Hecht Commodity Report

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  • Gold rises to a new record high in US dollar terms- Silver explodes higher- Platinum and palladium rally
  • The dollar breaks down through technical support levels
  • Energy prices move higher with natural gas posting a double-digit percentage gain
  • Grains were mostly lower- Soft commodities were mostly higher
  • Stability in copper and base metals- Lumber continues to surge

 

Summary

I had surgery on Tuesday, January 21, so I took the rest of the week off to recover. While I was resting, silver broke out to the upside, and gold moved to a new record level.

Since the last report, gold moved to a new record high as the yellow metal surpassed the 2011 peak at $1920.70 and appears headed for a new milestone above $2000 per ounce. Silver traded at over $26 per ounce. The volatile precious metal more than doubled in value since the March low. Crude oil remained around the $40 per barrel pivot point. Meanwhile, Bitcoin broke out to the upside and hit a high of $11,540, the highest price since August 2019.

The US dollar index broke below its technical support level at 94.61 to a low of 93.120. The next level on the downside was the September 2018 low at 93.395. Now that the dollar index fell below that level, the target is the February 2018 low at 88.15. I have been warning that the ascent of gold reflects the weakness in all global fiat currencies. The US dollar was the final shoe to drop against the yellow metal as all other foreign exchange instruments fell to new record lows against gold in 2019 and 2020. The combination of the monetary and fiscal stimulus in the US and worldwide and a falling dollar is a potent bullish cocktail for commodity prices. The Fed met on Wednesday, July 29, and expressed continued concerns over the economic impact of the global pandemic. The US continues to experience the highest number of reported cases and fatalities worldwide. The Fed left short-term rates unchanged and is not even thinking about anything but accommodation these days.

The price action in the raw materials asset class from 2008 through 2012 looks like a model for 2020 and the coming years. The trend in markets is always your best friend. In the world of commodities, the trends are mostly higher, and I believe that we will see far higher prices than most analysts think possible. I remain a buyer of commodity assets during periods of price weakness. We may be only at the beginning of an exciting bull market in all commodities, and I am only trading from the long side in the asset class.

 

Weekly Spreadsheet:

Copy of Spreadsheets for The Hecht Commodity Report July 29, 2020

 

Stocks and Bonds

Stocks edged mostly lower since July 20 on the back of the growing number of coronavirus cases in the US, weak economic data, and the lack of another government package as enhanced unemployment benefits run out at the end of July.

The S&P 500 was the exception as it gained 0.20% since July 20. The NASDAQ was 2.08% lower, and the DJIA posted a 0.53% loss. While the Fed’s monetary policy approach will continue to support the stock market, the US election, which is now less than four months away, should start to add volatility to share prices. The Fed meeting on Wednesday, July 29 indicated that the central bank will continue its historic accommodative stance on monetary policy.

Chinese stocks moved lower since July 20 and underperformed US equities. The US and
China closed satellite embassies over the past week as tensions between the two nations continue to increase.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $42.22 level on Wednesday, as it fell by 2.06% since the previous report. The Chinese large-cap ETF product has short-term technical support at $41.65 with resistance at the July 9 high at $45.93 per share. The Chinese government could be supporting the level of Chinese stocks. Chinese share prices could become highly volatile as the tensions between the US and China rise.

September US 30-Year bonds continued to move higher since July 20. Interest rates in the US are not moving appreciably higher any time soon. Economic uncertainty and the high level of unemployment will keep a significant bid under the bond market. On Wednesday, July 29, the September long bond futures contract was at the 181-20 level, 0.82% higher than on July 20. Short-term support for the long bond is at 177-06, with resistance at 181-30, the high from the past week. The bond market action reflects Fed policy, which has made dips in bonds a buying opportunity. The pattern of trading is likely to continue, given the Fed’s approach to monetary policy.

Open interest in the E-Mini S&P 500 futures contracts fell by 0.02% since July 17. Open interest in the long bond futures rose 1.66% over the period. The VIX traded to a high of 85.47 on March 18, the highest level since 2008. I have been writing, “I continue to believe that risk-reward favors buying the VIX and VIX-related products with tight stops and reestablishing positions after the market triggers stops is the optimal approach in the current environment. Nothing has altered my approach to the VIX over the past week.” The volatility index was at 24.09 on July 29, down 1.51% since July 20. I continue to believe that related short-term products like VIXX, and VIXY are in the buy zone. At just over 24, risk-reward continues to favor the upside.

We should prepare for bouts of volatility in the stock market as 2020 is a year like no other. The second half will present a series of challenges. Many corporations got a pass on second-quarter earnings, but economic conditions are likely to create a rocky road over the coming months.

 

The dollar and digital currencies

The dollar index broke to the downside since July 20. The September dollar index future contract was at 93.432 on July 29, down 2.34% from the level on July 20. The dollar has experienced selling pressure since March. Open interest in the dollar index futures contract exploded 46.81% higher since July 17 after increases in the previous reports. Rising open interest and falling price is a technical validation of the bearish trend in the index. The move below the 94.61 level may have ended the long-term uptrend in the dollar index. Daily historical volatility in the dollar index was 5.11% on Wednesday, higher than on July 20. The metric that measures price variance on the September contract rose to a high of 22.70% in late March. After breaking below the 93.395 level, the next target on the downside is the February 2018 low at 88.15.

The September euro currency was 2.81% higher against the dollar. The interest rate differential between the dollar and the euro has narrowed, which provides support for the euro. Open interest in the euro futures rose by 9.29%. The September pound moved 2.35% higher against the dollar since the previous report, and open interest rose by 3.41%. The dollar index could be heading significantly lower as currency markets tend to trend for long periods.

 

Bitcoin and the digital currency asset class surged to the upside since last Monday. Bitcoin was trading at the $11,212.55 level as of July 29.  Bitcoin had failed after several attempts to conquer the $10,000 level, but this time the level gave way, which could lead to much higher levels. The leading digital currency rose by 22.29% since July 20. Ethereum posted a 35.96% gain over the period. Ethereum was at $321.67 per token on Monday. The market cap of the entire asset class moved 21.26% higher. Bitcoin marginally outperformed the asset class since the previous report. The number of tokens increased by 74 to 5833 tokens since July 20. In late 2017 the overall market cap was at over $800 billion with a fraction of the number of tokens available today.

On Wednesday, the market cap was around $328.803 billion. Open interest in the CME Bitcoin futures rose by 39.20% since last week. Open interest has been increasing when Bitcoin moved higher and lower during downside moves, which continues to be a bullish sign for the cryptocurrency. The pattern continued over the past week. The next target on the upside stands at $11,540 per token, the July 28 high. The trend is your friend in Bitcoin, and it remains higher. Support is at $10,000 and $8,950.

The Canadian dollar moved 1.27% higher since July 20. Open interest in C$ futures rose by 2.71% and continued to increase. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that produces significant quantities of energy and agricultural products. Keep an eye on the oil futures market for clues about the Canadian dollar as it often acts as a proxy for the price of the energy commodity.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ moved 2.25% higher since last week. Open interest in the A$ futures was 8.32% higher. The geographical proximity to China makes the Australian dollar sensitive to events in China. The A$ is a proxy for both China and raw material prices. Economic strength or weakness in China will determine the path of the Australian economy. Any retribution over the spread of coronavirus could cause retaliatory measures by both sides, which would weigh on Australia’s economy. In the long-term, the stimulus is bullish for commodities prices and both the Australian and Canadian currencies. The brewing tensions with China are a reason to be cautious with the Australian currency. Over the coming months and years, we could see significant gains in the C$ and A$ as commodity prices rise because of inflationary pressures caused by the increase in the global money supply. I believe the price action in 2020 in all markets is similar to 2008. In the years that followed, commodity prices soared because of the stimulus, taking the Australian and Canadian currencies appreciably higher against the US dollar because of their sensitivity to raw material prices. Over the long-term, buying the A$ and C$ during periods of weakness could prove to be the optimal strategy. I am bullish on the two currencies that I view as proxies for commodities prices. Rising open interest in the two commodity-sensitive currencies is a bullish sign. I believe that any price weakness is a buying opportunity for the A$ and C$ over the coming weeks and months.

Over the past week, the volatile Brazilian real moved 3.23% higher against the US dollar on the September futures contract. The real moved to a high of $0.2053 level against the US dollar on June 10 on the September contract before turning lower. The September Brazilian currency was trading at the $0.193300 level after falling to a new and lower low at $0.16780 on May 13. The real is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets are sensitive to changes in the direction of the Brazilian real. The falling real had been a factor that weighed on sugar and coffee prices as Brazil is the world’s leading producer and exporter of the soft commodities and output costs are in local currency terms over the past weeks along with crude oil. However, as we have seen in other markets, low prices may not stop shortages of supplies as the virus impacts parts of the supply chain when it comes to processing or transporting the commodities. The weather conditions in critical growing regions and the spread of the virus could also cause price volatility in the agricultural products. Brazil has seen a significant increase in the number of infections and fatalities because of coronavirus, which could harm its currency value. The South American nation is second behind the US in cases and deaths. I am bullish for the real because of Brazil’s commodity production. The nation is a supermarket to the world for many products. In the aftermath of the global pandemic, the price tag for liquidity and stimulus could cause inflationary conditions that would provide support for the A$, C$, and even the Brazilian real. A rise in commodity prices could help to bolster the value of the real. I am a buyer of the real on any weakness against the US dollar. Technical resistance is at $0.2053, which could become a critical target and launch pad for the real over the coming weeks and months.

 

Precious metals shined brightly since July 20. Silver broke out to the upside, and gold moved to a new all-time high.   Platinum group metals all posted healthy gains since the previous report.

 

Precious Metals

All systems were go on the upside in the precious metals arena since July 20. Silver and platinum posted double-digit percentage gains. Palladium, rhodium, and gold prices all moved to the upside, with the yellow metal surpassing the all-time 2011 high.

Gold was 7.48% higher over the past week. The yellow metal made a higher high at $1974.90 on July 29. Silver rose by an incredible 20.45% since July 20. August gold futures settled at $1953.40 per ounce level on Wednesday. September silver settled at $24.321 per ounce, after breaking through technical resistance at $21.095, the July 2016 peak. Both metals were higher after the July Fed meeting. I maintain a bullish opinion on the gold and silver markets as the odds favor that the price action that followed the 2008 global financial crisis is a blueprint for the coming months and years.  Stimulus is bullish fuel for gold and silver as increases in the money supply weigh on the value of fiat currencies. Price corrections continue to be buying opportunities in the silver and gold markets. However, we could see wide price variance given the price levels. I continue to hold a long core position in gold and silver. I am also running short-term long positions looking to buy on dips with the hope of taking profits on rallies. On the short-term risk positions, I am using both the metals and the diversified gold and silver mining ETF products. Nothing has changed since the previous report. Gold continues to make strides on the upside. Silver took off on the upside, but it left a gap from $19.795 to $20.125 on the weekly chart.

While I am bullish on the gold and silver markets, they rarely move in a straight line. Using corrections as buying opportunities is likely to be the optimal approach to trading and investing.

Technical resistance for August gold stands at the $2000.00 per ounce, the all-time high from 2011. Short-term support is at $1791.10, the low from July 14. In September silver, support is at $19.795, with resistance at $23.325 on the active month contract. If the price action from 2008 through 2011 is a guide, gold will head for much higher prices over the coming months, and silver should continue to make gains on the upside.

Gold gold mining shares moved higher since July 20, with the GDX up 6.81% and GDXJ moving 8.83% to the upside. The mining shares tend to outperform the yellow metal on the upside and underperform on the downside. The mining shares kept pace with the price action in gold since July 20. The SIL and SILJ silver mining ETF products that hold portfolios of producing companies moved 13.84% and 8.87% higher since July 20. The price action underperformed the silver futures market during the explosive price move. The action in the stock market likely weighed on the performance of gold and silver mining shares since last Monday.

Gold underperformed silver since the previous report. The silver-gold ratio reached a new modern-day high as risk-off selling hit the silver market, taking the price below the $12 per ounce level. The ratio had been moving steadily lower over the past weeks. I will continue to add to long physical positions in gold, silver, and platinum, during periods of price weakness. I will continue to trade leveraged derivatives and mining stocks on a short-term basis with tight stops. While gold mining stocks and derivatives follow the price of gold, they are not the metal and could experience significant periods of price deviation if risk-off conditions return to the stock market. I hold long core positions but will employ tight stops on any new positions that increase exposure to the two leading precious metals.

October platinum rose 11.04% since July 20. October futures were at the $958.50 per ounce level on July 29. The level of technical resistance is at $1002.00 on the October futures contract, the July 28 high. Support in platinum is at $825.50 per ounce on the active month contract. Rhodium is a byproduct of platinum, and the price of the metal had been in a bull market since early 2016. The price of rhodium was at a midpoint price of $7,950 per ounce on July 29, up $650 or 8.90% over the past week. September Palladium rose by 7.20% since last week. Support is at $2000 on the September contract with resistance at $2418.80. September palladium settled at the $2261.20 per ounce level on Wednesday.

Open interest in the gold futures market moved 1.94% higher over the past week. The significant decline in open interest earlier in the year was because of problems with dealers when it comes to the EFP, or arbitrage positions between gold for delivery on COMEX and London. The metric moved 14.69% higher in platinum. The total number of open long and short positions increased by 20.48% in the palladium futures market. Silver open interest rose by 2.21% over the period. Rising open interest in all of the precious metals futures markets is a bullish sign for the sector.

The silver-gold ratio dropped like a stone over the past week as silver took out the 2016 high and kept on going.

Source: CQG

The daily chart of the price of August gold divided by September silver futures shows that the ratio was at 80.48 on Wednesday, down 9.03 from the level on July 20. The ratio traded to over the 124:5 level on the high on March 18 on the continuous contract. The long-term average for the price relationship is around the 55:1 level. The ratio rose to the highest level since futures began trading in 1974 as the price of silver tanked recently. The move lower since mid-March has been a supportive factor for the two metals. In 2008, the ratio peaked during the risk-off selling and then fell steadily until 2011.

Central banks continued to purchase gold over the first half of 2020, and net buying by central banks is a supportive factor for the price of the yellow metal. All signs are the trend will continue in Q3.

Platinum was 11.04% higher, and palladium moved 7.20% to the upside over the past week. September Palladium was trading at a premium over October platinum with the differential at the $1302.70 per ounce level on Wednesday, which widened since the last report. October platinum was trading at a $994.90 discount to August gold at the settlement prices on July, which widened since the previous report.

The price of rhodium, which does not trade on the futures market, rose $650 on the week. Rhodium is a byproduct of platinum production. The low price of platinum caused a decline in output in South African mines, creating a shortage in the rhodium market that lifted the price to the $13,000 level before risk-off conditions caused the price to evaporate to $2,000. Rhodium has been highly volatile over the past weeks after reaching its peak. The price moved higher from a low at $575 per ounce in 2016. The bid-offer spread in Rhodium remained at $2000 per ounce, $1,000 narrower than in previous weeks. The spread remains at a level that makes any investment in the metal irrational. Rhodium is an untradeable commodity, but it can provide clues about the price path of the other PGMs.

I continue to favor buying physical platinum as well as gold and silver during corrective periods. In gold and silver, the GLD, IAU, BAR, and SLV ETF products hold physical bullion and are acceptable proxies for the coins and bars. In platinum, PPLT and PLTM are the proxies. Since a NYMEX platinum futures contract contains 50 ounces of metal, purchasing a nearby futures contract on NYMEX and standing for delivery is a way to avoid significant premiums for the metal. At $958.50 per ounce, a contract on NYMEX has a value of $47,925, after falling to the lowest level just under two decades in March.

The GLTR ETF product holds a portfolio of physical gold, silver, platinum, and palladium, for those looking for diversified precious metals exposure. I continue to believe that gold is heading a lot higher, but the route will not be in a straight line. The stimulus in the US and Europe continues to be highly supportive of gold and silver prices. Platinum is inexpensive from a historical perspective compared to gold and palladium. Palladium and rhodium continue to trade in bullish patterns, but both are sensitive to global economic conditions. We should continue to see volatility in all of the precious metals with a bias to the upside. I continue to favor gold, silver, and platinum on price weakness. I hold a long core position and a trading position where I buy dips and take profits on rallies. Since mining shares tend to be more volatile, I have used the mining ETFs and ETNs in gold and silver shares for short-term trading purposes. The higher high in gold over the past week is another sign of technical and fundamental strength for the yellow metal as the Fed continues to add liquidity to markets. As I have written in the past, the ascent of gold marks the descent of fiat currencies that rely on the full faith and credit of the governments that print legal tender. Central banks and governments worldwide continue to hold and be net buyers of gold, which is the ultimate currency. While countries can print legal tender to their heart’s content, the gold stock can only increase by extracting more from the crust of the earth. If 2020 turns out to be anything like 2008, even higher highs in gold are on the horizon, and the precious metal has the potential to surprise and even shock market participants on the upside in the coming months and years. Gold moved to a record high in dollar terms, and it reached new highs in virtually all other currencies. Silver has broken a four-year resistance level. The price action in silver has been explosive since the metal created a blow-off low below $12 per ounce in March. The trend is always your best friend in markets, and it is higher in the precious metals. The odds of significant corrections will rise with the prices, so be careful and remember to take some profits on the way up.

 

Energy Commodities

Energy prices were mostly stable to higher since July 20. WTI and Brent edged higher. Gasoline and heating oil futures posted gains, but crack spreads were on either side of unchanged. Natural gas rallied; ethanol edged higher along with the price of coal for delivery in Rotterdam. August NYMEX futures rolled to September.

September NYMEX crude oil futures rose by 0.86% since July 20. The September contract settled at $41.27 per barrel on July 29 after trading to a low of $21.99 on April 22 and a high of $42.51 on June 21. The price action finally filled the bottom of the gap on the daily chart from March at the $42.49 level. Crude oil inventories rose for the week ending on July 17, according to both the API and EIA, product stockpiles were mostly lower during that week. For the week ending on July 24, crude oil stocks fell substantially. As the price remained above the $40 per barrel level, the tapering of output quotas did not cause any significant selling, which has been a sign of strength for the oil market over the past weeks.

Chinese demand for crude oil has been robust sine its economy reopened. With parts of the economy up and running in Europe and the US, the demand side of the equation has improved. However, the rising number of coronavirus cases throughout the US poses a threat to the recovery in the energy commodity. The next target on the upside in September NYMEX futures is at $48.97 per barrel from March 3, which stands as a resistance level. The crude oil market has been consolidating around the $40 level on nearby NYMEX futures contracts.

September Brent futures outperformed August NYMEX WTI futures, as they rose 1.09% since July 20. September gasoline was only 0.01% higher, and the processing spread in September moved 2.60% to the downside since last week. The September gasoline crack spread was at $9.75 per barrel. Wild swings in energy prices caused wide price ranges in the crack spreads the reflect refining margins. Gasoline crack spreads tend to exhibit strength during the summer driving season in the US, but 2020 is no ordinary year.

September heating oil futures moved 1.22% higher from the last report. The heating oil crack spread was 2.17% above the July 20 level. Heating oil is a proxy for other distillates such as jet and diesel fuels. The September distillate crack spread traded to a low of $9.43 in late May and closed on Wednesday at $11.80 per barrel. The price action in the processing spreads has been highly volatile, given the timing differences between moves in crude oil and products over the past months. The crack spreads are a real-time indicator of demand for crude oil as well as barometers for the earnings of refining companies that process raw crude oil into oil products. The crack spreads could be a significant indicator of demand over the coming days and weeks as the wheels of the US economy have begun moving. However, the energy market remains highly sensitive to new outbreaks and hotspots in the US and worldwide.

Technical resistance in the September NYMEX crude oil futures contract is at $48.97 and $54.50 per barrel level with short-term support at the $38.77 level. The measure of daily historical volatility was at 18.10% on July 29, lower than the 29.90% level on July 20. The price variance metric was at almost 172% in mid-March on September futures. Demand remains the overwhelming critical factor when it comes to the price direction of the energy commodity. As I wrote over the past weeks, “falling production should eventually balance the market and could create a deficit at some point in the future. The course of the pandemic is crucial for the oil market over the coming weeks and months. If we have seen the peak, we could see prices rise. However, further outbreaks that prompt a return to closing parts of the economy again would be a highly bearish factor for energy demand.” The September NYMEX crude oil futures contract has made higher lows and higher highs. The price needs to remain above the $38.77 and $34.36 levels to keep that pattern intact. However, the market has stalled at the $40 level, which has become a pivot point. The lack of a decline after the tapering of production cuts could be a bullish sign for the oil market.

The Middle East remains a potential flashpoint for the crude oil market. Relations between the US and Iran and Saudi Arabia and Iran have not improved over the past months. While the leadership in Teheran has had their hands full with coronavirus, we could see them lash out at US interests in the region over the coming weeks or months. Any hostilities that cause supply concerns could send the price of crude oil for nearby delivery appreciably higher in the blink of an eye. At just under $44 per barrel for the Brent benchmark, any actions that impact production, refining, or logistical routes could cause a far greater percentage move in the price of oil than we witnessed at the beginning of 2020. The Middle East could provide surprises to the oil market, but global demand remains the primary factor for the price over the coming weeks. The oil market has been quiet over the past week.

Crude oil open interest increased by 0.40% over the period. NYMEX crude oil rose by 0.86%, and the energy shares outperformed the energy commodity since July 20. The XLE rose 4.44% since July 20. We are starting to see consolidation in the oil business. BP sold its’ Alaskan assets that it owned since the late 1970s to a smaller operator and financed the deal. BP and Royal Dutch Shell announced significant write-downs of assets as the leading oil-producing companies concentrate on low-cost and cleaner production when it comes to hydrocarbons.

I continue to be cautious when it comes to any investments in debt-laden oil companies. I would only consider those with the most robust balance sheets like XOM and CVX in the US. Exxon and Chevron could stand to pick up lots of production assets at bargain-basement prices over the coming months as the number of bankruptcies rises in the oil and gas sectors. I would only purchase these companies during corrective periods. Nothing has changed since the prior report when it comes to opportunities for oil-related equities.

The spread between Brent and WTI crude oil futures in September rose to the $2.51 per barrel level for Brent, which was up 12.0 cents from the level on July 20. The September spread moved to a high of $5.45 on March 18. The continuous contract peak was at $11.52 on April 20 as all hell broke loose in the crude oil futures market. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. However, this time, it was the carnage in the price of WTI futures that drove the spread to higher levels. Brent crude can travel by ocean vessel to consumers around the globe, while WTI is a landlocked crude oil. The lack of storage capacity was responsible for the price action in the spread and outright prices in late April. The decline in the Brent-WTI could reflect the decline in US output and the anticipation of rising demand for gasoline. August NYMEX futures are rolling to September, and Brent will roll to October at the end of this month.

A decline in US production over the coming months could cause significant volatility in the Brent-WTI spread. Before 2010, WTI often traded at a $2 to $4 premium to Brent. The WTI grade has a lower sulfur content making it the preferable crude oil for processing into gasoline, the world’s most ubiquitous fuel. If US output continues to decline significantly and demand returns to the market, we could see it impact the Brent-WTI differential and cause periods where WTI returns to a premium to the Brent, which is better suited for refining into distillate products. The spread also reflects the political risk in the Middle East as the region uses the Brent price for its output. The USO and BNO ETF products replicate the short-term price action in WTI and Brent futures, respectively. While both do an adequate job tracking the futures in the short-term, neither are particularly effective for medium or long-term positions because of the volatility of the forward curves in both crude oil benchmarks. The path of least resistance of the oil market will be a function of the ups and downs of the global pandemic over the coming weeks and months.

Term structure in the oil market experienced a significant shift as the price of crude oil tanked in March and April. The flip from backwardation to contango in the spread reflected the flood of supplies in the crude oil market. Oil traders filled tanks and storage all over the world to take advantage of the wide contango with financing rates at historic lows. Cash and carry trades in the oil market became one of the only profitable areas of the market as demand evaporated back in February through April. The cash and carry trade put upward pressure on freight and storage rates. The forward curve had moved to the widest contango in years. The contango caused the price of May futures to plunge to an incredible low of negative $40.32 per barrel. As prices moved higher since late April, contango declined.

Since July 20, September 2021, minus September 2020, moved from a contango of $1.75 to $2.21, which was 46 cents higher over the period.  The $0.46 level in late June was the recent low in the spread. In early January, the spread traded to a backwardation of $5.06. The spread hit a high of $8.39 per barrel on March 9. September futures traded to a low of $21.99 on April 22. Rising contango was a sign of a glut in the oil market while falling contango signifies tighter supplies. The capacity for crude oil storage around the globe fell dramatically as well-capitalized traders purchased nearby crude oil, put it in storage, and sold it for futures delivery. The decline in the spread could have triggered some profit-taking, which opened up more capacity on the storage front.  Falling production also caused the spread to tighten. We have likely seen a least a partial unwind of some spreads as they gravitated back towards flat. Production declines and declining inventories over the coming months would result in significant profits for well-capitalized crude oil traders who continue to store crude oil against deferred short positions. The decline in contango since late April is a supportive sign for the price of oil. The number of rigs operating in the US continued to decline. According to Baker Hughes, on July 24, the number of rigs in operation was at 181, up one from the previous week, and 595 below the level last year.

US daily production stood at 11.1 million barrels per day of output as of July 24, according to the Energy Information Administration. The level of production was unchanged from the previous week, as the price remained around the $40 per barrel level on nearby NYMEX futures. As of July 17, the API reported an increase of 7.544 million barrels of crude oil stockpiles, and the EIA said they rose by 4.90 million barrels for the same week. The API reported a decline of 2.019 million barrels of gasoline stocks and said distillate inventories fell by 1.357 million barrels as of July 17. The EIA reported a decrease in gasoline stocks of 1.80 million barrels and a rise in distillates of 1.10 million barrels. The inventory data from both the API and EIA was bearish for the price of crude oil. As of July 24, US production dropped by 2.0 million barrels per day or over 15% since March.

OIH and VLO shares moved higher since July 20. OIH rose by 8.21%, while VLO moved 9.87% to the upside over the period. As I wrote over the past weeks, “the level of crack spreads is a reason for short-term caution for VLO.” OIH was trading at $131.08 per share level on Wednesday. I am holding a small position in OIH. We are long two units of VLO at an average of $70.04 per share. VLO was trading at $59.69 per share on Wednesday, which is disappointing. I continue to believe VLO is too low at the current price level.

The August natural gas contract rolled to September and settled at $1.930 on July 29, which was 14.61% higher than on July 20. The September futures contract recovered from a low of $1.646 on July 20. Support in September stands at the June low of $1.646 per MMBtu. The continuous contract made a new twenty-five-year low at $1.432 per MMBtu in late June. Technical resistance is at the July 7 high at $1.989 per MMBtu.

Over the past three weeks, the EIA reported smaller increases in natural gas stockpiles.

Source: EIA

The EIA reported an injection of 37 bcf, bringing the total inventories to 3.215 tcf as of July 17. Stocks were 25.6% above last year’s level and 15.7% above the five-year average for this time of the year. The previous week, the injection was 45 bcf. Natural gas stocks fell to a low of 1.107 tcf in March 2019, this year the low was at 1.986, 879 bcf higher. This week the consensus expectations are that the EIA will report a 32 bcf injection into storage for the week ending on July 24. The EIA will release its next report on Thursday, July 23, 2020.  Over the past seventeen weeks, the percentage above last year’s level has been declining when it comes to natural gas stockpiles. The steady decline from 79.5% above the one-year level as of March 20 to 25.6% last week has not provided much fundamental support to the natural gas market. The trend could reflect higher demand or lower production. Given the events since March, it is likely that output is causing a slower rate of injections into storage. Baker Hughes reported that a total of 68 natural gas rigs were operating in the US as of July 17, down three since last week, and 101 under last year’s level of 169. Meanwhile, the price action over the past few weeks continued to be a sign of fragile demand. I suggest tight stops on any risk positions but continue to prefer the long side over the coming week. The rebound was overdue, and the target is at the recent high at over $2.00 per MMBtu. I am looking for a move to the $2.10 level on September futures.

Open interest rose by 0.60% in natural gas over the past week. Short-term technical resistance is at $1.989 per MMBtu level on the August futures contract with support at $1.646. Price momentum and relative strength on the daily chart were rising towards overbought readings as of Wednesday.

August ethanol prices were moved 2.59% higher over the past week, with the price at $1.110 per gallon wholesale. Open interest in the thinly traded ethanol futures market moved 5.56% lower over the past week. With only 85 contracts of long and short positions, the biofuel market is untradeable and looks like it could be delisted. The KOL ETF product fell 0.12% compared to its price on July 20. The price of October coal futures in Rotterdam rose by 1.72% since last week’s report.

On Tuesday, July 28, the API told the crude oil market that US inventories fell by 6.829 million barrels for the week ending on July 24. Gasoline stocks rose by 1.083 million barrels, while distillates increased 187,000 barrels. On July 29, the EIA reported a decline in US crude oil stockpiles of 10.60 million barrels. The EIA said gasoline rose by 700,000 and distillates rose by 500,000 barrels as of July 24.  The latest data was bullish for the crude oil market.

I expect volatility in the crude oil market as it will move higher or lower on optimism or pessimism on the back of the progress of the virus and progress on treatments and a vaccine. The latest reports of new outbreaks were bearish for the energy sector. Production is falling, but demand remains the most significant factor when it comes to the price direction.

In natural gas, the forward curve continues to be wide, with January 2021 futures trading at a significant premium over natural gas for August 2020 delivery.   Nearby September futures settled at $1.930 on July 29 with natural gas for delivery in January 2021 at $3.010 per MMBtu., a 56% premium or contango. The spread narrowed over the past week as the price of nearby natural gas futures increased.

The price is in contango where deferred prices are higher than levels for nearby delivery, reflecting the condition of oversupply and high level of inventories compared to past years as we are in the 2020 injection season. Natural gas stockpiles started the 2020 injection season at a level where a build to over four trillion billion cubic feet and a new record high is possible in November, which could keep the price from running away on the upside in the lead-up to the winter of 2020/2021. However, production is likely grinding lower because of the low level of prices that make output uneconomic. The trend in stocks since March 20 compared to last year is a sign of declining output. The debt-laden oil and gas businesses in the US could receive support from the government to keep energy output flowing, but demand destruction is a critical factor.

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 were delisted by Credit Suisse, so I have been using the BOIL and KOLD products, which offer double leverage on the long and short sides. The demise of UGAZ and DGAZ is likely to increase the volumes in the BOIL and KOLD products.

We are holding a long position in PBR, Petroleo Brasileiro SA. At $9.27 per share, PBR was 5.10% higher than on July 20. I have a small position that I will hold as a long-term investment. PBR had been weak on the back of the falling value of the Brazilian currency.

Demand continues to be the primary factor that will drive energy prices over the coming days and weeks. The recovery ran into a roadblock as the number of cases of the virus is climbing in the US. I remain more comfortable with the long side with tight stops because of the low price level of natural gas. Tight stops are key when approaching energy commodities in the futures or ETF arena. When it comes to share prices, I believe that the leading companies will eventually rebound, but it could take some time. Energy powers the world, and demand is critical throughout the rest of 2020. In 2021, US energy policy could change, which would impact the dynamics of the fundamental equation for fossil fuels. The upcoming November election could significantly impact the oil and gas markets in the US as it is the world’s leading producer of both energy commodities. The trends in energy commodities are mostly higher, but I would be cautious and use tight stops. A sudden drop in the US stock market could weigh on crude oil prices.

 

Grains 

Corn and soybean prices edged lower since July 20, but wheat posted a gain. We are now coming into the latter stages of the 2020 growing season as August is on the horizon.

New crop November soybean futures fell 1.64% since July 20 and was at $8.8525 per bushel on July 20. The $9 per bushel level had become a pivot point for the oilseed futures over the past weeks, but the price moved away from that level.

Tensions between the US and China continue to weigh on soybean prices. The weather conditions are becoming less of a factor now that the growing season has progressed. Open interest in the soybean futures market moved 1.74% higher since June 17. Price momentum and relative strength indicators fell below neutral territory on Wednesday. November beans reached a high of $9.1250 on July 6 but retraced back to below the $9 level.

The December synthetic soybean crush spread was 7.25 cents higher from the level on July 20 at 96.25 cents. The processing spread in December for new crop beans had been trending lower since reaching a peak at $1.1550 in early April. It hit a low of 81.25 cents on July 13 and reversed course, climbing back over 96 cents, which could be a bullish sign for the beans.

I continue to suggest tight stops on long risk positions and would be looking to take profits on rallies to move to a neutral risk position. I have tightened the risk parameters on long positions, as we are now close to the start of August. I took profits on a scale-up basis, leaving a minimal core long position in soybeans.

December corn was trading at $3.2625 per bushel on July 29, which was 2.83% lower since July 20. Open interest in the corn futures market rose by 6.18% since July 17.

Technical metrics were falling toward oversold readings in the corn futures market on the daily chart as of Wednesday. Support on December corn futures is at the $3.2200 level, on the December futures, $3 per bushel is a line in the sand on the downside. Long positions should have stops below $3 per bushel. Technical resistance is at $3.6300 per bushel, the July 1 high.

Corn will continue to be highly sensitive to the price path of gasoline. Ethanol production in the US accounts for approximately 30% of the annual corn crop.  The price of September ethanol futures moved higher since the previous report. September ethanol futures were at $1.1100 per gallon on July 29, down from the recent high at $1.3850 per gallon. The spread between September gasoline and September ethanol futures was at 10.32 cents per gallon on July 29, with gasoline at a premium to ethanol. The spread moved 2.79 cents since July 20 as gasoline underperformed the biofuel in September futures.  The prospects for corn prices are a function of gasoline and crude oil prices as we move towards the 2020 harvest period.

September CBOT wheat futures rose 2.06% since July 20. The September futures were trading $5.3275 level on July 29. Open interest decreased by 1.64% over the past week in CBOT wheat futures.

The support and resistance levels in September CBOT wheat futures now stand at $5.1700 and $5.5175 per bushel. Price momentum and relative strength were one either side of neutral conditions on Wednesday on the daily chart.

As of July 29, the KCBT-CBOT spread in September was trading at a 87.00 cents per bushel discount with KCBT lower than CBOT wheat futures in the September contracts. The spread was unchanged since July 20. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.” Any sudden problem in the wheat market that causes consumer hedging to increase could result in a dramatic change in the spread between the hard and soft winter wheat futures contracts.

I continue to hold minimal long core positions in futures and the CORN, WEAT, and SOYB ETF products. The further we move into the growing season without any significant price appreciation, I will trim position sizes during periods of price strength. As crops mature, they can withstand periods of adverse conditions. I continue to favor the long side but will be looking at the calendar as a time stop on positions is likely to be the optimal approach to controlling risk. Early August is a line in the sand for the 2020 crop year. I took profits on soybean, corn, and wheat positions during the recent rally. I will not be aggressive when it comes to buying back recent sales as the prices decline. I am in a holding pattern in the grain markets as we move into August.

 

Copper, Metals, and Minerals

Most base metals and industrial commodities turned in a mixed performance since the previous report.  Copper on COMEX and the LME were on either side of unchanged since the previous report. Aluminum, nickel, lead, zinc, and tin prices posted gains. Iron ore moved higher. The Baltic Dry Index and uranium prices fell, and lumber continued its move to the upside.

COMEX copper was 0.12% higher, with copper on the LME down 0.84%. Open interest in the COMEX futures contracts moved 5.58% higher. Short-term technical support for the copper market is at $2.7035 per pound. Resistance is at $2.9930, $2.9955, and $3.3220 per pound. Chinese demand and output from South American producers will continue to be the most significant factors when it comes to the path of the price of copper over the coming weeks and months. During the 2008 financial crisis, copper fell to a bottom of $1.2475 per pound. The decline came from over $4 per pound in early 2008. By 2011, the copper price rose to a new all-time high at just under $4.65 per pound. A massive level of stimulus is supportive of the price of copper and other commodities. Any events that cause the economy to shut down again or take a significant step back in social distancing easing could cause selling to return to all markets, and industrial commodities could fall sharply after the recent gains. Therefore, caution is advisable in copper, which can become extremely volatile during risk-off periods. The $3 per pound level is a critical psychological level for the red metal. We could see volatility increase as tensions between the US and China rise. Copper fell to just below the $2.06 per pound level during the height of risk-off conditions in March, but the price has come storming back. Falling output, Chinese demand, a weakening US dollar, and the record levels of stimulus have created a bullish trend in the red metal.

The LME lead price moved higher by 0.93% since July 20. The rise in demand for electric automobiles around the world had been supportive of lead in the long term as the metal is a requirement for batteries, but coronavirus had weighed on the price of lead because of falling fuel prices. Since late April, the prices of crude oil, gasoline, and lead moved higher. The price of nickel moved 1.54% higher over the past week. The export ban in Indonesia began on January 1, 2020 but has had little impact on the price of the nonferrous metal so far this year as coronavirus has been a far more significant factor for all of the base metals, including nickel. Elon Musk is encouraging nickel production as he issued a plea to “any mining company in the world to mine more nickel. The message could turn out to be a very bullish message for the volatile metal. Tin rose 3.58% since the previous report. Aluminum was 3.29% higher since the last report. The price of zinc posted a 0.66% gain since July 20. Zinc was at the $2215 per ton level on July 28. Nonferrous metals remained within their respective trading ranges over the past week.

September lumber futures continued to work higher and were at the $585.00 level, 9.92% higher since the previous report as the price of wood added to recent gains. The expired July contract traded to a high of $600, the highest price since 2018 when it peaked at $659 per 1,000 board feet. Interest rates in the US influence the price of lumber. Lumber can be a leading economic indicator, at times. Housing starts data for June in the US was bullish for the price of lumber, as is the potential for an infrastructure building project by the government in 2021. The price of uranium for August delivery fell 2.46% lower and was at $31.70 per pound. The world’s leading producer, Kazakhstan, had suspended production nationwide for three months to slow the spread of COVID-19 in March, which helped lift the price over the past months. However, uranium has been declining since its high in mid-April. The volatile Baltic Dry Index fell 26.08% since July 20 to the 1264 level as the recent rally came to an end. August iron ore futures were 0.1.56% higher compared to the price on July 20 after recent gains. Supply shortages of iron ore from Brazil have supported the price over the past year. Open interest in the thinly traded lumber futures market rose by 4.87% since the previous report after an 11% increase last week. The metric has been increasing with the price, typically a technical validation of a bullish trend in a futures market.

LME copper inventories moved 14.82% lower to 134,025 as of July 28. COMEX copper stocks rose by 0.87% from July 17 to 89,181 tons. Lead stockpiles on the LME exploded 86.59% higher as of July 28, which could weigh on the price of the metal. Aluminum stocks were 0.37% lower. Aluminum stocks fell to the 1,658,175-ton level on July 28. Zinc stocks increased by 41.34% since July 17. Tin inventories fell 0.26% since July 17 to 3,825 tons. Nickel inventories were 0.05% higher compared to the level on July 17. We witnessed some significant moves in stockpiles on the LME over the past week, but they did not result in any substantial price moves in the lead or zinc markets.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 21 cents on July 15, unchanged since the previous report. The details for the call option are here:

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

 

US Steel shares were at $7.74 per share and moved 2.11% higher since last week.

FXC was trading at $13.30 on Wednesday, 13.0 cents, or 0.97% lower since the previous report. I continue to maintain a long position in FCX shares. FCX tends to move higher and lower with the price of copper. I took profits on the lower priced long position on the open on July 21 at $13.51 per share for a profit of over 38.5%. I left a selling order to sell on the open. We had purchased those shares at $9.75 one year ago. I remain long the higher priced long position at $11.37 and will use a stop at that level to protect capital.

I remain cautious on the sector and have limited any activity to very short-term risk positions. Brewing tensions between the US and China could cause a return of risk-off conditions to the industrial metals and commodities as can any new outbreaks of Coronavirus over the coming weeks and months. Keep stops tight on all positions in this sector that is highly sensitive to macroeconomic trends. The price action is bullish, but many of the metals and other industrial commodities are approaching levels that could require more positive support when it comes to the global economy. In the medium to longer-term, the stimulus is bullish for industrial commodities.

We are long PICK, the metals and mining ETF product. We bought PICK at the $23.38 per share level, and it was trading at $27.31 on July 29, up 58.0 cents, or 2.17% for the week. I continue to rate this metals and mining ETF that holds shares in the leading producing companies in the world a long-term hold. I would add to the long position on price weakness over the coming weeks and months if another risk-off period occurs. Base metals and industrial commodities prices could continue to follow crude oil and stocks over the coming week.  The price action in the sector has been bullish, but the market’s upward momentum seems to have paused over the past two weeks. Copper is the leader of the pack, so keep an eye on the price action in the red metal over the coming week. A move above the $3 level would be a confirmation of the bullish trend.

 

Animal Proteins

Cattle and hog prices rolled from August to October futures in a sign that the end of the 2020 grilling season is on the horizon. The peak season of demand tends to end during the first week of September each year. Lean hogs edged higher over the past week but live and feeder cattle prices were on either side of unchanged.

 

October live cattle futures were at $1.060500 per pound level down 0.31% from July 20. Technical resistance is now at $1.07225 per pound. Technical support stands at $1.02650 per pound level. Price momentum and relative strength indicators were above neutral readings on Wednesday. Open interest in the live cattle futures market moved 2.79% higher since the last report. The disconnect between cattle prices in the futures market and consumer prices at the supermarket continues to create dislocations in the market. Beef and pork prices will be moving into the offseason over the coming weeks, but 2020 is anything but an ordinary year.

October feeder cattle futures outperformed live cattle as they rose by only 0.19% since July 20. October feeder cattle futures were trading at the $1.432500 per pound level with support at $1.40500 and resistance at $1.4448250 per pound level on July 29. Open interest in feeder cattle futures rose by 3.20% since last week, after recent increases in the metric. While live cattle futures have a delivery mechanism, feeder cattle are a cash-settled futures contract. Sometimes live cattle prices lead feeder cattle prices, while at others, the opposite occurs. Price momentum and relative strength metrics were also above neutral readings on Wednesday. Cattle futures markets continue to make higher lows and higher highs.

Lean hog futures posted a gain since the previous report. The October lean hogs were at 50.15 cents on July 29, which was 1.93% higher than the level in the previous report. Price momentum and the relative strength index were below neutral readings on July 29 on the October contract. Support is at 49.025 cents with technical resistance on the October futures contract at the 52.075 cents per pound level. The continuous contact low from April at 37 cents is critical technical support. The same issues impacting beef are present in the hog market with low prices at origination points and bottlenecks at processing plants causing consumer prices to rise and shortages to limit availability for customers. Hog futures could have more upside. Reports of severe pork shortages in China should support the demand side of the fundamental equation, but trade friction between the US and Chinese may exacerbate shortages in China and a continuation of the glut conditions in the United States.

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. This week, we shift the attention to the spread in the October contracts.

 Source: CQG

Based on settlement prices, the spread was at 2.11470:1 compared to 2.16210:1 in the previous report. The spread fell by 4.74 cents as live cattle underperformed lean hog futures since July 20. The spread fell to a low of 1.4638 in mid-March, which was still above the long-term average, making beef more expensive than pork. The spread narrowed over the past week but remains at a level that is substantially above the long-term average for the price relationship.

In the previous reports, I wrote, “The current low prices could give way to far higher levels in 2021 as producers adjust to the new price environment. After processing plants resume regular schedules in the eventual aftermath of the virus, shortages could develop. I believe that today’s low price levels will cause prices to rise next year, and consumers will face even higher levels at the supermarket. I am a buyer of cattle and hogs on price weakness and would only trade the beef and pork futures market from the long side over the coming weeks.” On June 15, October live cattle futures put in a bullish reversal pattern on the daily chart. I continue to believe that prices will head higher, with the most significant moves to the upside developing in 2021. I will be a buyer of cattle and hog futures on price weakness.

 

Soft Commodities

The cotton and FCOJ prices moved lower since July 20. Coffee was the star performer, as it staged an over 11.8% comeback from below $1 per pound. Cocoa and sugar prices posted gains since the previous report.

October sugar futures rose by 2.47% since July 20, with the price settling at 12.01 on July 29. The price of the sweet commodity fell to a new multiyear low at 9.05 cents per pound on the May contract on April 28. Technical resistance on October futures is at 12.40 cents with support now at the recent low of 11.27 cents on active month futures. Sugar made a new high at 15.90 cents on February 12 on the continuous contract, but the price collapsed on the back of risk-off conditions. The decline in the price of crude oil and ethanol in April weighed on sugar as the primary ingredient in ethanol in Brazil is sugarcane. The recovery in the oil market provided support for the price of sugar. Weakness in the Brazilian currency reduces production costs and had been a bearish factor for the sugar market.

The value of the September Brazilian real against the US dollar was at the $0.193300 against the US dollar on Wednesday, 3.23% higher over the period. The September real traded to a new low of $0.16780 on May 13. The Brazilian currency had been making lower lows as coronavirus weighed heavily on all emerging markets. Anyone with a risk position in sugar should keep an eye on the price action in the Brazilian real.

Meanwhile, Brazil has become a hotspot of the global pandemic, which could lead to supply chain problems for sugar, coffee, and oranges, as well as the other commodities produced by South America’s most populous nation and leading economy. Over the past week, coffee and FCOJ moved higher, but sugar declined.

Price momentum and relative strength on the daily sugar chart were above neutral readings as of July 20. The metrics on the monthly chart were below a neutral reading, as was the quarterly chart. Sugar made a new high above its 2019 peak in February before correcting to the downside. The low at 9.05 was the lowest price for sugar since way back in 2007. In 2007, the price of sugar fell to a low of 8.36 cents before the price exploded to over 36 cents per pound in 2011. At that time, a secular rally in commodity prices helped push the sweet commodity to the highest price since 1980. If the central bank and government stimulus result in inflationary pressures, we could see a repeat performance in the price action in the commodities asset class that followed the 2008 financial crisis. Sugar could become a lot sweeter when it comes to the price of the soft commodity in a secular bull market caused by a decrease in the purchasing power of currencies around the world. The price action in sugar over the past weeks reflects the recovery in crude oil and gasoline prices as ethanol rebounded. Sugar is the primary ingredient in ethanol in Brazil. The bounce in the Brazilian real provided some support for the sweet commodity. Meanwhile, the lockdowns have weighed on demand, which could eventually cause production to decline.

In February, risk-off conditions stopped the rally dead in its tracks on the upside. Sugar found at least a temporary bottom at a lower low of 9.05 cents per pound. Open interest in sugar futures was 0.61% higher since last week. Sugar had rallied to new highs as drought conditions in Thailand created the supply concerns that lifted the price of sugar futures in late 2019 and early 2020. The correction in sympathy with the risk-off conditions in markets across all asset classes chased any speculative longs from the market. The long-term support level for the sweet commodity is now at 9.05 and 8.36 cents per pound. Without any specific fundamental input, sugar is likely to follow moves in the energy sector as well as the currency market when it comes to the exchange rate between the US dollar and the Brazilian real. Over the longer term, the cure for low prices in a commodity market is low prices as production declines, inventories fall, demand rises, and prices recover. We may have seen the start of a significant recovery in the sugar market after the most recent low. Over the past weeks, the price traded on either side of the 12 cents per pound level. The 12 cents level is now a pivot point as the price of sugar consolidates.

September coffee futures moved 11.88% to the upside since July 20. September futures were trading at the $1.11600 per pound level. The technical level on the downside is at 96.30 cents on the September futures contract. Below there, support is at around 92.70 and 86.35 cents on the continuous futures contract, the bottom from 2019. Short-term resistance moved higher to $1.14150 on the active month contract. I continue to favor coffee on the long side, but coffee can be a highly volatile commodity in the futures market, as we have witnessed over the past weeks and months. Our stop on the long position in JO is at $27.99. JO was trading at $34.60 on Wednesday. Open interest in the coffee futures market was 0.72% higher since last week. I continue to hold a small core long position after adding to my long position over the past weeks when the price fell below the $1 per pound level. I will be taking profits on a scale-up basis but will continue to hold a core long position.

The ultimate upside target is the November 2016, high at $1.76 per pound. Price momentum and relative strength were heading for overbought territory on Wednesday. On the monthly chart, the price action was below neutral, but turning higher. The quarterly picture was also below a neutral condition but was also turning higher. Coffee can be a wild bucking bronco when it comes to the price volatility of the soft commodity. Bottlenecks on South American ports could prove highly supportive of coffee prices as they could create a shortage of the beans. I expect volatility in coffee to continue, and I will look to trade on a short-term basis with a bias to the long side. Any new positions should have tight stops and defined profit objectives.

The price of cocoa futures moved higher since July 20. On Wednesday, September cocoa futures were at the $2341 per ton level, 5.50% higher than on July 20. Open interest fell by 0.38% over the past week. Relative strength and price momentum were heading for overbought readings on July 29. The price of cocoa futures rose to a new peak and the highest price since September 2016 at $2998 per ton on the March contract on February 13. Risk-off conditions pushed the price of cocoa beans lower, but they bounced after reaching a low that was $7 above the technical support level on the weekly chart. Cocoa had been falling since early June. The soft commodity put in a bullish reversal on July 20. We are long the NIB ETN product. NIB closed at $28.10 on Wednesday, July 29. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their cocoa exports, it should provide support to the cocoa market. The levels to watch on the upside is now at $2397, $2475, $2509, and at the mid-March high of $2618 per ton on the September contract on the daily chart. On the downside, technical support is at $2115 per ton on the September contract.

The potential for coronavirus to disrupt production in West Africa is high, which could lead to shortages of beans over the coming months. The health systems in producing countries like the Ivory Coast, Ghana, Nigeria, and others are not sufficient to treat patients or prevent the spread of the virus. Africa could suffer tragic consequences over the coming weeks and months. The flow of cocoa beans to the world could suffer as bottlenecks at ports could reduce exports. African farmers are suffering from financial woes with the low price of cocoa beans and the coronavirus. I continue to favor the long side in cocoa but will be cautious in the deflationary environment in markets. Nothing has changed since last week. I continue to view the price action in the cocoa futures market as a buying opportunity. I would leave wide buying scales in the cocoa futures market or in the NIB product.

December cotton futures corrected lower by 2.02% since July 20. December cotton futures had been making higher lows and higher highs since reaching a low of 50.18 cents in early April.  The correction on July 24 on higher than average volume was a sign that cotton may continue to decline. December cotton was trading at 61.61 cents on Wednesday, after falling to the lowest price since 2009 in early April when the continuous contract reached 48.35 cents per pound. On the downside, support is at 59.51, 52.15 cents, and then at 48.35 cents per pound. Resistance stands at the 64.90 cents per pound level. Open interest in the cotton futures market fell by 1.06% since July 17. Daily price momentum and relative strength metrics were below neutral territory on Wednesday. I had been optimistic about the prospects for the price of cotton since the 50 cents per pound level, but the risk rises with the price. Cotton needs to hold above the 57.75 cents level to keep the bullish pattern of higher lows and higher highs intact. I would continue to use tight stops on any long positions and a reward-risk ratio of at least 2:1. Cotton remains at an attractive price level, but the fundamentals remain problematic. The China-US issues are not a bullish factor for the price of the fiber. The move above 60 cents for the first time since March was constructive for the fiber futures, and it followed through on the upside. However, the fiber futures gave up a significant portion of the gains on July 24. Optimism in the economy could lead to more garment purchases, which supports the demand for cotton. Remember that cotton suffered selling pressure in 2008 that pushed the price to below 40 cents per pound. A decline in production and stimulative policies by central banks took cotton from the bottom end of its pricing cycle twelve years ago to an all-time high of $2.27 per pound in 2011. Cotton remained a lot closer to the low end of its pricing cycle on July 20.

September FCOJ futures moved higher since July 20. On Wednesday, the price of September futures was trading around $1.2205 per pound, 0.85% below the price on July 20. Support is at the $1.18750 level. Technical resistance is at $1.3200 per pound. Open interest fell by 0.41% since July 17. The Brazilian currency could eventually turn out to be bullish for the FCOJ futures, and bottlenecks at the ports could create volatility. FCOJ broke out to the upside in May and June, but the price stopped short of challenging the technical resistance at $1.32 per pound.

Coffee has had another bounce after probing below the $1 per pound level. Sugar remains at the 12 cents level. Cocoa remains at an inexpensive price along with cotton, but both soft commodities could continue to feel the demand impact of the global pandemic. OJ is sitting a lot closer to the recent high than at levels since in March. Soft commodities can be highly volatile markets. The decline in the US dollar is a bullish factor for all members of the sector.

 

A final note

My surgery last week was an eye-opening experience. After the initial pain, I am feeling a bit better each day. Sitting is a challenge, so standing and writing is the only choice for the coming weeks.

We should continue to expect volatility in markets across all asset classes. Keep those stops tight, take profits when they are on the table, and be selective when it comes to trading and investment risk positions. I would not be surprised to see another downdraft in the stock market. I remain bullish on commodities as the US Fed, and central banks of the world have set the stage for inflationary pressures. I continue to believe that 2008 through 2012 will be a model for 2020 and the coming years. Precious metals are running higher, remember to take some profits. I remain bullish and expect much higher prices. However, the risk of corrections increases with price levels. The falling dollar is bullish for the commodity asset class.

 

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

 

Please keep safe and healthy in this environment.

 

Until next week,

 

Andy Hecht

 

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

 

 

 

 

 

 

 

 

Andy Hecht

Author

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