Hecht Commodity Report

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  • Calm returns to markets in early September
  • Precious metals correct from the recent rallies
  • A choppy oil market, and above technical resistance in natural gas
  • Grains head into the September WASDE report
  • The ECB tomorrow and Fed next week could provoke a return of volatility

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

Summary and highlights:

 

On Thursday, September 5, there appeared to be a thaw in the trade war between the US and China, which sent stocks higher. At the same time, the latest move by the UK Parliament to put a roadblock in front of Prime Minister Johnson when it comes to Brexit also caused fears of a hard Brexit to subside.
The DJIA rose by 1.41% with 1.3% and 1.75% gains on the S&P 500 and NASDAQ respectively. The VIX fell to just over the 16 level as stocks rallied. The dollar index did not move much after Wednesday’s decline that took it to the 98.355 level. Soybean futures declined despite the ray of hope on the trade front, but corn and wheat futures posted marginal gains. Crude oil rallied on the back of trade and bullish data from the EIA, but the energy commodity gave back its intraday gains by the close. Oil products moved higher, while natural gas edged slightly lower. The EIA reported a larger than expected injection of 86 billion cubic feet into storage, but the price of October futures remained above the $2.40 per MMBtu level. The strength in natural gas was more a function of the season than the inventory report on September 5. Most precious metals fell sharply as a reminder that even the most aggressive bull markets suffer occasional setbacks. Gold was over $30 lower on the session as it fell to the $1525 per ounce level. Silver fell by over 70 cents per ounce to just over the $18.80 level on the December futures contract. Platinum was over $20 lower, but palladium posted a gain on the session. The price of copper moved more than four cents higher to over the $2.64 level on the December COMEX futures contract. Animal proteins moved lower across the board. In the soft commodities, cotton and FCOJ moved higher while sugar, coffee, and cocoa prices declined. Lumber also moved to the downside on the session. Bitcoin futures closed at $10,625 per token, down $210 from the previous day.

On Friday, the employment data was lower than the consensus level. The economy added 130,000 jobs in August compared to expectations for a rise of 160,000. While average hourly earnings rose 0.4%, 25,000 of the jobs added were temporary positions for the 2020 census. The data further the case of any interest rate reduction from the Fed at the September 17-18 FOMC meeting. Chairman Powell’s speech in Switzerland said little as he ducked and dodged questions on rate cuts. The market could be lowering its expectations for an aggressive move lower in the Fed Funds rate based on recent price action. The Fed is not likely to cut by 50 basis points, but a 25-point reduction seems likely.

The stock market did not move all that much on Friday, small gains in the DJIA and S&P 500 and a marginal loss in the NASDAQ index. The dollar index did not move much and closed the week at the 98.362 level, almost a full point below the new high at the start of the week at 99.33 on the September contract. Grain prices moved lower on the final session of last week, while energy prices posted gains except for ethanol, which fell on the back of corn. Natural gas futures rose to a high at $2.505 per MMBtu, as the October futures are moving towards the critical level of technical resistance at $2.53 per MMBtu. Gold continued to move lower after Thursday’s significant loss, but the price of silver moved the most on the downside. The December silver futures contract fell to a low at $18.045 after trading to a high at $19.75 on September 4 and closed at just over the $18.10 level. While gold put in a bearish reversal on the weekly chart, silver did not close below the previous week’s low. Copper edged lower on the session, but the red metal still managed to put in a bullish reversal on the daily chart after moving from under $2.50 at the start of the week to over $2.60 on Friday. Animal protein futures moved lower across the board with the most substantial loss in live cattle futures that fell the three cents limit on the October futures contract to a new low. Lumber edged lower, and cotton posted a loss of just over one-half cent on the session. FCOJ futures were lower while sugar, coffee, and cocoa all moved higher on September 6. The price of Bitcoin lost $180 to the $10,445 level, and the US long bond was around 0-18 higher.

On Monday, the stock market was quiet the dollar index did not move much, but the December long bond futures contract fell by over 2-00. The most action was in the energy sector was NYMEX crude oil moved around $1.50 per barrel higher on the October futures contract. Saudi Arabia’s newly installed oil minister said there would be no change in oil policy. The Saudis are trying to resurrect plans for an IPO of Saudi Aramco. Natural gas rallied above a critical resistance level at $2.53 per MMBtu and reached a high at $2.608 on the October contract. The break to the upside is likely the result of the seasonal pattern of trading at the end of the summer and beginning of the fall season. Wheat moved over 10 cents per bushel higher, while corn and beans were down and up around one cent on the session. Precious metals edged lower. Gold and silver closed above the $1500 and $18 per ounce levels. Platinum and palladium also moved to the downside on Monday. Meats dropped, and soft commodities were mixed. Cotton, coffee, and cocoa posted gains while sugar and FCOJ edged lower on the session. Lumber posted a marginal loss on the November futures contract. Bitcoin fell just $90 to $10,370.

On Tuesday, the stock market continued to experience calm conditions with small gains in the DJIA and S&P 500 and a marginal loss in the NASDAQ. However, the Russell 2000 was 1.23% higher on the session. The long bond fell another 2-0 on the session in a sign that optimism is returning to markets. National security chief John Bolton left the Trump administration. Many analysts believe that his departure lowers the chances of war in the Middle East and around the world as Bolton was a hardliner. Grain prices moved higher across the board with soybeans leading the way. Crude oil moved lower after the news on John Bolton after rising to a new high. Oil products posted small gains, and natural gas made a new high at $2.648 and closed at the $2.58 per MMBtu level. Gold fell $11.90 per ounce while silver posted a marginal gain. Citigroup projected that the price of the yellow metal would eventually rise to the $2000 per ounce level. Platinum moved lower while palladium moved higher on the session. Meats posted gains across the board with live cattle leading the way. Sugar edged lowed with cocoa futures, but lumber, cotton, FCOJ, and coffee moved to the upside. Coffee was the leader with a 3.35 cents gain that put the price back over $1 per pound. Bitcoin fell $310 to $10,060.

On Wednesday, one of the greatest names in the US energy sector died, as T. Boone Pickens passed away at the age of 91. Wednesday was also the 18th anniversary of the attacks on the US at the WTC in NYC, at the Pentagon, and from the plane crash in Pennsylvania. Rest in peace to all of those killed on that fateful day and to Mr. Pickens. Wednesday was a busy news day. Discussions about easing sanctions on Iran after the departure of John Bolton caused oil to decline. China handed the US an olive branch on trade but did not reduce tariffs on US soybean or hog exports. President Trump blasted the Fed in two tweets:

Source: Twitter

Tomorrow markets will hear from the ECB and if they will cut interest rates further. A more dovish ECB could put more pressure on the US Fed on September 18. Meanwhile, the ECB meeting will be the last for Mario Draghi as he will hand over the President’s seat to former IMF Managing Director Christine Lagarde next month.

Stocks moved higher on Wednesday with all of the leading indices posting gains. The long bond continued to correct lower as it fell below the 161 level on the December futures contract. The dollar index was up 0.320 on the now active month December contract. Grains moved lower on the back of the lack of tariff relief from China, but tomorrow’s WASDE report will likely move markets at noon EST. Energy prices moved lower with nearby NYMEX futures falling below the $56 per barrel level. Products fell but outperformed the raw energy commodity pushing crack spreads higher on the session.  The latest inventory data from the API and EIA was supportive of the price of oil, but the potential for discussions with Iran weighed on the price. Natural gas edged a bit lower but remained above the $2.55 per MMBtu level. Precious metals posted modest gains on Wednesday while copper edged lower. Cattle rallied while hogs fell. All of the soft commodities except sugar moved to the upside, while the sweet commodity fell to a new low at 10.73 cents per pound. Coffee was back over the $1 per pound level. Bitcoin was quiet at just over the $10,000 level.

I will never forget the many friends and colleagues who perished in the WTC in NYC on 9/11/01. Eighteen years later, the pain of that day remains with many of us.

Stocks and Bonds

Stocks continued to move higher over the past week. The markets calmed on two fronts. News that US-China negotiations would continue at the request of Beijing was reason enough for the market to move higher. At the same time, the UK Parliament made it almost sure that the deadline for a Brexit would move further into the future. After making it illegal for the Prime Minister to arrange for a hard Brexit, the Parliament turned did not offer enough votes for a snap election. The move was strategic as it will push back the date of an eventual election past the October 31 deadline. Prime Minister Johnson will limp into the contest in a weakened political condition. After losing his slim majority, he will face voters after not delivering on his pledge to fulfill the will of the UK people by not taking the nation out of the EU by the end of October as promised. Brexit and trade created the buying in the stock market as it avoided two risk-off conditions, and risk-on returned to the market.

The S&P 500 rose by 2.15% over the past week, while the NASDAQ moved 2.42% higher. The DJIA posted a 2.97% gain since the previous report. Trade and Brexit will remain two issues at the forefront of the minds of traders and investors over the coming week.

As US stocks rose, Chinese large-cap stocks went along for the ride. China backed down during the last week, giving in on one of the key issues in Hong Kong. The Beijing backed leadership in Hong Kong abandoned a resolution that would have allowed for those accused of committing crimes to be tried in the mainland. The move did not eliminate all of the issues that have caused the recent protest. However, it was a sign that Beijing is choosing a more tempered response rather than a military crackdown. China offered an olive branch on trade to the US on Wednesday. While it did not cover soybeans or hogs, it was a step towards a more pragmatic approach to the negotiating process and it helped to lift the value of Chinese equities.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $41.33 level on Wednesday, which was 3.20% higher than the closing level on September 4. Technical support is at the recent low at $37.66 per share from August 14. Resistance stands at the July 1 high at $44.02 per share.

US 30-Year bonds moved significantly lower as the stock market recovered over the past week. Recent comments from members of the voting FOMC show that there is still divided opinion over the potential for rate cuts. While the market had hoped for a 50-basis point cut at the September 17-18 Fed meeting, it appears that the best the market can hope for is another 25-basis point reduction in the Fed Funds rate is on the horizon. Bonds traded to a new high at 167-18 on the September futures contract on August 28 on the September contract. The December contract rose to a high at 166-25 and was at the 160-20 level on Wednesday as they moved 3.15% lower since the previous report.

Open interest in the E-Mini S&P 500 futures contracts rose by 4.37% since September 4. Open interest in the long bond rose by 1.36% over the past week during the contract roll. The VIX moved lower as stocks rose over the past week. The volatility index was at the 14.61 level on September 11, a decline of 15.7% since last week. The most recent high was at 24.81 on August 5. The VIX has been jumping around with the stock market over the past weeks, creating lots of trading opportunities.

As I have been writing, “I have been buying the VIXY and other VIX related products and was stopping out for small losses until Wednesday. I will continue to look for buying opportunities on dips with at least a 1:2 risk-reward ratio on trades. The many issues facing markets could cause sudden bouts of volatility in the stock market as we witnessed following the July Fed meeting.  The VIX and products like VIXY can capture short-term price corrections as they typically move in an inverse direction to the stock market.” I continue to favor purchasing the VIX and VIX-related products on dips and taking profits on rallies as I believe that volatility in the stock market will continue over the coming weeks and perhaps months. I believe the VIX is now back in the buy zone. Stocks and bonds received good news over the past week when it comes to trade and Brexit. Meanwhile, both issues promise to create price variance in markets across all asset classes over the coming days and weeks. The news cycle, economic data, and the day-to-day shifts in market sentiment will continue to add to volatility in the stock and bond market through the end of 2019.

 

The dollar and digital currencies

The dollar index rose marginally over the past week and posted a 0.25% gain since September 4. The index made a new and higher high at 99.33 on September 4 and corrected to the downside. The new peak was a continuation of the bullish trend in the dollar that started in February 2018. The dollar is the subject of contention between the Fed and President Trump who continues to criticize Fed Chairman Jerome Powell over tight monetary policy compared to other countries around the world.

The euro currency was 0.30% lower against the dollar since last week’s report. The euro fell against both the dollar and the pound over the past week after the UK Parliament put a roadblock in front of the Prime Minister over a hard Brexit at the end of October.

US rates are likely to move lower when the FOMC meets on September 17-18. It appears that another 25-basis point cut is on the horizon, which may not be enough considering the continuation of easing in Europe and other nations around the globe. The markets will hear from the ECB tomorrow, on September 12. The US economy continues to be the world’s strongest, which presents the voting members of the FOMC with a dilemma. A one-quarter of one percent rate reduction seems to be a compromise that the divided Fed can live with, but it will surely draw more criticism from President Trump.

 

The leader of the digital currency asset class moved lower and was trading at the $10,132.01 level as of September 11. Bitcoin and other digital currencies have been trading in a range. Bitcoin remains near the bottom of the $9000-$12,500 trading range.

Bitcoin moved 4.70% lower since last week while Ethereum posted a 0.25% gain as it was at around $177.91 per token. The market cap of the entire asset class moved 3.61% lower as Bitcoin underperformed the other digital currencies. The number of tokens rose by 93 since September 4. The consistent rise in the number of digital currencies continues to dilute the asset class. In late 2017 the overall market cap was at over $800 billion with far fewer tokens. Open interest in the CME Bitcoin futures fell by 8.12% since last week in the cash-settled futures product.

Custody continues to be the leading issue when it comes to any ETF product for the digital currency asset class. When an exchange can develop a system to store the cryptocurrencies and regulators fell that the market can fend off manipulation, the prices would likely receive a boost. However, many policymakers continue to believe that the currencies that fly beneath the radar of regulation and control is a threat to the legitimate flow of money and are tools for nefarious and illegal transactions in the global economy. I continue to believe that the future success of digital currencies depends on governments issuing forms of money that use the blockchain technology.

The Canadian dollar moved 0.32% higher since last week. Open interest in C$ futures rose by 8.56% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that also produces significant quantities of agricultural products. The Australian dollar is also a commodity-based currency with sensitivity to the Chinese economy. The positive data and increased optimism over trade lifted the A$ by 1.12% since last week’s report.

The British pound posted a 0.95% gain since the previous report after falling to a new low below the $1.20 level before recovering. The pound is likely to be volatile over the coming weeks as the Parliament, and Prime Minister Johnson continue to be at each other’s throats. Success in a general election could depend on a marriage of convenience between Johnson’s Tory party and the Brexit party headed by Nigel Farage. Farage’s party received the most votes in the latest elections for MPs to the EU Parliament. Without the support and splitting the vote amongst those who favor Brexit could put Labour party leader Jeremy Corbyn, a socialist, in the Prime Minister’s seat in the Parliament. A general election will be a second referendum for Brexit. The pound has declined when the odds of a hard Brexit increase. At the same time, a departure with an agreement or a reversal and course that makes the UK remains within the EU has been bullish for the pound. The uncertainty surrounding the exit of the UK from the EU will cause a continuation of volatility in the British pound against both the US dollar and the euro currency.

After falling to below the $0.24 level, the Brazilian real bounced a bit last week and was 1.0% higher since September 4. The Bolsonaro government is facing problems with fires in the Amazon and contagion from neighboring Argentina. The real remains not far above its lows. The Brazilian currency is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets are likely to move higher or lower with the direction of the Brazilian real over the coming weeks. Last year, the election of Jair Bolsonaro bolstered the currency, but now the markets are waiting to see the impact of new policies on Brazil’s economy. The problems in the Amazon and another in a long series of financial debacles in Argentina have been problematic for the Brazilian economy and the value of Brazil’s currency.

 

Gold corrected lower over the past week as the market ran out of steam on the upside. Markets rarely move in a straight line. Even the most aggressive bull markets suffer from periods of corrective price action. Gold had risen to new all-time highs in almost all world currencies except for the Swiss franc and US dollar throughout of the recent rally. I continue to believe that the bull market in the precious metal is far from over. Gold’s ascent has been a sign of the continuing devaluation of fiat currencies that derive value from the full faith and credit of the countries that print the legal tender. The bottom line is that accommodative central bank policies around the world continue to take a toll on the value of foreign exchange instruments, and that is likely to continue. As I have been writing, the dollar continues to be the king of the currency market. Meanwhile, gold has emerged as the monarch of money.

 

Precious Metals

At the end of last week, a correction began in the precious metals sector. The prices of all of the metals in the group posted losses since last week’s report except for palladium which moved marginally higher. After flying high throughout the summer, gold and silver prices moved to the downside after making new highs. Platinum also lost ground after probing the $1000 per ounce level while rhodium posted a loss and traded in a wide range.

Gold was 3.67% lower since last week while silver fell 7.05% after reaching a peak at $19.75 per ounce level. The price of December gold was just above the $1500 per ounce level on Wednesday while silver was around $18.17. December gold rose to a new high at $1566.20 on September 4, and December silver moved to another new high on the same day before both metals turned lower. Last week I wrote, “The trajectory of gains increased the odds of corrective moves.” Selling came into the market after the positive news on trade and the moved by the British Parliament that reduced the risk of a hard Brexit on October 31. Last week, gold put in a bearish reversal trading pattern on the weekly chart as it made a new high over the period and closed last Friday below the previous week’s low.

The price of platinum declined by 4.47% since last week after reaching a new short-term high at $1000.80 on September 5. Rhodium is a byproduct of platinum, and the price of the metal had taken off like a rocket ship on the upside. After weeks of significant gains, the price of rhodium fell by 3.23% since the previous report. The midpoint price of the metal fell to $4500 per ounce after probing above the $5000 level. Palladium was 0.30% higher on the week.

Open interest in the gold futures market moved 3.09% lower. The metric moved 6.52% higher in platinum while it was 2.53% higher in the palladium futures market. Silver open interest fell by 3.66% over the period.

Technical resistance on the December gold futures contract is at the recent high and at just over the $1600 per ounce level. Gold is now waiting for fresh news on global interest rates and the trade war between the US and China.  While fears of a hard Brexit subsided, the risk of volatility on the back of the UK’s departure from the EU remains a factor that could cause a return of buying into gold and perhaps the silver market over the coming weeks and months.

The silver-gold ratio moved higher over the past week as silver underperformed gold on the downside.

Source: CQG

The daily chart of the price of December gold divided by December silver futures shows that the ratio was at 82.77 on Wednesday 3.35 higher than the level on September 4. The long-term average for the price relationship is around the 55:1 level. The ratio remains at an elevated historical level. Silver remains historically cheap compared to gold, but it had been playing catchup over recent weeks. The ratio had declined to a low at 79.30 on September 4 when both gold and silver were on the recent highs. The ratio tends to move lower during bull market periods and higher when there is bearish price action in the markets

We are long the gold mining stock ETF products GDX and GDXJ, which underperformed the price of gold since the last report. While gold moved 3.67% lower, the GDX was 10.44% lower since September 4 and GDXJ was 11.07% below last week’s level. The mining stocks tend to outperform gold on the upside and underperform during corrective periods as it provides a leveraged return. The price action over the past week was typical of the relationship between the metal and the mining stocks. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product which posted an 7.58% loss since September 4 marginally underperformed the price action in the silver futures market. I believe that both gold and silver will find short-term lows at higher levels and will continue to appreciate given the path of global interest rates.

Platinum group metals all posted losses since September 4. October platinum futures fell by 4.47% to the $940.20 per ounce level. Palladium posted a 0.30% gain as of the close of business on September 11 and was at the $1556.80 per ounce level. Palladium was trading at a premium over platinum with the differential at the $616.60 per ounce level on Wednesday, which widened over the past week. October platinum was trading at a $563.00 discount to December gold at the settlement prices on September 4 which narrowed since the previous report. The price of rhodium, which does not trade on the futures market moved $150 lower over the past week and was at $4,500 per ounce on Wednesday after trading down to the $4000 level. Rhodium probed above the $5000 per ounce level last week before turning lower as it traded in a $1000 range. Rhodium is a byproduct of platinum production. The low price of platinum has caused a decline in output in South African mines, creating a shortage in the rhodium market. Rhodium is part of the reason that platinum is finally making a move on the upside. Some analysts are now projecting that the price of the rare metal could make a move to the $10,000 per ounce level, which is more than double the current price. However, markets rarely move in a straight line.

We are long the PPLT platinum ETF product which moved 4.24% lower since September 4. Platinum continues to offer the most attractive value proposition in the precious metals sector even after the recent rally. Platinum needs to make a move above the $1000 and $1200 resistance levels to break to the upside on a technical basis.

The bullish summer months gave way to new highs in early September, but the prices turned lower from the recent peaks in a corrective move. Falling global interest rates should provide support for the members of the precious metals sector. At the same time, the trade war between the US and China is far from over despite the recent optimism over a return to the negotiating table by both sides. The Brexit issue may be extended, but a general election in the UK could stand as a second referendum in the weeks ahead. The Brexit risks are far from off the table.

Gold has rallied in all currencies over the past weeks reaching a new record high in most foreign exchange terms. The Swiss franc and US dollar remain the two currencies that have not experienced a new nominal high in gold, but the trend of the yellow metal in both currencies remains bullish. We should expect a continuation of two-way price volatility in the precious metals over the coming week. I would view a continuation of selling as an opportunity to buy on a scale-down basis.

 

Energy Commodities

Over the past week, all of the members of the energy sector posted gains except for NYMEX crude oil, which moved less than 1% lower. Brent crude oil, oil products, ethanol, and natural gas prices all appreciated along with the price of coal.

October NYMEX crude oil futures fell by 0.91% since last week. November Brent futures moved 0.17% higher since September 4. October gasoline was 2.41% higher, and the processing spread in October posted a 25.62% gain since last week as gasoline outperformed the price of crude oil over the period. The gasoline crack spread is now in a seasonally weak period of the year as the driving season ends with the summer, but the recent decline turned out to be a bit overdone. October heating oil futures moved 1.22% higher since the previous report, and the heating oil crack spread rose by 6.76% since last week.

Technical resistance in the October NYMEX crude oil futures contract is at $58.76 per barrel level, the high from September 10, with support at the $50.50 level. Crude oil open interest fell by 0.07% since last week. More positive news on trade was supportive of the price of crude oil, as was the recent economic data from China. However, the potential for discussions between the US and Iran after the departure of John Bolton weighed on the price of oil. Bullish and bearish factors continue to pull the price of oil in opposite directions.

The spread between Brent and WTI crude oil futures in November rose to the $5.11 per barrel level for Brent, which was $0.53 above the September 4 level. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. The Brent premium traded as high as $11.59 per barrel in late May, but the November contract reached a high at a lower level at $7.41 on the high when it comes to the spread. The spread found at least a temporary bottom at $3.46 on August 20.

US daily production stood at 12.4 million barrels per day as of September 6 according to the Energy Information Administration, which was just 0.10 million below a record peak for daily output. As of August 30, the API reported an increase of 401,000 barrels of crude oil stockpiles while the EIA said they fell by 4.80 million barrels for the same week. The API reported a decline of 877,000 barrels of gasoline stocks and said distillate inventories fell by 1.20 million barrels as of August 30. The EIA reported a drop in gasoline stocks of 2.4 million barrels and a decrease in distillates of 2.50 million barrels. Rig counts, as reported by Baker Hughes, fell by 4 last week to 738 rigs in operations as of September 6, which is 122 below the level operating last year at this time. The decrease in the number of rigs with daily output at 12.4 million barrel per day level is a sign of the efficiency of the oil business in the US. However, if the rig count continues to drop, it could weigh on production and provide some degree of support for the price of oil.

OIH and VLO shares moved higher since last week with selling in the oil and stock markets. OIH rose by 12.59%, and VLO moved 10.55% higher since September 4. We are long two units of the OIH ETF product at an average price of around $13.40 per share. I believe the ETF that reflects the price of oil service company shares is far too low at its current price level. I intend to add to the position on further price weakness. Oil services stocks have done much worse than other oil-related equities over the past weeks.

October natural gas futures hit a low so far in 2019 on August 5 at $2.045 per MMBtu while the continuous contract fell to $2.029. Over the past week, the price moved higher despite a favorable outcome in the wake of Hurricane Dorian and a larger than expected injection into inventories last Thursday. The October futures were at $2.552 on September 11, which was 4.38% higher than on September 4. Last week, the EIA reported an injection of 84 bcf into storage brought the total amount of gas in storage to 2.941 tcf as of August 30. The low for the 2018/2019 withdrawal season was at 1.107 tcf in March. Last year stocks rose to a high at 3.247 before the start of the withdrawal season in November. At the current rate of injections, the amount of natural gas in storage at the end of the injection season in November will be higher than last year.

Source: EIA

As the chart shows, stockpiles of natural gas are 15.0% above last year’s level but were still 2.7% under the five-year average as of August 16. Last week’s injection was higher than the market had expected. This week, I expect the EIA to report an injection of around 86 bcf as the flow into storage begins to increase over the coming weeks as cooler weather in September arrives. Open interest fell by 5.22% over the past week. Technical resistance stood at $2.53 per MMBtu level on the continuous futures contract. $2.53 and $2.522 were the lows from 2018 and 2017 respectively. The price traded to a high at $2.648 per MMBtu on September 10. The peak season for demand tends to begin in mid-November, but the futures market has a habit of reflecting the shift from injections to withdrawals from storage a lot earlier. The break to the upside likely attracted both technical and speculative buying and short covering. The price action has been constructive, but is may be too early for the price to continue to make strides on the upside.

With approximately 10 weeks to go before the beginning of the withdrawal season in November, stocks will need to climb by an average of 30.6 bcf each week to reach last year’s peak at 3.247 tcf in storage around the US. An average of 105.9 bcf per week is needed to push the supplies over the four tcf level at the start of the 2019/2020 peak season for demand. We are likely to see stocks peak somewhere around the 3.6-3.8 tcf level at the beginning of the withdrawal season in November.

As I reported over the past weeks, I began buying some call options with strike prices at the $2.80 per MMBtu for expiration in December 2019 through February 2020 in the natural gas futures options market over the recent weeks. The January $2.80 call at 31.9 cents was 6.2 cents higher over the past week; I began purchasing these calls at the 16 cents level. I had also been buying the leveraged GASL product at prices below $9 per share. I will continue to leave plenty of room to add to these positions on any future price weakness in the natural gas call options. In GASL, I will work tight stops and look to take profits and re-establish long positions at a lower level if selling in natural gas, the stock market, or both weigh on the leveraged ETF. I will not work any stops on the call option positions as I will at least hold them into the early winter months at the end of 2019. The natural gas market has likely seen the lows for 2019 in early August. I did not add any new call positions over the past week.

October ethanol prices moved 1.29% higher on the October futures over the past week. Open interest in the thinly traded ethanol futures market rose by 0.96% over the past week. However, with only 525 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product rose by 6.54% compared to its price on September 4, and the price of October coal futures in Rotterdam increased by 7.87% over the past week. As I had been writing in recent weeks, coal should experience a seasonal bounce over the coming weeks as the market prepares for the 2019/2020 winter season in the northern hemisphere.

On Wednesday, the API reported that oil inventories fell by 7.227 million barrels for the week ending on September 6. The EIA said that stocks were 6.90 million barrels lower as of the end of last week. Analysts had expected a decline of 2.6 million barrels for the API report. When it comes to products, the API reported a decrease in gasoline inventories of 4.46 million barrels and a rise in distillate stocks of 618,000 barrels. The EIA said that gasoline stockpiles fell by 700,000 barrels and distillate inventories moved 2.7 million barrels higher for the week ending on September 6. The overall inventory data was bullish for the price of crude oil and products. When it comes to crude oil, the situation in the Middle East and any further incidents involving Iran could cause an increase in price volatility over the coming weeks. However, the prospects of talks sent the price of oil lower on Wednesday. Nothing has changed since the previous report as nearby NYMEX crude oil futures continue to trade between the $50 support and the $60 resistance levels in a choppy market. The only change in the oil patch is that oil-related equities have found some buying over the past week.

In natural gas, prices moved higher over the past week. The aftermath of Hurricane Dorian that did not do devastating damage in the US and a higher than expected injection into inventories did not stop the price from moving to the upside. When a market has reasons to fall, and it does not, it often tells us that the path of least resistance for the price is higher.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the peak price for this coming winter was at $2.851 in January, which was 12.3 cents per MMBtu higher than last week. I am sitting on small positions in December through February call options with strike prices below the $2.80 per MMBtu level and the GASL product. I will continue to look to purchase call options on price dips with a time stop in early winter rather than a price stop. My stops on GASL will be tight, given the volatile nature of the product. I will take profits on rallies and trade around the current long position over the coming week.

I have been tracking the price action in BG shares. Since September 4, the price of BG shares moved 7.55% higher to $57.97 per share on September 11. We are working a stop on close in BG at $49.49 per share on the downside. Our average cost of the shares is at $54.82. I will continue to post weekly updates on this position.

The market will likely watch the inventory and rig count data for direction over the coming week, but volatility in the stock market increases the potential of risk-off periods in the crude oil futures contracts. 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. The UCO and SCO products can be helpful for those who do not trade futures. Iran remains a significant factor that could change the pricing dynamics for crude oil at any time.

I continue to favor a long position in PBR, Petroleo Brasileiro SA. We are long two units at an average price of $15.16 per share. PBR shares were 4.22% higher over the past week at $14.57 per share. I will add another unit at a much lower price to lower the average cost of the long position. While I remain bullish on Brazil, contagion from Argentina and selling in the overall stock market pushed the price of the shares lower over the recent weeks.

Trade between the US and China and economic data from both nations are likely to provide guidance for oil prices over the coming week. The threat of a risk-off period is bearish for the energy commodity, but a more positive outlook for the global economy would be bullish. The price of oil is drifting towards the upper end of its trading range but remains one news story away from a return to the bottom. I continue to favor trading rather than investing in the oil market. Iran continues to pose the greatest threat to the oil market when it comes to supplies and could cause short-term price spikes.

Natural gas challenged the critical level of resistance at the $2.53 per MMBtu level. While the move above that price triggered some buying, it could be too early for a significant rally that would take the price towards the $3 per MMBtu level. Meanwhile, the volatile natural gas market tends always to be full of surprises. I expect coal to edge higher as the winter season approaches. Ethanol’s price will be a function of the price action in the corn and sugar futures markets in the US and Brazil.

 

Grains                                                             

New crop soybean moved lower over the past week. Meanwhile, corn and CBOT wheat futures posted gains. The USDA will release its September World Agricultural Supply and Demand Estimates report tomorrow on, September 12 at noon EST. We could see lots of price action in the grain futures market following the release of the September report from the USDA

 

 

New-crop November soybean futures moved 1.03% lower over the past week. Open interest in the soybean futures market rose by 4.26% since last week. The December synthetic soybean crush spread moved higher and was at the $0.99 per bushel level on September 11, down one cent since September 4. The crush spread is a real-time indicator of demand for soybean meal and oil. Therefore, price trends in the crush spreads can cause buying or selling in the raw oilseeds at times. Any significant moves in the crush spread are likely to translate into price movement in the soybean futures. The price action in the December crush spread is slightly bearish for the price of the oilseed futures.

New-crop December corn was trading at $3.6000 per bushel on September 11, which was 0.42% higher on the week. The August WASDE report was highly bearish for the price of corn and pushed the price to a low at $3.5225 on the December futures contract on September 9 as the selling continued to weigh on the price of corn over the past week. Corn made new lows steadily since the last USDA report and awaits the release of tomorrow’s WASDE. Open interest in the corn futures market rose by 3.44% since September 3. The price of ethanol rose by 1.29% since the previous report. October ethanol futures were at $1.3330 per gallon on Wednesday. The spread between October gasoline and ethanol futures widened to 23.69 cents per gallon on September 11, up 2.0 cents since the prior week on strength in gasoline futures.

 

December CBOT wheat futures rose 3.64% since last week. The December futures were trading $4.7750 level on September 11. Open interest rose by 2.76% over the past week in CBOT wheat futures.

 

As of Wednesday, the KCBT-CBOT spread in December was trading at a 79.00 cents per bushel discount with KCBT lower than CBOT wheat futures in the December contracts. The spread widened by 2.75 cents since September 4. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.”  The spread continues to be at a level that I view as highly bearish for the wheat market.

My positions in the grain markets continue to be minimal, given the time of the year and the recent price volatility. I have minimal long core positions in futures and the CORN, WEAT, and SOYB ETF products. The further we move towards the harvest season, the less active I will be when it comes to trading. The trade dispute between the US and China remains one of the most significant factors for prices of soybeans and corn. For the coming week, the price volatility is likely to be a function of the September WASDE report. However, any news from the trade front between the US and China could cause increased volatility.

As I wrote last week, “We need to keep in mind that, politics aside, the global population continues to move higher as the world adds approximately 20 million new mouths to feed each quarter. More people around the world require more food each day. Agricultural output must keep pace with the demand side of the fundamental equation in the grain and other markets. During bear market periods, prices are likely to find bottoms at higher levels than in the past. During bull markets, we could witness explosive price moves. Therefore, buying weakness in the three leading grains, even during the offseason months, could be the optimal approach for nimble traders and investors prepared to take profits when prices recover.” Grains are in wait and see mode until they hear from the USDA on Thursday at noon EST.

 

Copper, Metals, and Minerals

 

A return of some degree of optimism over trade injected support into all of the base metals that trade on the London Metals Exchange. Nickel had been the most significant mover on the upside over past weeks as an export ban in Indonesia stoked fears of shortages for the nonferrous metal. Over the past week, nickel posted the small gain as it only edged higher.

The one-day lag in COMEX versus LME copper prices caught up over the past week as the red metal on the LME posted a significant gain. Lead was the metal that led the way on the upside on a percentage basis since last week’s report. Meanwhile, the price of lumber moved to the upside while the Baltic Dry fell after recent gains. The price of iron ore was higher since last week. Uranium futures edged lower since the previous report.

Copper moved 0.75% higher on COMEX, while the red metal posted a 3.69% gain on the LME since the previous report. Open interest in the COMEX futures market moved 6.97% lower on the week. Copper was trading at $2.6145 per pound level on the nearby December futures contract. Copper is one of the leading barometers when it comes to the trade dispute between the US and China, which is now a trade war. Copper fell to a new low below the $2.50 level on September 3 but turned higher. Over the past week, copper inventories on the LME fell while COMEX stocks moved marginally higher.

LME lead moved higher by 5.11% since September 3, while the price of nickel edged 0.31% higher over the past week after recent extraordinary gains. Tin posted a 4.10% gain since the previous report. Aluminum was 3.44% higher on the week. The price of zinc rose by 4.20% since September 3. Positive economic news from China and some optimism over trade lifted the price of the base metals since last week’s report.

November lumber futures were at the $380.30 level, 4.22% higher since the previous report. The price of uranium for December delivery was a touch lower at $25.35 per pound level down 0.59%. The Baltic Dry Index was 4.32% lower as it moved below the 2500 level after weeks of gains. The cost of shipping had moved higher on the back of new fuel requirements. October iron ore futures posted a 2.73% gain compared to the price on September 4. Open interest in the thinly traded lumber futures market fell by 7.28% over the past week.

LME copper inventories fell by 5.94% to 310,450 metric tons since last week. COMEX copper stocks increased 0.23% since last week to 44,214 tons. Lead stockpiles on the LME fell by 0.91%, while aluminum stocks rose by 0.32%. Aluminum stocks were at under the 917,000-ton level. Zinc stocks moved 3.98% lower since the previous report. Tin inventories moved 0.29% lower since last week to 6,955 tons. Nickel inventories were 1.89% higher compared to the level on September 3. The dollar, US interest rates, trade, and the overall direction of the global economy are the primary factors when it comes to base metal prices. Trade and the Chinese economy are bound to have the most significant impact on the path of least resistance for the nonferrous metals. The prices have stabilized after the recent developments that have returned at least some optimism to the markets.

We own two units of Energy Fuels Inc. (UUUU), a US producer of uranium and vanadium, at an average of $2.55 per share. We are working a stop at $1.19 and have an initial profit target at $6 per share. There is a double bottom on the long-term chart at the $1.29 level. I am giving this position plenty of room and plenty of time. If the shares continue to fall, I will add another one and possibly two units to this trade to average down the price on the long position. UUUU was trading at $2.03 per share on Wednesday up 15.50 cents since last week.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $2.59 on September 11. I believe this option is an inexpensive way to hold a long-term position in X shares at a low level. The details for the call option are here:

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

 

We own two units of FCX shares at an average of $10.56. The stock was trading at $10.08 on September 11, 79 cents higher over the past week. I will maintain a small long position in FCX shares and would only add if the price drops from the current level.

The trade war’s impact on the global economy should continue to have the most substantial effect on industrial commodities prices over the coming week. Copper bounce from the lows is a positive sign as the red metal tends to be the leader of the pack.

 

Animal Proteins

As we moved deeper into the offseason, the prices of both of live cattle and hog futures continued to decline over the past week while feeder cattle posted a marginal gain. The animal protein markets are now waiting for tomorrow’s USDA report. The monthly World Agricultural Supply and Demand Estimates Report will supply the market with the latest fundamental data that always has the potential to move prices and create volatility. Given the price path of the meat futures, the market expects supplies to rise and demand to fall over the coming weeks and months.

October live cattle futures continued to trade at under $1 per pound and were at 98.50 cents per pound level down 0.53% from last week. Technical resistance is at $1.0485, which is the upper end of a gap on the October contract.  Technical support stands at 93.40 cents per pound level, as the market continues to make new and lower lows. Price momentum and relative strength indicators are in neutral territory as the price is bouncing back towards the $1 per pound level. Open interest in the live cattle futures market moved 3.73% higher since the last report.

October feeder cattle futures outperformed live cattle as they rose by 0.45% since last week. October feeder cattle futures were trading at the $1.34025 per pound level with support at $1.27325 and resistance at $1.36575 per pound. Open interest in feeder cattle futures rose by 0.58% since last week. While live cattle futures have a delivery mechanism, feeder cattle are a cash-settled futures contract. Sometimes live cattle prices lead feeder cattle prices, while at others the opposite occurs.

Lean hog futures tanked again over the past week. October lean hogs were at 60.175 cents on September 11, which was 10.35% lower on the week. The open interest metric rose by 0.63% from last week’s level. Price momentum is crossing lower in neutral territory with the relative strength index falling. Support is at 59.30 cents with technical resistance on the October futures contract at just below the 70 cents per pound level.

The forward curve in live cattle is in contango from October 2019 until April 2020. From April 2020 until August 2020 a backwardation or tight market returns to the forward curve for live cattle, but it shifts back to contango until from this August 2020 through February 2021. The Feeder cattle forward curve is in a backwardation from September through March 2020. From March 2020 through August 2020 a contango returns.

In the lean hog futures arena, there is contango from October 2019 until July 2020.  From July 2020 through December 2021 the curve is in backwardation, but contango returns from December 2020 through February 2021. The forward curves reflect the seasonal trading patterns in the meat markets. The curves shifted to reflect the recent selling in the animal protein futures markets.

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

Source: CQG

Based on settlement prices, the spread was at 1.6369:1 compared to 1.4752:1 in the previous report. The spread increased by 16.17 cents as cattle became much more expensive compared to hogs on a historical basis.

The animal protein sector is now waiting for the September WASDE report, which comes out tomorrow at noon EST.

 

Soft Commodities

The price of sugar moved to the downside over the past week. Coffee, cocoa, FCOJ and cotton all posted gains compared to their closing prices on September 4. The only significant percentage move in the soft commodities futures contracts that trade on the Intercontinental Exchange since the previous report was in the coffee market which posted an over 7% gain.

October sugar futures fell 1.82% since last week as the price of the sweet commodity slipped below the 11 cents per pound level. Technical resistance is at the August 12 peak at 11.96 cents. Nearby sugar futures traded to a low at 10.73 cents on September 6 which is now the level of short-term support. The value of the Brazilian real against the US dollar moved higher over the last week and was at the $0.2456 level against the US dollar, which was $0.00245 or 1.0% higher. The recent decline in the Brazilian currency likely contributed to the weakness in the price of sugar.

Price momentum and relative strength on the daily sugar chart declined into oversold territory. The metrics on the weekly and monthly charts are declining toward oversold conditions. If sugar suffers a substantial decline, I will look to add to long positions. Sugar open interest fell by 2.16% over the past week after rising to a new all-time high. I will be looking to add to the long position in CANE at lower levels and have cancelled the stop below.

December coffee futures rose by 7.04% since last week’s report and were trading at the $1.034 per pound level. Short-term support is at the August 20 low at 93.40 cents on the December futures contract. I continue to favor coffee on the long side, but it has been a bumpy ride in the soft commodity. Our stop on the long position in JO is at $27.99; we are long two units of the ETN at an average price at $34.92 per share. JO was trading at $34.15 on Wednesday. Open interest in the coffee futures market rose by 0.69% since last week. I continue to believe the soft commodity is near the bottom end of its long-term pricing cycle. I have been a scale-down buyer leaving room to add on further weakness over the coming days and weeks.

Cocoa futures continued to recover over the past week after the recent losses. On Wednesday, December cocoa futures were at the $2304 per ton level, 1.54% higher than last week. Open interest rose by 1.51%. Relative strength and price momentum are rising above neutral conditions. The price of cocoa futures rose to a new peak and the highest price since May 2018 with cash prices at a high at $2602 per ton in early July, which is now the technical resistance level for cocoa futures. We are long the NIB ETN product at $25.76. NIB closed at $26.24 on Wednesday, September 11.

December cotton futures continue to sit near the recent low but were 1.99% higher over the past week. Cotton came close to the March 2016 low at 55.66 cents per pound. On August 26, the price fell to a low at 56.59 cents, less than one cent above the critical low. The first target on the upside is technical resistance at 60.25 cents, the August 19 high. Above there, the next level on the upside is at the 64.68 cents per pound level on the December contract, the July 25 peak. On the downside, support is at 55.66 cents per pound. Open interest in the cotton futures market rose by 2.78% since September 3. The USDA’s WASDE report tomorrow will guide the cotton market. We are long two units at $37.90 per share. BAL was at $36.20 on September 11.

Price momentum and relative strength metrics were rising from neutral conditions on the daily chart on Wednesday. The metrics remain in oversold conditions on the weekly and monthly charts. I continue to believe cotton is in the buying zone and that a correction to the upside will eventually occur from around the 55.66 cents per pound level.

November FCOJ moved higher over the past week. On Wednesday, the price of November futures was trading around $1.0525 per pound. FCOJ nearby futures moved 2.43% higher over the past week. Support is at the 94.65 cents level, the August 19 low. Technical resistance at the early August high at around $1.06 per pound. Open interest fell by 1.82% since September 3.

The Brazilian real should continue to have some influence over the price direction of sugar, coffee, and FCOJ futures. Cocoa seems to have found at least a temporary bottom, and cotton is near the bottom end of its pricing cycle as it is not far above multiyear lows. Coffee and sugar futures are moving in opposite directions. I continue to favor the upside in both markets over the coming weeks. Soft commodities can be extremely volatile at times, but most of the prices have been hovering near lows. I continue to be bullish on most of the soft commodities for the medium to long-term.

 

A final note

Trade, Brexit, Iran, and a host of other factors have the potential to move markets over the coming days, weeks, and months. Over the past week, some degree of optimism returned to markets. However, all asset classes have experienced shifts from pessimism to optimism and back again over the past months. With all of the issues facing markets, we are likely to see a continuation of price volatility over the coming weeks, and perhaps months.

We must always remember the souls lost on 9/11 in 2001. May they rest in peace.

 

 

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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