I have been on the sidelines in GASL. If I do dip a toe back into the leveraged ETF product on the long side, I would use a very tight stop and trade it like the ERX product.

March ethanol prices moved 0.52% lower over the past week on the back of weak energy prices. Open interest in the thinly traded ethanol futures market moved 13.24% lower over the past week. With only 531 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product fell 0.91% compared to its price on February 5, and the price of April coal futures in Rotterdam moved 1.47% lower over the past week.

Late Tuesday, the API reported a 6.0-million-barrel rise in crude oil inventories for the week ending on February 7. Gasoline stocks rose by 1.10 million barrels, while distillate stockpiles fell 2.30 million barrels over the period. The EIA said daily output rose by 100,000 barrels to 13 million per day. The EIA reported a rise of 7.50 million barrels of crude oil inventories on Wednesday morning. They said that gasoline stocks fell by 100,000 barrels, while distillate inventories fell by 2.0 million barrels as of the end of last week. The API and EIA inventory reports were bearish for the price of the energy commodity, but the price at around the $50 level on nearby NYMEX futures is at a level that continued to absorb negative news and the price moved higher. Without any fresh news from the Middle East, the price is likely to follow inventory data over the coming weeks.

In natural gas, the price action continues to be bearish for this time of the year.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the price at $1.844 in March on the settlement price on February 12, was 1.70 cents per MMBtu lower than on February 5. If the current trend continues, we could see a test of the $1.611 per MMBtu low. Meanwhile, the oversold condition of the market presents a chance for a technical recovery rally. We could see volatility increase over the coming weeks as the March-April spread becomes active. Since March-April represents the time of the year when withdrawals from storage end and injections begin, the spread has the nickname as “the widow maker” because of its history of extreme price volatility. The spread was trading at a 3.00cents premium for April on February 12, up 0.40 cents over the past week.

Keep in mind that price action tends to fill the gaps created by the island reversals on the daily and weekly charts. The top end of the gaps is an eventual target for the price action, but it could be quite some time before prices reach those levels. Time is not on the side of natural gas bulls. As I wrote over the past weeks, “The longer the price takes to recover, the lower the chances of any significant move to the upside. Sellers are likely to take advantage of any price recovery over the coming days and weeks. The rise in open interest could be a sign of increasing short positions, which could lead bears to push the price of the energy commodity lower as the winter season has not come with below-average temperatures across the US.” The price action over the past week continued to be bearish, and a test of prices below the $1.80 occurred during the week as the price fell to $1.753. Market participants holding short positions are likely to push the price lower through the end of the withdrawal season and perhaps during the early weeks of the 2020 injection season.

I have been tracking the price action in BG shares. BG is a significant producer of ethanol in Brazil. The price of BG shares moved 1.21% higher to $55.02 per share on February 12. 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.

I have been taking profits quickly and stopping losses looking for a 1:2 risk-reward ratio on forays into the crude oil futures market. UCO and SCO products can be helpful for those who do not trade futures. In natural gas, UGAZ and DGAZ have attracted lots of volume over the past week as the price of natural gas fell to new lows. I expect volatility to continue in both energy commodities.

We are holding a long position in PBR, Petroleo Brasileiro SA. We are long two units at an average price of $15.16 per share. PBR shares were 3.40% higher over the past two weeks at $14.92 per share. I will add another unit at a much lower price to lower the average cost of the long position.

The oil market is focused on the potential for an economic slowdown caused by the spread of Coronavirus. However, the potential for another production cut by OPEC in early March could keep a bid under the market. Iran could also cause the price to spike higher if tensions in the Middle East suddenly increase. In natural gas, the trend remains lower, but the oversold condition of the market is a warning that the risk of a short position rises the lower the price sinks. The short-term trends in both oil and gas markets remained lower as of February 12, but both are showing signs of recovery.

 

Grains                                                             

On Tuesday, February 11, the USDA released its February World Agricultural Supply and Demand Estimates report. The monthly WASDE is the gold-standard when it comes to fundamental data on grains. The grain markets had moved mostly lower since the first WASDE report of the year on January 10. The impact of Coronavirus and risk-off conditions in markets across all asset classes because of the economic slowdown in China weighed on grain prices. Even though the January 15, 2020 signing of the “phase one” trade deal between the US and China was a bullish sign for grain demand and prices, the virus trumped the good news.  The WASDE report was not all that bullish or bearish for grain prices as we are entering the time of the year, where uncertainty over the annual crop begins to rise. Beans and corn moved a bit higher after the report, but wheat continued to correct.

I reached out to my friend Sal Gilberte, the founder of the Teucrium family of grain ETF products for his take on the latest WASDE report. Sal told me:

 

It is important to note that he February 11 WASDE report, which had only minor adjustments versus January’s report, did not include any expectations of Chinese buying related to the Phase One Trade Agreement. Nonetheless, U.S. soybean inventories were lowered fifty million bushels on an anticipated increase in export levels based upon the healthy export pace so far this crop year. All eyes will be on the USDA’s Agricultural Outlook Forum to be held later this month to see if adjustments will be made in anticipation of Chinese buying. Any actual buying by China, along with any weather-related events during South America’s soybean harvest, could cause the USDA to tighten its U.S and global ending soybean stock estimates even further. Soybean and corn prices remain in a sideways price range near their cost of production; they have not followed wheat’s lead higher the past several months, but things could change quickly given any further tightening of supplies, most especially in soybeans.”

 

 

March soybean futures rose by 1.42% over the past week and was at $8.9250 per bushel on February 12. Open interest in the soybean futures market grew by 2.46% since last week. Price momentum and relative strength indicators on the daily chart crossed higher over the past week from oversold territory. The USDA told the soybean market:

This month’s 2019/20 U.S. soybean outlook is for increased exports and lower ending stocks. Soybean exports for 2019/20 are projected at 1.825 billion bushels, up 50 million from last month partly reflecting increased imports for China. With soybean crush unchanged, soybean ending stocks are reduced 50 million bushels to 425 million. The U.S. season-average soybean price for 2019/20 is forecast at $8.75 per bushel, down 25 cents reflecting reported prices to date. The soybean oil price forecast is lowered 0.5 cents to 33.5 cents per pound. The soybean meal price forecast is unchanged at $305.00 per short ton. This month’s 2019/20 global oilseed outlook includes higher production, trade, and stocks relative to last month. Global oilseed production is raised 2.2 million tons to 576.8 million, with higher soybean, sunflowerseed, and cottonseed production. Partly offsetting is lower palm kernel production. Soybean production for Brazil is increased 2 million tons to 125 million due to favorable weather in Mato Grosso as well as improved rainfall in southern and northeastern soybean areas. Sunflowerseed production is increased for Ukraine on a higher yield. Palm kernel and palm oil production are reduced for Malaysia and Indonesia on current production to date and dry weather conditions throughout the past year. Global 2019/20 oilseed exports are raised mainly on a 2.4-million-ton increase to soybean trade. China’s soybean imports are increased 3 million tons to 88 million reflecting higher soybean crush. Correspondingly, soybean exports are increased for the United States, Brazil, and Ukraine. Global soybean ending stocks are 2.2 million tons higher than last month, with higher stocks for China and Brazil.

Source: February USDA WASDE report

The March synthetic soybean crush spread fell over the past week and was at the 90.50 cents per bushel level on February 12, down 6.25 cents since February 5. The crush spread is a real-time indicator of demand for soybean meal and oil. Therefore, price trends in the crush spreads can cause buying or selling in the raw oilseeds at times. Any significant moves in the crush spread are likely to translate into price movement in the soybean futures. The decline in the crush spread is a confirmation of the recent bearish trend. However, the spring planting season is right around the corner now that we are in February, and it is the wrong time of the year to become overly bearish in soybeans or any of the grain markets.

March corn was trading at $3.8300 per bushel on February 12, which was 0.59% higher on the week. Open interest in the corn futures market rose by 0.41% since January 29. Technical metrics were in neutral territory in the corn futures market on the daily chart as of Wednesday. The price of March ethanol futures fell by 0.52% since the previous report on the back of recent weakness in energy prices. March ethanol futures were at $1.3450 per gallon on February 12. The spread between March gasoline and ethanol futures widened to 23.60 cents per gallon on February 12, up 10.17 cents since last week.  The USDA told the corn market:

This month’s 2019/20 U.S. corn outlook is little changed relative to last month, with offsetting changes to exports and corn used for ethanol. Exports are lowered 50 million bushels, reflecting the slow pace of shipments through January. Offsetting is a 50 million bushel increase in corn used for ethanol, based on Grain Crushings and Co-Products Production data through December and the robust pace of weekly ethanol production data as reported by the Energy Information Administration during the month of January. With no other use changes, U.S. corn ending stocks are unchanged from last month. The season average corn price received by producers is also unchanged at $3.85 per bushel. Global coarse grain production for 2019/20 is projected 0.9 million tons higher to 1,402.7 million. This month’s foreign coarse grain outlook is for larger production and consumption, and lower stocks relative to last month. Global corn production is raised 0.8 million tons, with increases for South Africa, Moldova, and Ukraine more than offsetting a reduction for Vietnam. For South Africa, production is higher as timely rainfall during the month of January improves yield prospects. Major global trade changes for 2019/20 include higher projected corn exports for South Africa, Ukraine, and the EU, with a largely offsetting reduction for the United States. Corn imports are raised for Turkey and Brazil, with the latter reflecting larger-than-expected shipments to livestock production areas in the southern part of the country. Foreign corn ending stocks are down from last month, mostly reflecting reductions for Vietnam, Brazil, Paraguay, and the EU. Global corn ending stocks, at 296.8 million tons, are down 1.0 million from last month.

Source: February USDA WASDE report

 

 

March CBOT wheat futures were 2.58% lower since last week. The March futures were trading $5.4750 level on February 12. Open interest fell 3.48% over the past week in CBOT wheat futures. The metric rose in corn and soybean futures markets as they prepare for the 2020 planting season. The rise in the total number of long and short positions reflects an increase in hedging activity. In wheat, the decline in the metric as the price corrected lower is not a validation of a bearish trend. Technical metrics in CBOT wheat were in oversold territory on Wednesday. Wheat traded to a high of $5.925 on January 22, just one-half cent below the technical resistance on the longer-term charts, but the price failed, leading to the correction over recent sessions.

The USDA told the wheat market:

The outlook for 2019/20 U.S. wheat is for stable supplies, increased exports, and decreased ending stocks. The only supply or use category that was changed this month was a 25 million bushel increase in exports reflecting growing competitiveness in international markets. Ending stocks are cut by a corresponding amount and are now forecast to total 940 million bushels, a five-year low. Global wheat supplies are lowered fractionally on small and mostly offsetting changes to beginning stocks and production. World exports are increased 1.8 million tons led by a 1.0- million-ton increase for the EU on strong shipments and more competitive prices. Kazakhstan is raised 0.8 million tons, also on a fast export pace. United States is increased 0.7 million tons and is projected to have the largest exports in three years. Partly offsetting are export reductions of 0.5 million tons for Canada and 0.3 million tons for Pakistan. World imports for 2019/20 are raised 1.9 million tons led by a 0.8-million-ton increase for China and a 0.7-million-ton increase for Turkey, both on a strong pace to date. There are also several historical revisions for trade, consumption, and ending stocks reflecting updated export data, particularly for Pakistan. For the 2019/20 market year, global consumption and ending stocks are lowered fractionally though world ending stocks remain record large.

Source: February USDA WASDE report

 

As of Wednesday, the KCBT-CBOT spread in March was trading at an 76.50 cents per bushel discount with KCBT lower than CBOT wheat futures in the March contracts. The spread narrowed by 11.75 cents since February 5. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.”  The spread continues to be at a level that is bearish for the wheat market, but it moved towards the norm over the past week. 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.

I will continue to build long core positions in futures and the CORN, WEAT, and SOYB ETF products over the coming weeks on price weakness. The trade deal resulting in a de-escalation of the trade war is supportive of the prices of grains. The outbreak of the Coronavirus has been a bearish factor for the grain markets. The uncertainty of the 2020 crop year could add volatility to the market as the spring planting season gets underway. I would be a scale-down buyer of beans, corn, and wheat on price weakness. The WASDE report was not bearish for the prices of grains.

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

Source: CQG

The chart of the November 2020 soybean futures divided by December 2020 corn futures shows that the ratio moved lower over the past week and was at the 2.3439:1 level on February 12, down only 0.0007 since last week. The ratio is below the long-term norm. On February 12, the spread was at a level that provides a clue about farmers planting behavior in the coming months. If it continues to decline, farmers would likely increase corn crops at the expense of soybeans when it comes to the planting season in the early spring below the 2.4:1 level.

The uncertainty of the 2020 crop year is likely to add price variance to the grain futures markets over the coming weeks. I will look to build long positions during periods of price weakness. The deal with China should limit any downside until the 2020 growing season during the summer months. However, Coronavirus has weighed on the prices over the past weeks. Lower price levels could create a buying opportunity in the agricultural products that feed the world for the coming weeks and months. I continue to believe that the demand side of the fundamental equation for grains will limit any selloffs. At the same time, the uncertainty of the weather during the coming crop year could create the ideal conditions for sudden sharp rallies. I believe that any weakness in grains could offer some of the most compelling buying opportunities in the commodities asset class over the coming weeks.

The detailed February WASDE report is available via this link:

https://www.usda.gov/oce/commodity/wasde/wasde0220.pdf

Copper, Metals, and Minerals

After the selling that took many base metals and industrial commodity prices lower over the past few weeks, some stability returned to the sector since February 5. Many of the base metals edged higher but lead and zinc prices declined. The Baltic Dry Index continued to be a falling knife as freight rates have dropped significantly. Lumber moved higher on the back of low interest rates and a robust market for new homes in the US. The price of uranium fell since last week.  Iron rallied on the back of supply problems in Brazil.

Copper rose 0.99% on COMEX, while the red metal posted a 0.85% gain on the LME since the last report. Open interest in the COMEX futures market moved 1.96% higher since February 4. March copper was trading at $2.6000 per pound level on Wednesday after trading to a low of $2.4875 on February 3. Copper is a leading barometer for the overall health and wellbeing of the Chinese and global economies. The outbreak of Coronavirus has weighed on Chinese economic growth. The increase in stockpiles had weighed on the price of the red nonferrous metal. Over the past two weeks, copper inventories declined.

Just as in the crude oil market, copper put in a bearish reversal on the monthly chart in January. A close below $2.5150 per pound at the end of March would put in the same bearish price reversal pattern on the quarterly chart. Both copper and oil were above the levels that would create bearish reversal on the long-term chart on Wednesday.

The LME lead price moved lower by 1.85% since February 4. The rise in demand for electric automobiles around the world is supportive of lead in the long term as the metal is a requirement for batteries. The price of nickel rose by 2.14% over the past week. The export ban in Indonesia began on January 1, 2020 but has had little impact on the price of the nonferrous metal so far this year. Tin rose 0.96% since the previous report. Aluminum was 0.26% higher since the last report. The price of zinc was down 2.80% since February 4. Zinc was just below the $2150 level on February 11. Base metals will continue to be highly sensitive to any news and developments on trade between the US and China. The path of least resistance of the US dollar could also impact prices, and the greenback was moving towards its September 2019 high on Wednesday. The current level of global interest rates is supportive of the prices of nonferrous metals, but the Coronavirus is a negative factor as it weighs on Chinese economic growth. Base metals prices have moved to, and in some cases below, the bottom end of their trading ranges over recent weeks.

March lumber futures were at the $454.50 level, up 6.12% since the previous report. Interest rates in the US will influence the price of lumber. The US Fed left interest rates unchanged at its recent January meeting. Lumber is a requirement for new home construction, which is a function of the level of interest rates. Low rates are likely to support the price of wood in 2020. The price of uranium for March delivery was down 1.01% at $24.60 per pound. The volatile Baltic Dry Index fell another 7.73% since February 5 to the 418 level as shipping demand from China has ground to a halt and because of seasonal factors during the winter months. June iron ore futures rose 8.25% compared to the price on February 5 on supply concerns. Open interest in the thinly traded lumber futures market increased by 19.98% over the period, which is a bullish sign for the price of wood.

LME copper inventories moved 4.67% lower to 170,000 metric tons since last week after a series of significant increases over the past weeks. COMEX copper stocks fell by 3.08% from February 4 to 29,439 tons. Lead stockpiles on the LME were unchanged for the second consecutive week, while aluminum stocks were 1.44% lower. Aluminum stocks fell to the 1,239,800-ton level. Zinc stocks exploded 45.14% higher since the last report, which weighed heavily on the price of the base metal that galvanizes steel. Tin inventories fell 4.70% since February 4 to 6,390 tons. Nickel inventories were 3.87% higher compared to the level on February 4. The export ban from Indonesia took effect on January 1.

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 will have the most significant impact on the path of least resistance for the nonferrous metals. The trade deal provided some support for the sector but concerns over Coronavirus have overwhelmed the markets over the past weeks and caused risk-off conditions in industrial commodities and markets across all asset classes until some light buying stabilized prices.

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 $1.72 per share on Wednesday, down one cent over the past week. Low uranium prices continue weighed on the share prices of most producers over recent weeks.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 43 cents on February 12, down 9 cents since last week. I believe this option is an inexpensive way to hold a long-term position in X shares at a low level until early 2021. The details for the call option are here:

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

 

US Steel shares were at $9.12 per share and moved 3.90% lower since last week.

We own two units of FCX shares at an average of $10.56. The stock was trading at $12.67 on Wednesday, $0.26 higher since the previous report. I will maintain a small long position in FCX shares.

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

I remain cautiously bullish on the prospects for base metals and industrial commodities prices in 2020, but this continues to be a time for caution. I would be a buyer on price weakness, leaving plenty of room to add at lower prices in all of the industrial commodities. A program of cautious scale-down buying with lots of room to build positions could wind up being the optimal approach to the current risk-off period in the industrial commodities sector of the raw materials asset class. I am encouraged by the price action in the copper market.

 

Animal Proteins

Live and feeder cattle prices were marginally lower over the past week, but lean hogs moved higher as the price of pork bounced after the selling over previous weeks. The USDA February WASDE report told the animal protein markets:

 

The 2020 forecast for total red meat and poultry production is raised from last month on higher forecast beef, pork, and broiler production. The beef production forecast is raised from the previous month on higher cattle slaughter and heavier cattle weights in the first half of the year. However, the forecasts for second half beef production is reduced on lower anticipated steer and heifer slaughter in the second half of the year. This reflects a smaller number of cattle outside feedlots implied by the January 1 Cattle report which results in lower placements during 2020. Pork production is raised on higher expected hog slaughter and heavier carcass weights. Broiler production is raised on recent hatchery data which shows continued growth in the laying flock.

For 2020, the beef export forecast is lowered slightly reflecting weakness in several markets, but no change is made to the beef import forecast. The pork export forecast is raised from last month on expected robust global demand. Livestock, poultry and egg trade estimates for 2019 are adjusted to reflect December trade data. Fed-cattle prices for the first quarter of 2020 are lowered from last month on recent prices. Hog price forecasts are reduced from last month on increased production.

Source: USDA February WASDE report

The market will soon shift focus to the upcoming grilling season, which is the peak time of the year for the demand of meats. The grilling season begins in late May during the Memorial Day weekend holiday.

April live cattle futures were at $1.17850 per pound level down 1.11% from February 5 as the market continued to decline over the past week. Technical resistance is at $1.28550 and $1.3000 per pound. Technical support stands at around $1.15000 per pound level. Price momentum and relative strength indicators were at oversold readings on Wednesday. Open interest in the live cattle futures market moved 3.04% lower since the last report. The total number of open long and short positions in the live cattle futures market had been moving higher since mid-October, but the falling price caused longs to exit to risk positions over the recent weeks.

March feeder cattle futures outperformed live cattle as they fell by 0.46% since last week. March feeder cattle futures were trading at the $1.35050 per pound level with support at $1.3000 and resistance at $1.38075 per pound level, where there is now a double top formation. Open interest in feeder cattle futures rose by 1.25% since last week. While live cattle futures have a delivery mechanism, feeder cattle are a cash-settled futures contract. Sometimes live cattle prices lead feeder cattle prices, while at others, the opposite occurs.

Lean hog futures outperformed the cattle futures since the previous report. The active month April lean hogs were at 63.775 cents on February 12, which was 3.07% higher from the level on February 5. Price momentum and the relative strength index tuned higher from deeply oversold readings over the past week. Support is at 61.00 cents with short-term technical resistance on the April futures contract at 66.85 cents per pound level.

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

In the lean hog futures arena, there is contango from February 2019 until July 2020. From July 2020 through December 2020, the curve is in backwardation, but contango returns from December 2020 through June 2021. The forward curves reflect the seasonal trading patterns in the meat markets. In lean hogs, the shortage in China could impact the forward curve over the coming weeks and months now that the trade war de-escalated. China needs US pork exports given the current situation, and we could see purchases as a result of Chinese concessions as the nation continues to suffer from a severe shortage of pork. The Coronavirus could increase demand for pork from China as the country is banning the consumption of other meat products, which could be the source of the virus. However, the kneejerk reaction to the virus had caused significant selling and risk-off conditions in the lean hog futures arena. Lean hog futures recovered over the past week.

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

Source: CQG

Based on settlement prices, the spread was at 1.84790:1 compared to 1.92610:1 in the previous report. The spread decreased by 7.82 cents as live cattle became less expensive because of the rebound in the lean hog futures market. The spread moved towards the historical norm on the April futures contracts.

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

I continue to believe we will see recoveries in cattle and hog prices, the COW ETN product tends to move with the prices of the meats, but it suffers from limited liquidity because of its small net asset base. The WASDE report set the stage for the 2020 crop year in grains as well as for the supply and demand fundamentals for beef and pork. However, the report did not take into account the trade agreement between the US and China as the USDA does not seem to have a handle on the impact of the “phase one” and what it will mean for potential US exports. I believe the USDA is underestimating demand, which could lead to higher prices over the coming weeks and months.

 

Soft Commodities

All of the five soft commodities that trade in the futures market on the Intercontinental Exchange moved higher over the past week. Sugar futures led the way on the upside as the price made another new high on February 12. FCOJ did not rise above the $1 level, but the price posted the second-largest percentage gain. Cocoa was just over 4% higher and the price was just over $2900 per ton. Coffee and cotton prices gained between 1.5 and 3.0% compared to their prices in the previous report.

March sugar futures rose 7.13% since February 5, as the price of the sweet commodity was around the 15.78 cents per pound level. Technical resistance is at 15.90 cents with support at 14.05 cents. Sugar made a new high at 15.90 cents on February 12. Nearby sugar futures traded to a low at 11.74 cents on September 12, which is a critical level of longer-term support. The value of the January Brazilian real against the US dollar continued to decline over the past week and was at the $0.230050 level against the US dollar on the February contract, down 2.36% over the period. The Brazilian currency fell below its multiyear lows, which is a factor for the price of sugar and other commodities where Brazil is a leading producer and exporter. The currency fell through the critical support level at $0.23040 and probed below $0.23. Anyone with a risk position in sugar should keep an eye on the price action in the Brazilian real. Price momentum and relative strength on the daily sugar chart were rising in overbought territory as of February 12. The metrics on the monthly chart crossed higher from a neutral condition and are headed for overbought territory. Sugar made a new high above its 2019 peak, and the next significant target on the upside could be the 20 cents per pound in the volatile sugar futures market.  Open interest in sugar futures was 4.37% higher since last week. Open interest has been rising with the price, which continues to be a bullish technical factor for the sweet commodity. Sugar rallied to new highs over recent weeks as drought conditions in Thailand have created supply concerns.

March coffee futures moved 2.97% higher since February 5 after a significant correction from the December 2019 high. March futures were trading at the $1.0065 per pound level. The first level to watch on the downside is 97.40 cents. Below there, support is at around 92.20 cents on the continuous futures contract. Resistance is now at $1.10 on the nearby contract. I continue to favor coffee on the long side, but coffee can be a highly volatile commodity in the futures market. 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 $32.67 on Wednesday. Open interest in the coffee futures market fell by 3.98% since last week. I am holding a small long position in the coffee futures market and the JO ETN product after taking profits scale-up in late 2019. Volatility has increased in the coffee futures market. I began buying lightly as the price fell below the $1 per pound level. I will continue to add to the long position on a scale-down basis, leading plenty of room to add on further price weakness. I will look to sell around $1.10 but will continue to hold a small core long position.

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 have subsided, causing the price of the soft commodity to decline. Coffee had made higher lows since reaching 86.35 cents in mid-April. The ultimate upside target is the November 2016, high at $1.76 per pound. Coffee had moved into overbought territory on the short-term chart and crossed lower. Price momentum and relative strength crossed higher in deeply oversold readings during the week. On the monthly and quarterly charts, the price action was threatening to turn bearish again as the metrics were crossing lower. 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.

The price of cocoa futures posted a significant gain over the past week. On Wednesday, March cocoa futures were at the $2904 per ton level, 4.09% higher than on February 5. Open interest fell by 0.18%. Relative strength and price momentum were above neutral territory on February 12. The price of cocoa futures rose to a new peak and the highest price since September 2016 at $2935 per ton on the March contract on February 7. We are long the NIB ETN product at $25.76. NIB closed at $34.05 on Wednesday, February 5. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their exports of cocoa beans, it should provide support to the cocoa market on price dips. The level to watch on the upside above the recent high is now at $3000 per ton. On the downside, short-term technical support now stands at $2702 per ton.

March cotton futures rose 1.59% lower over the past week on the back over concerns about the Chinese economy. On August 26, the price of nearby futures fell to a low at 56.59 cents, less than one cent above the critical 2016 low at 55.66 cents per pound. March cotton was trading at 68.58 cents on February 12. On the downside, support is at 65, 61.73, 56.19, and 55.66 cents per pound. Open interest in the cotton futures market fell by 10.24% since February 4. Price momentum and relative strength metrics were crossing higher from oversold readings on Wednesday. The “phase one” trade agreement between the US and China was a bullish factor for the price of the fiber futures, but Coronavirus cuts the other way. Cotton is coming into a time of the year when the price tends to peak. However, news out of China will determine the path of the fiber futures over the coming weeks, and that news has been problematic for the cotton market. As the Chinese economy grinds to a halt, the demand for cotton suffers.  On February 11, in its February WASDE report, the USDA told the cotton market:

The U.S. cotton estimates for 2019/20 are unchanged, except for a 1 cent-per pound reduction in the season-average upland farm price, to 62 cents, 8.3 cents lower than in 2018/19. The 2019/20 world cotton forecasts include a 2.5-million-bale increase in ending stocks, driven by both larger production and lower consumption. A 1-million-bale decline in China’s expected consumption is the largest single change this month: consumption is lower despite the positive impact of the U.S.-China trade agreement, due in part to the negative economic effects of the novel coronavirus outbreak. Consumption is also projected lower in Vietnam but higher in Pakistan and Turkey. Production in Brazil in 2018/19 is revised upward by 480,000 bales reflecting higher production in Mato Grosso. Pakistan, Brazil, and Tanzania production in 2019/20 is revised upward. Total production changes this month come to a 1.3- million-bale global increase, while total consumption changes net to a 1.2-million-bale reduction.

Source: USDA February WASDE report

March FCOJ posted a substantial gain since last week. On Wednesday, the price of March futures was trading around 98.00 cents per pound. FCOJ nearby futures moved 4.53% higher over the past week but remain at a very low level. Support is at 91.60 cents level. Technical resistance is at $1.0480 per pound. Open interest fell by 4.40% since February 4. The Brazilian currency continued to weigh on the FCOJ futures. $1 per pound could become a critical pivot point for the OJ futures. The steady increase in open interest since late December could mean a move is on the horizon. Given the low price of FCOJ, the odds favor the upside in the soft commodity, but the price remained not far above the recent low over the past week.

Soft commodities can be one of the most volatile sectors of the commodities market. The products that trade on the Intercontinental Exchange can be as unpredictable as Tesla shares at times. The low level of the Brazilian real continues to weigh on the prices of sugar, coffee, and FCOJ. The surcharge on cocoa exports from West Africa has pushed the price of the beans to their highest price since 2016. When it comes to cotton, events in China will dictate the path of least resistance for the price of the fluffy fiber over the coming weeks. We are entering into a time of the year when cotton futures tend to experience seasonal strength over the uncertainty for the 2020 crop year. The futures in all of the soft commodities are now rolling from March to May, which could cause volatility to increase over the coming sessions.

 

A final note

Markets calmed over the past week. Crude oil fell to a new low but recovered back over the $50 per barrel level on nearby NYMEX futures. Copper traded below $2.50, but the price also bounced. Developments surround the Coronavirus are likely to determine the path of least resistance in both the oil and copper markets. Natural gas prices fell to a new low and could still be a sitting duck at below the $1.90 per MMBtu level. While the technical picture displays an oversold condition, natural gas faces the end of the withdrawal season and overwhelming bearish market sentiment.

As we are heading towards the 2020 planting season in the US and northern hemisphere, uncertainty over the crop yields is likely to rise over the coming weeks. I believe that risk-reward currently favors a scale-down approach to buying corn, soybeans, and wheat at the current price levels. I would leave room to add to long positions on price weakness going into the planting season. I also favor long positions in cotton as the fiber is coming into a seasonally strong period for prices.

Coronavirus continues to be the most significant issue facing markets across all asset classes. However, the most considerable volatility often comes from surprises, which always tend to occur when the market least expects.

 

 

 

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.   

 

 

 

 

Andy Hecht

Author

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