Hecht Commodity Report

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  • The stock market comes roaring back in the face of troublesome economic data
  • Precious metals rise with an explosive move in platinum group metals and silver
  • Energy commodities move higher across the board
  • Industrial commodities move higher on optimism
  • Most agricultural commodities stabilize, and many move higher

 

Summary and highlights:

On Thursday, May 14, stocks moved higher after losses on Tuesday and Wednesday. The news that 2.98 million more Americans applied for first-time unemployment benefits did not cause stocks to continue lower. Over 36 million people in the US have lost jobs since March. The DJIA was 1.62% higher, the S&P 500 was 1.15%, and NASDAQ gained 0.91% on Thursday. The Russell 2000 was 0.35% higher on the session. US 30-Year bonds in June were 0-31 higher to 181-20, while the June dollar index futures contract climbed 0.216 to 100.507. Corn edged 0.75 cents lower, and July soybeans fell 2.5 cents per bushel. July wheat was only 0.50 cents higher. June crude oil gained $2.27 per barrel to settle at $27.56 with the July futures at $27.88. gasoline and heating oil futures were higher, outperformed crude oil, and pushed crack spreads higher on the day. Natural gas recovered to just under the $1.70 per MMBtu level after the EIA reported that stockpiles rose by 103 bcf for the week ending on May 8. Gold and silver posted significant gains of $24.50 and 48.5 cents per ounce, respectively. July copper was unchanged at $2.3640. Platinum and palladium posted marginal gains of $5.20 and $7.20 per ounce, respectively. June live cattle were marginally higher, while August feeder cattle fell a little over two cents per pound. June lean hogs were up 0.875 cents to 58.75 cents per pound. Cocoa fell, but cotton, FCOJ, coffee, sugar, and lumber prices all posted gains. Bitcoin moved $455 higher to $9725 per token as the digital currency looked ready for another challenge of the $10,000 level.

On Friday, stocks moved higher despite ugly industrial production numbers that showed an 11.2% decline in April led by a record plunge in manufacturing. The DJIA rose 0.25%, with the S&P 500 gained 0.39%. The NASDAQ was 0.79% higher, and the Russell 2000 moved 1.57% to the upside. The June long bond fell 0-26 to 180-26, while the June dollar index edged only 0.073 lower to 100.434. Corn and soybeans were 1.75 and 1.50 cents per bushel higher, but July CBOT wheat fell 2 cents. Crude oil was $1.64 higher on the now active month July contract to settle at $29.52. July gasoline and heating oil futures moved higher. Gasoline crack spreads were around the $11.68 level, but heating oil processing spreads fell below the $10 per barrel level. Natural gas was lower to settle at $1.646, but ethanol in July rose only 0.2 cents to $1.067 per gallon. Gold was $15.40 higher to $1756.30, but silver exploded to the upside to settle at over $17 with an over 90 cents per ounce gain on the session. Platinum was $42.1 higher as the price was over $815, and palladium moved almost $60 to the upside to just under $1860 per ounce. Copper fell 1.55 cents to $2.3305. June live cattle were up by a little under three cents to 97 cents per pound. August feeder cattle edged 0.025 cents higher to $1.31075, but June lean hogs fell 0.875 cents to 57.875 cents. Sugar and cocoa prices edged lower on the final session of the week. Cotton, FCOJ, coffee, and lumber posted gains. Bitcoin fell $330 to $9395 per token.

On Monday, the stock market moved significantly higher on news that Moderna, the pharmaceutical giant, is testing a vaccine for Coronavirus that is showing promising results. Over the weekend, an interview with Fed Chairman Powell on CBS’s 60 Minutes provided the markets with more reason to move higher. The Chairman said the central bank is ready to do whatever is necessary to support the US economy. The DJIA moved over 900 points higher on the first session of the week and settled up 3.85%. The S&P 500 was up 3.15%, with the NASDAQ posting a 2.44% gain. The Russell 2000 was the leader as the small-cap index moved 6.10% to the upside. The VIX fell as stocks rallied. The volatility index was at the 29.30 level. US 30-Year Treasury bonds fell 2-12 to 178-18, and the dollar index fell below the 100 level to settle at 99.681. Corn and soybean prices edged higher, but wheat moved below the $5.00 per bushel level as the grain fell 3.25 cents on May 18. Crude oil continued on its path higher. June and July NYMEX futures settled at $31.82 and $31.65 per barrel, respectively. Heating oil and gasoline both moved higher and over the $1 per gallon level on June and July futures for the first time since March in gasoline and April in the distillate. Natural gas posted a significant gain with the price of June futures settling at $1.783, up almost 14 cents on the session. Ethanol also moved higher to round out a bullish day in the energy sector. Gold traded up to a high of $1775.80 and then turned lower as the yellow metal put in a bearish reversal on the daily chart. Silver settled at just under the $17.50 level, up around 40 cents on the daily. Platinum and palladium also moved higher, with the prices gaining $52.20 and $169.20 per ounce, respectively. Copper was higher by 7.35 cents as the July contract settled at $2.4040 per pound. June live cattle and August feeder cattle futures rallied, but June lean hog futures edged lower on the session. Cotton edged lower, cocoa was unchanged, but FCOH, coffee, sugar, and lumber all finished Monday with gains. Bitcoin was around $310 higher to $9705 per token.

On Tuesday, stocks fell after Monday’s rally, but the losses were less than the previous day’s gain. The DJIA was 1.59% lower, with the S&P 500 falling 1.05%. The tech-heavy NASDAQ was the best-performing index with a loss of 0.54%, while the small-cap Russell 2000 was the worst as it declined 1.95%. The June US 30-Year long bond futures contract was 0-30 higher to 179-03. The dollar index in June fell 0.315 to 99.366. Corn was only 0.50 higher, but soybean futures in July fell 2.5 cents per bushel. July CBOT wheat was up 1.75 cents but remained below the $5 per bushel level. July NYMEX crude oil moved marginally higher, while Brent futures posted a minor loss on the session. Gasoline and heating oil futures in July moved in opposite directions, leading to strength in the gasoline crack and weakness in the distillate refining spread. Natural gas was a touch higher, with the June contract settling at over $1.80 per MMBtu. Gold and silver prices moved to the upside along with platinum and palladium. Platinum was near the $900 level with palladium back over $2000 per ounce. June live cattle posted a marginal gain, but August feeder cattle eased lower. June lean hogs were down one cent per pound to 56.65 cents. Coffee was a bit lower, but cotton, FCOJ, sugar, cocoa, and lumber futures all moved higher. Housing data reflected the overall bearish conditions in the economy, but that did not stop the shares of homebuilding companies and the price of wood from moving higher on the session. Bitcoin was $65 lower at $9680 per token as the $10,000 resistance level continues to be just above the market.

On Wednesday, the Fed released the minutes from its last meeting. The central bank is ready to use all of its tools to continue to provide stability to markets. The minutes said the downturn in the economy is unprecedented. Members of the committee expressed pessimism that some business models will no longer be viable in the post-pandemic environment. They discussed more transparency when it comes to providing future guidance, outlining date or event-based monetary policy, and capping interest rates further along the yield curve. While the stock market and other assets have rallied, the Fed remains concerned over the potential for secondary outbreaks of COVID-19. On Friday, Argentina is likely to default on its debt, which could have consequences for US and other financial institutions. The DJIA rallied 1.52% on Wednesday, with the S&P 500 up 1.67%. NASDAQ moved 2.08% higher, and the Russell 2000 posted a 2.93% gain. US 30-Year Treasury bond futures in June were 0-24 higher to 179-12. The June dollar index fell to the 99.135 level. Corn edged lower, but July soybeans gained 4.25 cents, while CBOT wheat bounce 15 cents per bushel after recent losses. The price of wheat moved back over the $5 per bushel level. Crude oil and production were higher, but gasoline lagged heating oil. Both the gasoline and distillate crack spreads fell on the session. Natural gas was lower by around 6 cents per MMBtu to below the $1.80 level. Ethanol declined. All precious metals moved higher, with the PGMs leading the way on the upside. Platinum moved over $930, palladium was at just below $2160, and silver closed north of $18 per ounce. Gold was above the $1750 level on the June futures contract. Live and feeder cattle futures fell, but lean hogs in June posted a marginal gain. Sugar and lumber prices were higher, but cotton, FCOJ, coffee, and cocoa declined. Bitcoin was around $120 lower to the $9560 level.

 

Weekly Spreadsheet:

Copy of Spreadsheets for the The Hecht Commodity Report May 20, 2020

 

Stocks and Bonds

The economic data keeps getting worse, and that trend is likely to continue for the foreseeable future. Last week, another three million people applied for first-time unemployment benefits, bringing the total to over a staggering 36 million. At the end of last week, industrial production figures were ugly, with a double-digit percentage loss in April. Markets thrive in sentiment; they digest the expected and react, often violently, to the unexpected. When it comes to the US stock market, expectations are for horrendous data, and the markets have not been disappointed. The unending tidal wave of liquidity from the US Fed and government stimulus in the trillions have created a mirage in the stock market as share prices seem almost immune from the Coronavirus’s financial impact on the US and the rest of the world. Time will tell if share prices can continue to hold up in an environment where a recession is a given. A depression could better characterize the coming months and perhaps years. The leading stock market indices posted gains over the past week in an environment that seems almost detached from reality. Optimism over a vaccine lifted the equity markets, and the Fed’s willingness to do everything possible to stabilize markets has been bullish fuel for the stock market. However, with over 36 million people unemployment the division of wealth is a clear and present danger for all markets. The bottom line is that the stock market is moving back to the highs, but economic indicators, corporate earnings, and consumer behavior do not reflect the rise in share prices.

The S&P 500 rose by 5.38% since last week. The NASDAQ was 5.78% higher, and the DJIA posted a 5.71% gain.

Optimism and stimulus are holding markets up, with parts of the US economy slowly coming back on stream. However, any increase in the number of cases that cause further shutdowns could burst the optimistic bubble in the blink of an eye. The stock market’s action is proof that sentiment is far more significant than fundamentals when it comes to the prospects for earnings and the overall economic landscape in the US and around the world. Job losses of 36 million in only two months amounts to around 10% of the total population of the US. The stock market is ignoring that data as the stimulus continues to fuel its performance. I am very cautious in the current environment and expect that we could see another severe downdraft with little warning when the balance tips to the dark side on sentiment. The tipping point could come from brewing tensions between the US and China.

Chinese stocks underperformed US stocks over the past week. The rhetoric between Washington DC and Beijing seems to be rising again. Accusations that China has been far from forthcoming at the start of the pandemic or with its reporting on the number of cases and deaths have caused a rift to widen. The Trump administration in the US, and other countries in the world are blaming China for the pandemic. Many are beginning to talk about seeking monetary compensation from the Chinese government. As China has investments around the globe, we could see unprecedented actions to punish the world’s most populous nation over the coming weeks and months. The Chinese government will not likely sit back and accept any punishment. We could see a new period of tensions with far more consequences than during the trade war in 2018 and 2019. The issue is dividing the political parties in the US as we head into the November Presidential election. The leading ETF that reflects the Chinese stock market posted a loss while US stocks moved higher since last week.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $39.61 level on Wednesday, as it rose by 2.43% since the previous report. We could see lots of volatility in Chinese stocks on the back of the news cycle over the coming weeks.

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

Optimism in the stock market is a function of the put option the Fed and other central banks installed under the bond market. Rates are not going significantly higher anytime soon, given the economic data. Data drive the Fed’s decision-making policy. On Wednesday, May 20, the June long bond futures contract was at the 179-12 level, 0.66% lower than on May 13. Short-term support for the long bond at 177-26 with resistance at 182-15. The bonds were close to the middle of the trading range, given the strength in stock prices.

Open interest in the E-Mini S&P 500 futures contracts fell by 1.11% since May 12. Open interest in the long bond futures rose 2.20% over the past week. The VIX moved lower to the 27.93 level on May 20, 20.22% lower from last week’s level. The VIX traded to a high of 85.47 on March 18, the highest level since 2008. I continue to believe that risk-reward favors buying the VIX and VIX-related products with tight stops and reestablishing positions after the market triggers stops is the optimal approach in the current environment. Nothing has altered my approach to the VIX over the past week.

At below 30, the VIX is attractive and could experience periods of sudden dramatic increases. The VIX related products like VIXX and VIXY are short-term, trading tools. I continue to look for at least a 2:1 reward over risk on any long positions in the VIX or VIX-related products. Over the past week, I stopped out of a few long positions in the VIX with minimal losses, but I will continue to trade the volatility index from the long side over the coming week.

The markets are holding their collective breath for information on the number of Coronavirus infections in states that have eased social distancing guidelines. At the same time, the increase in testing will provide insight into the true mortality rate of the virus. Any sudden outbreaks that cause other shutdowns over the coming weeks could weigh on the stock market as it would be horrible news for the overall economy. Keep an eye out for the impact of a default by Argentina on its debt on Friday as it could cause some volatility in markets. Meanwhile, as businesses begin to reopen, optimism may continue to provide an upward bias to stocks. The stock market is taking the stairs higher. Another elevator shaft ride to the downside remains a clear and present danger during these uncertain times. We will find out soon if the stock market is a mirage or it reflects the end of the pandemic. The economic data is more than worrying, given the number of unemployed and companies planning to do more with less in the months, and perhaps years, ahead.

 

The dollar and digital currencies

The dollar index moved back below the 100 level over the past week, but the century mark remains a pivot point for the index. Bitcoin recovered from the previous week after the digital currency ran into resistance at the $10,000 level. The currency markets continued to trade in a range reflecting the likelihood of government intervention to foster stability in exchange rates.

The June dollar index future contract was at 99.315 on May 20, down 1.16% from the level on May 13. The dollar index has been trading on either side of the 100 level since late March. Stability in the foreign exchange arena is critical during challenging periods. Open interest in the dollar index futures contract moved 1.14% higher since May 12. The dollar index has been trending higher since 2018. The 100 level has been a consolidation area. Daily historical volatility in the dollar index rose to over 21.5% in late March but was at 5.52% on Wednesday, which reflects a narrow trading range in the greenback against other leading world currency instruments.

The euro currency was 1.57% higher against the dollar. Europe’s economy went into the crisis in worse shape than the US, but intervention could be holding the two foreign exchange instruments in a tight band to provide stability. The pound moved 0.08% higher against the dollar since last week. The pound faces both the virus and a total reorganization of its economy after the UK’s official departure from the UK in late January. The euro accounts for almost 58% of the dollar index, so the European currency is the most significant factor when it comes to the path of least resistance of the index. Both the dollar and euro have gone nowhere fast over the recent weeks as Europe and the US remain the regions of the world most impacted by Coronavirus. While President Trump continues to advocate for negative interest rates in the US, the Fed has told markets it has no intention to push the Fed Funds rate below zero. The Fed’s position on a sub-zero Fed Funds rate could be providing support for the US dollar. The Trump administration would prefer a weaker US currency.

Coronavirus data is robust in the US and Europe as testing is increasing. However, in lesser developed parts of the world, the data is suspect as the healthcare systems and government infrastructure cannot keep up with the pandemic or is unwilling to collect data. The virus does not discriminate when it comes to borders, so we should assume that it is taking a far greater toll on countries in South America, Africa, and other parts of the world that do not have the same access to medical technology. Many of these regions produce commodities that consumers all over the world require. Therefore, the virus is likely to have a continuing impact on production and logistics that could add volatility to raw material prices.

 

Bitcoin and the digital currency asset class moved higher over the past week. Bitcoin was trading at the $9,531.56 level as of May 20, after failing at the $10,000 level recently and falling back to $8200. Bitcoin rose 5.07% since last week. Ethereum posted a 7.02% gain since May 13. Ethereum was at $209.76 per token on Wednesday. The market cap of the entire asset class moved 5.84% higher over the past week. Bitcoin underperformed the whole asset class since the previous report. The number of tokens increased by 29 to 5493 tokens since May 13. 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 $262.263 billion, up 7.02% since the prior report. Open interest in the CME Bitcoin futures rose 5.07% since last week, after rising by over 20% in two consecutive weeks. As I wrote over the past month, “I continue to believe that Bitcoin will attract buying during periods of price weakness but would only dip a toe into the market on the long side with a very tight stop. I would rather trade from long than short in the digital currencies. In a germophobic world, the attraction of digital currencies is likely to rise. Other factors that could support digital currencies are a rise of germaphobia, the stops people from holding cash, and the falling value of all foreign exchange instruments on the back of massive stimulus measures from central banks.” I continue to favor the long side of the leading cryptocurrencies. I would only approach the digital currencies with tight and trailing stops because of the potential for massive volatility in these assets. The risk of a correction rises with the price of the digital currency.

Meanwhile, the rise in open interest during the bullish trend is a supportive technical factor for the cryptocurrency. Bitcoin rose to my first target at the $10,000 level and corrected. The next level on the upside stands at $11,005. The trend is your friend in Bitcoin, and it remains higher. Bitcoin’s role as a hedge against inflation received a considerable boost of support from Paul Tudor Jones two weeks ago, as many market participants are likely to follow his lead. However, risk-off conditions could cause a rocky ride in the digital currency, as we have witnessed with the move from $10,000 to just over $8000. I expect higher highs, but we may not see a significant move higher until the price climbs above technical resistance at just below the $14,000 level

The Canadian dollar moved 1.55% higher since May 13. Open interest in C$ futures rose by 8.01% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that produces significant quantities of energy and agricultural products. Keep an eye on the oil futures market for clues about the Canadian dollar as it often acts as a proxy for the price of the energy commodity. Weakness in grain prices is not helping the value of the Canadian currency. Meanwhile, the recovery in crude oil is supportive of the looney.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ moved 2.50% higher since last week. The geographical proximity to China makes the Australian dollar sensitive to events in China. Australia has experienced an outbreak of the virus, but the government has sealed the nation and instituted some of the most severe social distancing regulations in the world. The A$ is a proxy for both China and raw material prices. I would be cautious with any positions on the long or short side of the A$ given the potential for volatility in the current conditions. Economic strength or weakness in China will determine the path of the Australian economy. Any retribution over the spread of Coronavirus could cause retaliatory measures by both sides, which would weigh on Australia’s economy. In the long-term, the stimulus is bullish for commodities prices and both the Australian and Canadian currencies. The brewing tensions with China are a reason to be cautious with the Australian currency.

The British pound rose buy 0.08% since May 13. The UK faces challenges after its divorce from the EU, but the move may have insulated the nation from the massive price tag for Coronavirus in Europe. The UK has also experienced more than its fair share of cases, but members of the EU will be sharing the costs of the toll the virus has taken on Spain, Italy, and France while the UK is on its own after Brexit. The pound remains at a depressed level against the US dollar, and there is room for a recovery if the pandemic continues to ease over the coming weeks.

Over the past week, the Brazilian real recovered by 4.39% higher against the US dollar after making new lows over the past weeks. The real was back above the $0.1700 level against the US dollar. The June Brazilian currency was trading at the $0.175900 level after falling to a new and lower low at $0.16730 on May 14. The real is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets could move higher or lower with any significant changes in the direction of the Brazilian real over the coming weeks. The falling real had been a factor that weighed on sugar and coffee prices as Brazil is the world’s leading producer and exporter of the soft commodities and output costs are in local currency terms over the past weeks along with crude oil. However, as we have seen in other markets, low prices may not stop shortages of supplies as the virus impacts parts of the supply chain when it comes to processing or transporting the commodities. The weather conditions in critical growing regions, as well as the spread of the virus, could also cause price volatility in the agricultural products. The Brazilian currency reached a high at over $0.65 against the dollar in 2011 when commodity prices rallied to multiyear highs. A bull market in commodities could end the bearish trend in the Brazilian currency as higher raw material prices increase commercial and tax revenues in South America’s leading economy. An Argentine default at the end of this week could cause some contagion in neighboring Brazil.

Currencies have been quiet. The US dollar should be higher against other world currencies, but the management of the foreign exchange market is likely preventing a move to challenge the May high at almost 104 on the dollar index. I expect the dollar index to remain in a range around the 100 level over the coming weeks in the current environment, despite the decline to the 99 level on Wednesday.

 

Precious metals prices moved higher across the board over the past week with silver posting an impressive gain. Platinum and palladium also moved higher, and gold continues to consolidate. The unprecedented level of stimulus and the expansion of the money supply is bullish for gold and silver prices.

 

Precious Metals

Gold and silver moved higher over the past week, with silver leading the way on the upside for the second consecutive week. Platinum and palladium prices exploded to the upside. Silver, platinum, and palladium all posted over 15% gains on the week. Gold was sitting over the $1750 level with silver over $18 on the July contract. Platinum was just south of $935, and palladium was just below the $2160 per ounce level. The illiquid rhodium market moved higher since May 13.

Last week I wrote, “I see many similarities developing between 2008 and 2020 in the gold and silver markets. The initial risk-off period in 2008 took the price of gold to a low of $681 and silver to $8.40 per ounce. In mid-March, gold dropped to the $1450 level, and silver fell its lowest price since 2009 at $11.74. By 2011, the prices reached $1920.70 and $49.82, respectively. The stimulus moves in open interest, and trading patterns over the past weeks could be highly bullish signs for the gold and silver markets over the coming months and years if history from twelve years ago repeats.”  I believe gold and silver prices are on a path to higher highs.

Gold rose by 2.08% over the past week. Silver was 15.06% higher since May 13. June gold futures were at $1752.10 per ounce level on Wednesday. July silver was at $18.031 per ounce on May 20. 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.

Technical resistance for June gold stands at $1788.80 per ounce, the recent high. Support is at $1666.20. In silver, support is at $14.715, with resistance now at $19.075 on the July contract. If the price action from 2008 through 2011 is a guide, gold will head for the $2000 to $3000 per ounce level over the coming months, and silver will follow the yellow metal to the upside. Silver’s move over the past week is a bullish sign for the two metals. Silver tends to move on sentiment, which has turned bullish.

Gold mining shares moved higher over the past week with the GDX and GDXJ, both posting 7.42% and 13.43%, respective gains, which is supportive of the price of the precious metal. The SIL and SILJ silver mining ETF products that hold portfolios of producing companies moved 16.22% higher and 28.06% higher since May 13, which outperformed the bullish price action in the silver futures market.

Gold underperformed silver over the past two weeks, which tends to be a bullish sign for both metals. The silver-gold ratio reached a new modern-day high as risk-off selling hit the silver market, taking the price below the $12 per ounce level. I will continue to add to long physical positions in gold, silver, and platinum, during periods of price weakness. I will continue to trade leveraged derivatives and mining stocks on a short-term basis with tight stops. While gold mining stocks and derivatives follow the price of gold, they are not the metal and could experience significant periods of price deviation if risk-off conditions return to the stock market. However, the action in the mining shares has been decidedly bullish for the gold and silver markets.

July platinum rose 21.40% since the previous report.  Platinum had been a laggard in the precious metals sector in 2020. July futures moved to the $934.50 per ounce level on May 20. The level of technical resistance is at $1026 on the July futures contract. Support in platinum is currently at $767.50 per ounce, the most recent low in the nearby futures contract. Rhodium is a byproduct of platinum, and the price of the metal had been in a bull market since early 2016. The price of rhodium was at a midpoint price of $6,900 per ounce on May 20, up $900 or 15% over the past week. Palladium rose 20.59% since last week. The price traded to a new peak at $2815.50 on February 27 on the nearby futures contract. June palladium settled at the $2159.40 per ounce level on Wednesday.

Open interest in the gold futures market moved 6.34% higher over the past week. The metric moved 3.42% higher in platinum after significant declines in recent weeks as longs exited positions. The total number of open long and short positions decreased by 3.17% in the palladium futures market after substantial declines. Silver open interest increased by 10.47% over the period after significant decreases since March. Silver moved to the upside above multiple levels of short-term technical resistance over the past week, which is a positive sign for both gold and silver.

The silver-gold ratio moved significantly lower over the past week.

Source: CQG

The daily chart of the price of June gold divided by July silver futures shows that the ratio was at 96.95 on Wednesday, down 12.40 from the level on May 13. The ratio traded to over the 124:4 level on the high on March 18. The long-term average for the price relationship is around the 55:1 level. The ratio rose to the highest level since futures began trading in 1974 as the price of silver tanked recently. The move lower since mid-March has been a supportive factor for the two metals. In 2008, the ratio peaked during the risk-off selling and then fell steadily until 2011.

Platinum and palladium prices posted substantial gains over the past week. June Palladium was trading at a premium over July platinum with the differential at the $1224.90 per ounce level on Wednesday, which widened since the last report. July platinum was trading at a $817.60 discount to June gold at the settlement prices on May 20, which narrowed since the previous report.

The price of rhodium, which does not trade on the futures market, was at the $6,900 per ounce level on Wednesday, up $900 on the week. Rhodium is a byproduct of platinum production. The low price of platinum caused a decline in output in South African mines, creating a shortage in the rhodium market that lifted the price to the $13,000 level before risk-off conditions caused the price to evaporate to $2,000. Rhodium has been highly volatile over the past weeks after reaching its peak. The price moved higher from a low at $575 per ounce in 2016. The bid-offer spread in Rhodium remains at the $3000 per ounce level, unchanged from previous weeks. Illiquid markets can become untradeable. The price action in rhodium is somewhat like what has been going on with some illiquid issues in the bond market these days. The Fed is providing a backstop to eliminate the lack of liquidity, but in rhodium, there is no backstop. Rhodium is an untradeable commodity, but it can provide clues about the price path of the other PGMs.

I continue to favor buying physical platinum as well as gold and silver during 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 $934.50 per ounce, a contract on NYMEX has a value of $46,725, after falling to the lowest level just under two decades in March.

The GLTR ETF product holds a portfolio of physical gold, silver, platinum, and palladium, for those looking for diversified precious metals exposure. I continue to believe that gold is heading a lot higher, but the route will not be in a straight line. Silver’s performance since mid-March has been a sign of demand for precious metals in the current environment. The price rose from below $12 to over $18 in two months. Silver can exhibit wild price volatility, as we witnessed between February and March when the price fell from over $19 to below $12 per ounce. As I said in a recent interview on Kitco, I prefer gold as a long-term investment, but silver is my choice when it comes to a trading sardine. I am bullish on both metals over the coming weeks. When it comes to platinum and palladium, we could also see higher prices. However, I would keep stops tight on all short-term positions in the current environment as markets are far from stable.

 

Energy Commodities

Prices for all energy commodities rose over the past week. Even Rotterdam coal and ethanol moved a bit higher since last week. Brent and WTI crude oil futures, oil products, crack spreads, and natural gas all posted impressive percentage gains since the previous report. The expiration of the June futures contract on NYMEX was not a repeat performance from April 20. The price of the nearby oil futures contract moved over the $30 per barrel level after trading as low as $6.50 on April 21. WTI, Brent, and gasoline and heating oil prices all posted double-digit percentage gains over the past week. The processing spreads for gasoline and distillates were steady to higher in a sign of demand for energy. The Brent-WTI spread in July fell as the price of oil rose. While crude oil made a significant comeback, the price remains at a level where most producers are losing money, albeit a lot less than a few short weeks ago. Natural gas posted a gain, but the price remained below the $1.80 per MMBtu level on the June futures contract.

June NYMEX crude oil futures rolled to July and rose 30.41% since May 13 after weeks of successive gains. The July contract settled at $33.49 per barrel on May 20 after trading to a low of $17.27 on April 28. The Saudis told the oil market that they would cut production by another one million barrels per day starting on June 1 and were pushing other producers to extend the current production quotas past the two-month period. Other producing nations in the Middle East said they would follow Saudi Arabia with production cuts. At the same time, rig counts in the US continued to drop, and the EIA reported its first decline in inventories since January for the week ending on May 8. The production declines helped push the price of the energy commodity higher. At the same time, optimism as some states in the US begin to reopen increased hopes for rising demand, and purchases from China also provided support to the crude oil market over the past week.

July Brent futures underperformed June NYMEX WTI futures, but they still were 22.74% higher since May 13. July gasoline rose 19.77%, and the processing spread in July was unchanged since last week. The July gasoline crack spread was at $10.97 per barrel. The price path of gasoline depends on reopening the US economy so that people begin commuting to work and venture out in automobiles again. Wild swings in energy prices have caused wide price ranges in the crack spreads the reflect refining margins. Gasoline kept pace with the price action in crude oil since last week.

July heating oil futures moved 18.84% higher from the last report. The heating oil crack spread was 4.99% higher since May 13 after significant declines over the past weeks. Heating oil is a proxy for other distillates such as jet and diesel fuels. The price action in the processing spreads has been highly volatile, given the timing differences between moves in crude oil and products.

Technical resistance in the July NYMEX crude oil futures contract is at $35.18 per barrel level with support now at the $24.38 level on the June contract. The price range narrowed over the past week. The measure of daily historical volatility was at 68.4% on May 20, down from the 113% level on May 13.  Demand remains a critical factor when it comes to the price direction of the energy commodity. As I wrote last week, “falling production should eventually balance the market and could create a deficit at some point in the future. The course of the pandemic is crucial for the oil market over the coming weeks and months. If we have seen the peak, we could see prices rise. However, further outbreaks that prompt a return to closing parts of the economy again would be a highly bearish factor for energy demand.”

The crude oil market has not focused much on the potential for hostilities with Iran in the region over the past weeks. The Middle East remains the most turbulent political region in the world. Any events that impact production, refining, or logistical routes in the area could cause sudden price spikes in nearby crude oil futures if supply concerns increase.

Crude oil open interest decreased by 3.97% over the period. Crude oil shares did not keep pace with the energy commodity over the past week, but they still posted just over a double-digit percentage gain. The XLE rose 10.13%, even though NYMEX futures posted an over 30% gain since May 13.

I continue to be cautious when it comes to any investments in debt-laden oil companies. I would only consider those with the most robust balance sheets like XOM and CVX in the US. Exxon and Chevron could stand to pick up lots of production assets at bargain-basement prices over the coming months as the number of bankruptcies rises in the oil and gas sectors. I would only purchase these companies during corrective periods.

The spread between Brent and WTI crude oil futures in July fell to the $2.30 per barrel level for Brent, which was $1.18 below the level on May 13. The July spread moved to a high of $5.60 on April 30. The continuous contract peak was at $11.52 on April 20 as all hell broke loose in the crude oil futures market. The high in the spread between the two benchmark crude oil prices was the highest level since May 2019. On April 21, the spread moved briefly to an 89 cents per barrel premium for Brent. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. However, this time, it was the carnage in the price of WTI futures that drove the spread to higher levels. Brent crude can travel by ocean vessel to consumers around the globe, while WTI is a landlocked crude oil. The lack of storage capacity was responsible for the recent price action in the spread and outright prices for the energy commodity.

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

Term structure in the oil market experienced a significant shift as the price of crude oil tanked in March and April. The flip from backwardation to contango in the spread reflects the flood of supplies in the crude oil market. Oil traders have filled tanks and storage all over the world to take advantage of the wide contango with financing rates at historic lows. Cash and carry trades in the oil market became one of the only profitable areas of the market as demand evaporated. The cash and carry trade put upward pressure on freight and storage rates. The forward curve in crude oil highlights the current state of the widest contango in years. The US is filling its strategic petroleum reserve to the brim at the current low price levels. And, the contango caused the price of May futures to plunge to an incredible low of negative $40.32 per barrel. As prices moved higher over the recent weeks, contango declined.

Over the past week, July 2021, minus July 2020, moved from a contango of $7.08 to $3.31, a fall of $3.77 per barrel. In early January, the spread traded to a backwardation of $5.65, $9.42 per barrel tighter than the level on May 20. The spread hit a high of $13.46 per barrel on April 27, the day that July futures reached a low of $17.27 per barrel. Rising contango was a sign of a glut in the oil market while falling contango signifies tighter supplies. The capacity for crude oil storage around the globe fell dramatically as well-capitalized traders purchased nearby crude oil, put it in storage, and sold it for futures delivery. The decline in the spread could be triggering some profit-taking and more capacity on the storage front.  Falling production is causing the spread to tighten. We could see an unwind of the spreads continue if they gravitate back towards flat as production declines and inventories begin to fall over the coming months, which would result in significant profits for well-capitalized crude oil traders. The number of rigs operating in the US continued to decline significantly over the past week, and production has been moving lower in response to the lowest price levels in years and demand problems over the past months.

US daily production fell to 11.50 million barrels per day of output as of May 15, according to the Energy Information Administration. The level of production fell 100,000 barrels from the previous week. Meanwhile, the reports on inventory levels from the API and EIA in crude oil showed different results in last week’s reports. As of May 8, the API reported an increase of 7.58 million barrels of crude oil stockpiles, but the EIA said they declined by 700,000 barrels for the same week. The API reported a decline of 1.911 million barrels of gasoline stocks and said distillate inventories rose by 4.712 million barrels as of May 1. The EIA reported a decrease in gasoline stocks of 3.50 million barrels and an increase in distillates of 3.50 million barrels. Rig counts, as published by Baker Hughes, fell by 34 for the week ending on May 15, which is 544 below the level operating last year at this time. The decline in the rig count has been significant and should lead to falling output in the US. The number of rigs operating stood at 258 as of May 15. The inventory data from both the API and EIA had been consistently bearish for the price of crude oil and products over the past weeks, but the price moved higher as it reached an unsustainable level on the downside. Last week’s data began to show that some demand could be returning at a time when production is falling. However, the inventory levels could cap the potential for rallies above $40 per barrel on nearby NYMEX futures until it begins to decline to levels that lead to more of a fundamental supply and demand balance to the oil market. However, the oil futures market has been on a bullish tear since April 21.

OIH and VLO shares moved in higher since May 13, OIH rose by 15.90%, while VLO moved 14.04% to the upside over the past week. The rising price of oil was a supportive factor for VLO, but the level of crack spreads is a reason for caution. OIH was trading at $115.19 per share level on Wednesday. I am holding a small position in OIH. I will hold the ETF as a long-term position and will look to double it or more if the conditions warrant.

Our short put options on VLO expired on May 15, and we are now long two units of VLO at an average of $70.04 per share. VLO was trading at $67.34 per share on Wednesday.

The June natural gas contract settled at $1.771 on May 20, which was 9.59% higher than on May 13. The June futures contract traded to a high of $2.162 on May 5, where it failed miserably. Support in June stands at $1.595, the recent low on the June contracts, and at $1.519 per MMBtu the low from late March and early April. After making lower highs and lower lows from November 2019 until early April, natural gas shifted to the opposite pattern over the past month, but the price action above $2 failed. Natural gas is now back at a level that offers more value from a risk-reward perspective. A move above $2.25 on June futures is necessary to validate the end of the bearish price pattern. Be cautious in natural gas as it suffers from the same demand problems as crude oil, as we have seen over the recent sessions. The weekly chart has made higher lows and higher highs since the week of March 23, but last week’s low was just two ticks above the bottom from the week of April 27. I believe natural gas offers upside potential, but a move below the $1.55 level could be dangerous as shorts would look to push the energy commodity to a new twenty-five year low.

Last Thursday, natural gas stockpiles posted its second triple-digit increase of the injection season, according to the EIA.

Source: EIA

The EIA reported an injection of 103 bcf, bringing the total inventories to 2.422 tcf as of May 8. Stocks were 49.2% above last year’s level and 20.6% above the five-year average for this time of the year. Natural gas stocks fell to a low of 1.107 tcf in March 2019, this year the low was at 1.986, 879 bcf higher. This week the consensus expectations are that the EIA will report a 98 bcf injection into storage for the week ending on May 15. The EIA will release its next report on Thursday, May 21, 2020.  Over the past eight weeks, the percentage above last year’s level has been declining when it comes to natural gas stockpiles. The steady decline from 79.5% above the one-year level as of March 20 to 49.2% last week could have provided some fundamental support to the natural gas market that took the price to a high of $2.162 per MMBtu on May 5. The trend could reflect higher demand or lower production. Given the events since March, it is likely that output is causing a slower rate of injections into storage. However, the price action over the past two weeks was a sign of fragile demand. Meanwhile, the decline put natural gas back in the buy zone at below the $1.70 per MMBtu level on the June futures contract. I would use tight stops on any risk positions but prefer the long side over the coming week.

Open interest rose by 1.01% in natural gas over the past week. Short-term technical resistance is at $2.162 per MMBtu level on the June futures contract with support now at $1.595 per MMBtu, the recent low. On the upside, $2.255 is the next level of resistance on the weekly chart, but the price moved far away from that level since May 5. The downside target is at the March low of $1.519 per MMBtu. Price momentum and relative strength on the daily chart were below neutral conditions as of Wednesday because of the recent price failure that took the price back to below the $1.60 level. The price put in a bullish reversal on April 16 and followed through on the upside. The low from that day was at $1.705, which stood as technical support in the June futures contract that gave way on May 12. The price was back above that level on Wednesday.

July ethanol prices moved 0.83% higher over the past week on the back of weakness in corn. Open interest in the thinly traded ethanol futures market moved 16.90% lower over the past week. With only 354 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product rose by 5.80% compared to its price on May 13. The price of July coal futures in Rotterdam moved 0.93% higher over the past week.

On Tuesday, May 19, the API reported a 4.80 million-barrel decline in crude oil inventories for the week ending on May 15. Gasoline stocks fell by 651,000 barrels, while distillate stockpiles increased 5.10 million barrels over the period. On May 20, the EIA said crude oil stocks fell 5.00 million barrels for the previous week. Gasoline inventories were 2.80 million barrels higher, while distillate stocks rose 3.80 million barrels. The API and EIA inventory reports were not bearish for the price of the energy commodities. As I wrote over the past weeks, “Demand remains the critical issue facing the oil market. At the current price levels, all the bad news is already in the market. Goldman Sachs said they were bullish on the price of crude oil at the end of last week, and so far, they have been correct.” Goldman continued to be correct in the projection. Demand remains a significant factor, but optimism over reopening parts of the economy has lifted prices. At the same time, output is declining fast with the number of operating rigs plunging and the daily production data from the EIA trending lower. The oil market could be heading towards a balance, which could continue to lift the price of the energy commodity above the $35 per barrel level on nearby NYMEX futures. Iran and the Middle East remain factors that could cause periods of upside mayhem in the futures market over the coming weeks and months, so be careful with risk positions. Meanwhile, a spike in the number of cases of the virus would not support gains in crude oil and could send prices lower. Expect volatility to continue.

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

Source: NYMEX/RMB

As the forward curve over the coming months shows and the settlement prices on May 20, at $1.771 in June on the settlement price on May 20, it was 15.50 cents per MMBtu higher than on May 13.

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 could grind lower given the lack of workers during the shutdown period in many states and because of the low level of prices that make output uneconomic. The 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. The US government is likely to support the energy sector as a matter of national security.  Meanwhile, the differential between nearby June futures and natural gas for delivery in January was $1.181 per MMBtu or 66.7% higher than the nearby price, reflecting both seasonality and substantial inventory levels. The spread narrowed by 13.9 cents over the past week.

I have been taking profits quickly and stopping losses looking for a 1:2 risk-reward ratio on forays into the crude oil futures market. UCO and SCO products can be helpful for those who do not trade futures. In natural gas, UGAZ and DGAZ attract lots of volume and are excellent short-term proxies for natural gas futures. I will not take positions in leveraged products overnight and will only day trade, given the volatility in the markets.

We are holding a long position in PBR, Petroleo Brasileiro SA. PBR shares tanked with oil and the Brazilian real. At $6.99 per share, PBR was 14.22% higher than on May 13. The shares of the company remain too low to sell at the current price. I have a small position that I will hold as a long-term investment and look to double up or more when the market conditions warrant. PBR has been weak on the back of the falling value of the Brazilian currency.

Demand remains the critical issue in the crude oil market as supplies decline in an attempt to provide balance to the market. Production is underwater at under the $40 per barrel level. In the US debt and low prices is a toxic combination that could force many producers out of business. The leading oil and gas companies with the most robust balance sheets are likely to receive government support and weather the current storm. However, it remains to be seen if the government support dilutes shareholders. When it comes to price direction, natural gas appears to be in the buy zone, while the risk of a long position in crude oil has increased with the price of the energy commodity. I would keep stops very tight and take profits when they are on the table on any risk positions in the energy sector as the potential for wide price swings remains high. I will use at least a 1:2 risk-reward ratio on short-term positions over the coming week.

 

Grains                                                             

The grain futures markets went into the May WASDE report under pressure, and they came out of the monthly fundamental roundup for soybeans, corn, and wheat with not all that much price movement across the board. The focus is now on the weather conditions across the fertile plains of the US and northern hemisphere over the coming weeks and months. Trade issues, the global pandemic, and other factors could impact prices, but the weather is the primary determinate of crop size for grain and oilseeds during the fall harvest.

July soybean futures rose by 0.86% over the past week and was at $8.4675 per bushel on May 20. Open interest in the soybean futures market moved 1.38% higher since last week. Price momentum and relative strength indicators were on either side of neutral readings on Wednesday. Soybean futures were consolidating not far above the bottom end of the longer-term trading range. The potential for tensions between the US and China is problematic for the soybean market as it could wind up dashing optimism over Chinese purchases of oilseeds from American producers in 2020.

The July synthetic soybean crush spread moved marginally higher over the past week and was at the 82.25 cents per bushel level on May 20, down 2.50 cents since May 13. The crush spread is a real-time indicator of demand for soybean meal and oil. Price trends in the crush spreads can signal changes in the path of the price of the raw oilseed futures at times. The crush spread is trading close to the lowest level of 2020, which is another bearish factor for the price of soybean futures.

I continue to believe that a relief rally is possible in the soybean futures and would only position from the long side of the market at under $8.50 per bushel. However, I suggest tight stops on long risk positions and would be looking to take profits on rallies. I will tighten risk parameters the further we move into the growing season, which risks tailing off to minimal levels during the peak summer months when crops become established. The best chances for a supply-based rally will come early in the growing season when the plants are most vulnerable.

July corn was trading at $3.1950 per bushel on May 20, which was 0.39% higher on the week. Open interest in the corn futures market rose by 1.07% since May 12. Technical metrics were on either side of neutral readings in the corn futures market on the daily chart as of Wednesday. Support on nearby corn futures is at then $3.09 level, on the continuous contract, $3 per bushel is a line in the sand on the downside. Long positions should have stops below $3 per bushel. Corn will continue to be highly sensitive to the price path of gasoline. Ethanol production in the US accounts for approximately 30% of the annual corn crop.

The price of July ethanol futures rose by 0.83% since the previous report. July ethanol futures were at $1.089 per gallon on May 20. The spread between July gasoline and July ethanol futures was at 3.29 cents per gallon on May 20 with ethanol at a small premium to gasoline. The spread was 16.53 cents narrower since last week as gasoline outperformed the biofuel in July.  The prospects for corn prices are a function of both the weather and the price of gasoline and crude oil. While the energy commodities made a significant comeback since April, corn has not, which is a warning sign for the coarse grain.

July CBOT wheat futures recovered by 2.39% since last week. The July futures were trading $5.1375 level on May 20. Open interest rose by 5.08% over the past week in CBOT wheat futures. The support and resistance levels in July CBOT wheat futures stand at $4.9375 and $5.2800 per bushel. Price momentum and relative strength were rising from oversold readings to a neutral condition on Wednesday on the daily chart.

As of Wednesday, the KCBT-CBOT spread in July was trading at a 60.50 cents per bushel discount with KCBT lower than CBOT wheat futures in the May contracts. The spread widened by 13.0 cents since May 13. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.” Any sudden problem in the wheat market that causes consumer hedging to increase could result in a dramatic change in the spread between the hard and soft winter wheat futures contracts. The spread moved away from the long-term average over the past week.

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

The further we move into the growing season without any significant price appreciation, I will work to cut position sizes. The time of the year when crops are most vulnerable to the weather is between now and July. As crops mature, they can withstand periods of adverse conditions. I continue to favor the long side but will be looking at the calendar as a time stop on positions is likely to be the optimal approach to controlling risk.

 

Copper, Metals, and Minerals

I am pleased to report that the base metals market’s LME inventory data is back with only a one-day lag as of the end of last week. Last week I railed against the exchange for removing the data and delaying it for another day, but it appears that market forces impressed the importance of transparency on the world’s oldest market that is pricing hub for the nonferrous metals. The prices of copper, aluminum, and nickel moved higher since May 12. Lead, zinc, and tin posted marginal losses over the period. Copper futures on COMEX also moved higher along with the price of lumber and the Baltic Dry Index. Iron ore was higher since last week’s report.

Copper rose 4.86% on COMEX over the past week. The red metal posted a 1.52% gain as of May 19 on the LME since the last report. Open interest in the COMEX futures market moved 1.53% higher since May 12. July copper was trading at $2.4600 per pound level on Wednesday. Copper is a leading barometer for the overall health and wellbeing of the Chinese and global economies. Over the past week, LME and COMEX stockpiles moved higher, which is a sign of falling demand for the red metal.

Long-term support for the copper market is at the early 2016 low of $1.9355 per pound. From a short-term perspective, the first level on the downside stands at $2.2170 per pound on July futures, and then the $2.0595 level. Chinese demand will continue to be the most significant factor when it comes to the path of the price of copper and other base metals and industrial commodities over the coming weeks and months. Keep in mind that during the 2008 financial crisis, copper fell to a bottom of $1.2475 per pound. The decline came from over $4 per pound in early 2008. By 2011, the price of copper rose to a new all-time high at just under $4.65 per pound. Nearby technical resistance is at $2.5000 per barrel on the July futures contract on COMEX. The markets are not yet out of the woods when it comes to Coronavirus. Any outbreaks that cause the economy to shut down again or take a significant step back in social distancing easing could cause selling to return to all markets, and industrial commodities could fall sharply. Therefore, caution is available in copper, which can become extremely volatile during risk-off periods.

The LME lead price moved lower by 0.21% since May 12. The rise in demand for electric automobiles around the world had been supportive of lead in the long term as the metal is a requirement for batteries, but Coronavirus weighed on the price of lead because of falling fuel prices. The price of nickel moved 0.13% 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. Tin fell 0.16% since the previous report. Aluminum was 1.08% higher since the last report. The price of zinc posted a 0.12% loss since May 12. Zinc was at just below the $2020 level on May 20. Nonferrous metals remained within their respective trading ranges, except for copper. The red metal broke above the short-term resistance level on COMEX at $2.43 per pound.

July lumber futures were at the $367.50 level, up 5.45% since the previous report. Interest rates in the US will eventually influence the price of lumber. Lumber can be a leading economic indicator, at times. The price of uranium for July delivery was up 0.15% after recent gains and was at $33.70 per pound. The world’s leading producer, Kazakhstan, suspended production nationwide for three months to slow the spread of COVID-19, which helped to lift the price. The volatile Baltic Dry Index rose 4.62% since May 13 to the 453 level. June iron ore futures were 6.05% higher compared to the price on May 13. Supply shortages of iron ore from Brazil have supported the price over the past year. Open interest in the thinly traded lumber futures market fell by 0.77% since the previous report.

LME copper inventories moved 13.47% higher to 274,225 as of May 19. COMEX copper stocks rose by 13.35% from May 12 to 51,056 tons. Lead stockpiles on the LME were up 1.52% as of May 19, while aluminum stocks were 6.64% higher. Aluminum stocks rose to the 1,436,575-ton level on May 19. Zinc stocks decreased by 1.75% since May 11. Tin inventories fell 26.24% since May 11 to 3,500 tons. Nickel inventories were 0.40% higher compared to the level on May 11. Then rise in copper stocks is a factor to watch over the coming week.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at 22 cents on May 13, up four cents 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 $7.92 per share and moved 9.54% higher since last week.

FXC was trading at $9.12 on Wednesday, $0.72 higher since the previous report. I continue to maintain a small long position in FCX shares. I will not sell the stock at this level, but I am on the sidelines when it comes to adding to the position.

I remain extremely cautious on the sector and have limited any activity to very short-term risk positions. Brewing tensions between the US and China could cause risk-off conditions to return to the industrial metals and commodities as can any new outbreaks of Coronavirus over the coming weeks and months. Keep stops tight on all positions in this sector that is highly sensitive to macroeconomic trends.

 

Animal Proteins

Live cattle futures moved higher on the June contract over the past week while August feeder cattle were lower. Lean hog futures in June edged lower since last week. After wild swings in the animal protein sector, the futures markets have calmed, for now. The WASDE was not all that bearish for meat prices considering their low levels going into the 2020 grilling season, which begins on the Memorial Day holiday. However, the lack of demand from restaurants, bottlenecks at processing plants, and excess supplies in the hands of ranchers continue to create distortions in the cattle and hog futures markets.

June live cattle futures were at 98.40 cents per pound level up 4.82% from May 13. Technical resistance is at 99.775 cents per pound. Technical support stands at 89.475 cents per pound level. Price momentum and relative strength indicators were moving lower towards neutral readings on Wednesday. Open interest in the live cattle futures market moved 1.00% lower since the last report. Beef shortages are appearing in supermarkets, and prices for consumers are rising across the US. Bottlenecks at processing plants are causing limits for retail customers.

August feeder cattle futures underperformed live cattle as they declined by 3.06% since last week. August feeder cattle futures were trading at the $1.2900 per pound level with support at $1.10025 and resistance at $1.3900 per pound level. Open interest in feeder cattle futures fell by 3.00% since last week. While live cattle futures have a delivery mechanism, feeder cattle are a cash-settled futures contract. Sometimes live cattle prices lead feeder cattle prices, while at others, the opposite occurs. Price momentum and relative strength metrics were below neutral territory on Wednesday.

Lean hog futures declined since the previous report. The active month June lean hogs were at 56.875 cents on May 20, which was 1.73% lower from last week’s level. Price momentum and the relative strength index were heading for oversold readings on May 20. Support is at 50.00 cents with technical resistance on the June futures contract at the 66.95 cents per pound level. The hogs were trading in the middle of the short-term range. The same issues impacting beef are present in the hog market with low prices at origination points and bottlenecks at processing plants causing consumer prices to rise and shortages to limit availability for customers.

The forward curve in live cattle is in backwardation from June 2020 until August 2020 and contango from August 2020 until April 2021. There is a backwardation between April 2021 and August 2021, when contango returns until October 2021. The Feeder cattle forward curve is in contango from May through November 2020 before it becomes backwardated and flattens until April 2021. The forward curves shifted slightly over the past week in the cattle futures market.

In the lean hog futures arena, there is backwardation from June 2020 until October 2020. Contango exists from October 2020 through June 2021. There is a slight backwardation from June through October 2021. Futures prices have moved to reflect the potential for shortages for consumers. Some supermarkets are limiting beef, pork, and chicken purchases to prevent hoarding.

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

 Source: CQG

Based on settlement prices, the spread was at 1.73010:1 compared to 1.62200:1 in the previous report. The spread rose by 10.81 cents as live cattle rose, and lean hog futures declined over the past week. The spread moved 25.75 cents higher last week. The spread powered back above the historical norm on the June futures contracts. The differential had narrowed dramatically before it found a bottom. The spread was at its highest level since 2015 in mid-April, but it turned lower as hogs recovered from multiyear lows pushing the differential to the long-term average. Beef has moved to a level that is becoming more expensive compared to pork on a historical basis.

The price action in the beef and pork futures markets could become highly volatile as supply gluts at origination points have not translated to increased supplies for consumers. Shortages at supermarkets reflect the bottlenecks at processing plants that have lifted prices and limited the amount of purchases to prevent hoarding. The situation in the animal protein arena is an example of how risk-off periods can impact producers and consumers. In the case of the meat markets, ranchers and carnivores are both losers these days. If consumer shortages remain and prices remain low for producers, we could see production decline dramatically, exacerbating the lack of availabilities leading to higher prices. Coronavirus has created a unique divergence in the animal protein sector. At the current price levels, risk-reward favors the upside. However, I would only approach the cattle and hog futures with very tight stops as price action could continue to be irrational for the foreseeable future. Supply and demand fundamentals will eventually balance the market, which could lead to price appreciation in the coming months, and perhaps years. A sudden spike in grain prices that sends the price of animal feed higher could cause additional volatility as it would entice ranchers to keep even fewer animals in inventory. The peak season of demand in the animal protein sector starts with the Memorial Day holiday weekend, which has arrived.

 

Soft Commodities

Cocoa prices moved to the downside over the past week, while sugar, coffee, cotton, and FCOJ futures moved higher. The most significant gain was in sugar as the rise in the crude oil market pushed the sweet commodity over the 11 cents per pound level. FCOJ was over 6.5% higher.

July sugar futures rose 9.06% since May 13, with the price settling at 11.19 on May 20. The price of the sweet commodity fell to a new multiyear low at 9.05 cents per pound on the May contract on April 28. Technical resistance on July futures is now at 12.23 cents with support at 10.05 cents on July futures. Sugar made a new high at 15.90 cents on February 12 on the continuous contract, but the price collapsed on the back of risk-off conditions. The decline in the price of crude oil and ethanol in April weighed on sugar as the primary ingredient in ethanol in Brazil is sugarcane. The recovery in the oil market provided support for the price of sugar. Weakness in the Brazilian currency reduces production costs and had been a bearish factor for the sugar market, but the Brazilian real rose over the past week.

The value of the January Brazilian real against the US dollar was at the $0.17590 level against the US dollar on the June contract on Wednesday, 4.39% higher over the period after trading to a new low of $0.16730 on May 14. The Brazilian currency has been making lower lows as Coronavirus weighed heavily on all emerging markets. Anyone with a risk position in sugar should keep an eye on the price action in the Brazilian real. We could see lots of action in the Brazilian currency on Friday, if Argentina defaults on its debt.

Price momentum and relative strength on the daily sugar chart were rising towards overbought territory as of May 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 reflects the recovery in crude oil.

In February, risk-off conditions stopped the rally dead in its tracks. Sugar found at least a temporary bottom at a lower low of 9.05 cents per pound. Open interest in sugar futures was 1.86% 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.

July coffee futures moved 0.57% higher since May 13. July futures were trading at the $1.0565 per pound level. The technical level on the downside is $1.0380, the late April low. Below there, support is at around 97.40 cents on the continuous futures contract. Short-term resistance is now at $1.1315 on the July contract. I continue to favor coffee on the long side, but coffee can be a highly volatile commodity in the futures market, as we have witnessed over the past weeks and months. Our stop on the long position in JO is at $27.99, but in the current conditions, I would increase the stop and exercise extreme caution. JO was trading at $33.80 on Wednesday. Open interest in the coffee futures market was 2.44% higher since last week. I continue to hold a small core long position in coffee after taking profits during the rally in March.

Supply concerns over Brazilian production in the off-year for crops had been supportive of the price of the soft commodity from mid-October through December. The ICO has warned that a deficit between supply and demand could be in the cards for the market because of the 2019/2020 crop year. However, those fears subsided, causing the price of the soft commodity to decline to a level where buying returned to the market. Coffee had made higher lows since reaching 86.35 cents in mid-April. The price of coffee has remained firm despite the risk-off conditions. The ultimate upside target is the November 2016, high at $1.76 per pound. Price momentum and relative strength were heading for oversold readings on Wednesday. On the monthly chart, the price action was below neutral. The quarterly picture was below a neutral condition. As I wrote in previous reports, “The risk rises with the price in the volatile coffee futures market. We should expect wide intraday trading ranges in the coffee futures market.”  Coffee can be a wild bucking bronco when it comes to the price volatility of the soft commodity. Bottlenecks on South American ports could prove highly supportive of coffee prices as they could create a shortage of the beans. I expect volatility in coffee to continue, and I will look to trade on a short-term basis with a bias to the upside. I will keep a tight stop at just below the $1 per pound level on futures and ETN products on any new purchases over the coming week.

The price of cocoa futures fell over the past week. On Wednesday, July cocoa futures were at the $2401 per ton level, 2.24% lower than on May 13. Open interest rose by 3.23%. Relative strength and price momentum were on either side of neutral readings on May 13. The price of cocoa futures rose to a new peak and the highest price since September 2016 at $2998 per ton on the March contract on February 13. Risk-off conditions pushed the price of cocoa beans lower, but they bounced after reaching a low that was $7 above the technical support level on the weekly chart. We are long the NIB ETN product. NIB closed at $28.06 on Wednesday, May 13. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their cocoa exports, it should provide support to the cocoa market. The levels to watch on the upside is now at $2487, $2500, and at the mid-March high of $2631 per ton on the July contract on the daily chart. On the downside, technical support now stands at $2215 and $2201 per ton. The potential for Coronavirus to disrupt production in West Africa is high, which could lead to shortages of beans over the coming months. The health systems in producing countries like the Ivory Coast, Ghana, Nigeria, and others are not sufficient to treat patients or prevent the spread of the virus. Africa could suffer tragic consequences over the coming weeks and months. The flow of cocoa beans to the world could suffer as bottlenecks at ports could reduce exports. I continue to favor the long side in cocoa but will be cautious in the deflationary environment in markets.

July cotton futures rose 1.31% over the past week. The recent declines have been on the back of continued concerns about the Chinese and global economies. July cotton was trading at 58.21 cents on May 20, after falling to the lowest price since 2009 in early April. On the downside, support is at the recent low of 53.20, 52.01 cents, and then at 48.15 cents per pound. Resistance stands at the 60 cents per pound level. Open interest in the cotton futures market rose by 0.85% since May 12. Daily price momentum and relative strength metrics were rising above neutral territory towards an overbought condition on Wednesday.

I remain slightly bullish on the prospects for the price of cotton at above the 50 cents per pound level but would use tight stops on any long positions.

July FCOJ futures moved to the upside since the last report. On Wednesday, the price of July futures was trading around $1.2495 per pound, 6.52% higher than on May 13. Support is at the $1.1035 level. Technical resistance is at $1.3100 per pound. Open interest rose 12.06% since May 12. The Brazilian currency had weighed on the FCOJ futures, but bottlenecks at the ports could work in the opposite direction. FCOJ broke out to the upside over the past week. The rise in open interest is a bullish sign for the FCOJ market.

Soft commodities prices can be highly volatile. Based on multiyear trading ranges, sugar, coffee, and cotton are near the bottom ends of their pricing cycles, so risk-reward favors the upside. Cocoa should find support on corrections as the market has been making higher lows and higher highs since 2017. FCOJ is an illiquid market that is always susceptible to price gaps on the up and downside. Volume and open interest increased in the FCOJ futures market as it broke out to the upside, which tends to be a technical validation of a bullish move. Keep stops tight on any risk positions and take profits when they are on the table.

 

A final note

The comparison between the price action in the commodities asset class between 2008 and 2011 and the current environment in 2020 could be a compelling reason for significant sector-wide price appreciation over the coming months and years. Markets rarely move in a straight line, and history tends to rhyme, rather than repeat. However, the flood of stimulus and other government programs that are necessary band-aids to combat the economic impact of the global pandemic comes at a price. As the money supply expands, the purchasing power of fiat currencies decreases, which is the ingredients for inflationary pressures. As we are far from out of the woods when it comes to Coronavirus, the financial cost will remain long after the virus fades into the history books. We could see far higher prices over the coming years. Those commodities that are closer to the bottom than the top end of their pricing cycles could experience a rebalancing period where buying takes them to far higher levels like in 2011. The level of stimulus is much greater in 2020 than during the 2008 crisis. The potential for price appreciation is at an elevated level from a long-term perspective. Be careful out there but keep the big picture in mind when approaching markets across all asset classes.

 

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

 

Please keep safe and healthy in this environment.

 

 

 

Until next week,

 

Andy Hecht

 

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

 

 

 

 

 

 

Andy Hecht

Author

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