Hecht Commodity Report

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  • Precious metals continue to move to the upside
  • Platinum leads the shiny metals higher
  • Wide ranges in crude oil without direction- Signs of bullish life in natural gas
  • New highs in the dollar index and then a pullback
  • A new low in copper and a bounce

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

Summary and highlights:

 

On Thursday, August 29, the stock market took an elevator ride on the upside with a 1.25% gain in the DJIA. The S&P 500 and NASDAQ rose by 1.27% and 1.48% respectively. The 30-year Treasury bond futures fell by 0-18, and the dollar index rose to the 98.455 level as it approached the August 1 high and level of critical technical resistance at 98.700.  The frenetic trading in August continued during the session before the final trading day of the month and the unofficial end of the summer season. Wheat and corn prices edged lower while soybeans posted a small gain on Thursday. Crude oil and natural gas posted gains. The EIA and API reports continued to provide support for the price of oil. In the natural gas market, the approach of Hurricane Dorian caused the price to rise to just over the $2.30 per MMBtu level on the now active October futures contract. Some projections were for the storm to make landfall in Florida as a Category Four hurricane. Gold and silver prices corrected lower, but gold remained above the $1535 level on active month December futures. Silver made a new high at $18.615 per ounce, but the price reversed and closed below the $18.20 level in the volatile precious metal. Platinum and palladium priced moved higher but settled below their respective highs for the session. Rhodium, the bull market that keeps on giving, moved to a midpoint value at over $4,500 per ounce as it gained $175 on the day. The price of copper edged higher on the session. Cattle and hog futures bounced a bit as all of the futures contracts posted small gains. In the soft commodities sector, cotton and FCOJ prices moved higher while sugar, coffee, and cocoa moved lower. Lumber also edged lower on the session. The Brazilian real was probing below the $0.24 level against the dollar, which could have weighed on the prices of coffee and sugar futures. Bitcoin futures continue to move to the downside as they settled at $9,570 per token. The market began to thin out in anticipation of the final weekend of the summer season.

Friday, August 30 was the final trading session of a very hectic month in markets and the start of the Labor Day holiday weekend. In the commodities market, Labor Day marks the end of the grilling and driving seasons. The offseason for animal protein and gasoline demand begins in September. The markets likely suffered from thin conditions on the day before the long weekend, but the dollar index rose to a new high and put in a bullish reversal on the weekly chart. President Trump was not pleased with the ascent of the greenback as he took to Twitter and wrote:

Source: Twitter

Stocks were either side of unchanged on the session. Wheat dropped sharply, but corn and bean prices were close to unchanged on the session. Crude oil declined to the $55 per barrel level as Brent futures rolled to November. Oil products moved lower with the price of oil. Even though Hurricane Dorian was projected to hit the state of Florida as a massive Category Four storm, natural gas futures declined by 1.1 cents per MMBtu on the session. Gold moved lower on the back of the new high in the dollar, but silver, platinum, and palladium all posted gains. Copper fell by 2.65 cents per pound on the final session of the month. Meats were down across the board. Coffee, cocoa, and lumber posted gains while sugar, cotton and FCOJ futures fell on the session. Bonds did not move much, and Bitcoin futures closed the week at the $9,650 level on the CME futures contract.

Monday was the Labor Day holiday in the US, and most markets were closed.  On Tuesday, the weakest ISM number since January 2016 at below the 50 level sent stocks lower on the session. In the UK some members of Prime Minister Johnson’s Tory Party abandoned ship on the back of his plans to suspend the Parliament and move forward with a hard Brexit. The Prime Minister lost his majority, and a snap election could be in the cards for October 14, just two weeks before the deadline for Brexit. The pound slipped to a new low as it probed below the $1.20 level for the first time in decades but bounced back above by the close. The US stock market fell along with crude oil and copper. Gold and precious metals moved higher with silver leading the way. Silver futures closed over $19 per ounce for the first time since November 2016 as the price of the precious metal rose above the next level of technical resistance at the 2017 peak at $18.655 per ounce. Platinum moved around $25 per ounce higher to a new short-term peak, and gold was around $25 higher on the session. Palladium posted a small decline, and the rhodium market edged a bit lower. Trade and economic data weighed on the price of crude oil, which fell by over $1 per barrel on the session taking the prices of oil products lower. Natural gas rose above its technical resistance level at the August 1 high at $2.338 and settled sat $2.358 on the back of Hurricane Dorian and the end of the summer season. The next level on the upside is the critical technical resistance at just over $2.50 per MMBtu.

Ethanol edged lower with losses in gasoline and all of the leading grain futures markets. Copper fell to a new low below $2.50 per pound, but the price recovered to above that level on the close. Meat prices posted across the board gains led by a limit up move in the lean hog futures in the October contract. Cotton, lumber, FCOJ, and coffee prices fell. Sugar and cocoa prices edged higher on the session. The Brazilian real slipped below the $0.24 level, which likely weighed on the prices of sugar, coffee, and FCOJ futures. The real is closing in on the September 2018 low and the bottom dating back to 2015 at just over the $0.23 level against the US dollar. Bitcoin moved higher to the $10,800 level. Late in the day, the Fed’s James Bullard said, “A 50 basis point cut would align the central bank with market expectations.” Late in the evening in the UK lawmakers took control of Parliament to block a no-deal Brexit increasing the potential for a general election.

On Wednesday, the Beige Book sent a mixed message to markets as it characterized growth across all sectors of the US economy as moderate. The dollar index moved lower from Tuesday new high, which provided support for many commodities prices. Precious metals moved higher across the board on NYMEX and COMEX, but rhodium declined. Crude oil was schizophrenic as the loses on Tuesday turned to significant gains on Wednesday as recession fears faded. News that Chinese imports of crude oil rose was bullish for the price of the energy commodity. Natural gas moved over the $2.40 per MMBtu level. Corn was a touch lower, but soybeans and wheat posted gains on the session. Ethanol edged a bit higher on the back of gains in gasoline and crude oil. Meats were stable and mostly higher. Sugar fell to the 11 cents per pound level, which all of the other soft commodities posted gains on the session. Lumber edged lower, and Bitcoin did not change much as was at just under the $10,800 level. The stock market moved higher on Wednesday as the long bond was steady. In the UK, the Parliament voted to tie Prime Minister Johnson’s hands when it comes to a hard Brexit. The new Prime Minister will not be allowed to leave the EU without a deal as the Parliament voted 327-299 to put a roadblock in front leader of the Tory Party. The move will likely lead to a new election, but the initial vote that requires a two-thirds majority failed on Wednesday. However, in another sign that the pound currency does not want a hard Brexit, the pound rallied against the dollar and the euro in the aftermath of the Parliamentary vote. In Hong Kong, the government backed down in what was a small but meaningful victory for the protesters. The calming of tensions lifted markets on Wednesday.

Stocks and Bonds

Stocks recovered on the week in the continuing saga of the up and down stock market. The daily trading ranges have expanded in the stock market over recent weeks.

The S&P 500 rose by 1.73% over the past week, while the NASDAQ moved 1.53% higher. The DJIA posted a 1.23% gain since the previous report. Trade remains the primary issue pushing the stock market around as investors and traders deal with recession-on and recession-off market conditions.

As US stocks rose, Chinese large-cap stocks outperformed the US market on the back of positive economic data and the easing of tensions in Hong Kong.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $40.05 level on Wednesday, which was 0.70% higher than the closing level on August 28. Technical support is at the recent low at $37.66 per share from August 14. We could see an increase in volatility over the coming weeks as the market focuses on central bank interest rate cuts and Brexit.

US 30-Year bonds moved higher even though the stock market recovered over the past week. Bonds traded to a new high at 167-18 on the September futures contract on August 28. The September contract rolled to December and was at the 165-27 level on Wednesday as they moved 0.17% higher since the previous report. The yield curve continues to experience periodic inversions, which is adding to market volatility across all asset classes.

Open interest in the E-Mini S&P 500 futures contracts rose by 0.70% since August 27. Open interest in the long bond fell by 5.24% 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 17.33 level on September 4, a decline of 10.44% 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. Nothing has changed since last week despite the stock market recovery.

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.

The stock and bond markets could experience wide price variance over the coming weeks and months, given the many political and economic issues facing the world. Natural buying in the stock market each day creates a bias towards the upside. The commitment by the central banks of the world to push rates lower to stimulate economic conditions should also be supportive of stocks. However, the trade war between the US and China, Brexit, and other issues continue to be a bearish force for stocks and bullish for bonds. The bottom line is that volatility should continue in the current environment, which amounts to risk-on and risk-off trading depending on the political and economic temperature of the day.

 

The dollar and digital currencies

The dollar index rose to a new high over the past week and posted a 0.28% gain since August 28. The index made a new and higher high at 99.33 on September 4. The new peak was a continuation of the bullish trend in the dollar that started in February 2018. The dollar is the king of currencies in a foreign exchange arena where all members are losing value compared to gold. While the yellow metal is both a commodity and a means of exchange, central banks around the world hold gold as an integral part of their currency reserves. The appreciation of gold is all currencies could be telling us that the faith in the governments that print legal tender is declining along with the implied credit ratings of the countries. The dollar may be the strongest foreign exchange instrument in the world, but it has also dropped in value since June as the price of gold in dollar terms has risen to over the $1550 per ounce level.

The euro currency was 0.46% lower against the dollar since last week’s report. The euro is dealing with Brexit and the ongoing political and economic problems in southern Europe. A hard Brexit could take a toll on the euro as well as the pound. However, the latest move by the UK Parliament lowered the risk for the coming weeks.

US rates are likely to move lower when the FOMC meets on September 17-18. A move of 50 basis points seems unlikely because of the overall strength in US economic data and dissensions by two voting members at the July 31 meeting. The odds favor another 25-basis point decline in the Fed Funds rate later this month, which will result in additional pressure from President Trump. If the dollar continues to rally, the potential for currency market intervention by the US Treasury will grow. The markets would like to see a more aggressive dovish move by the central bank, but all indications are that the central bank will resist maintaining its independence from political forces. Moreover, the FOMC is likely concerned that they only have so much room on the downside to cut interest rates before sending them into negative territory in the case of a recession in the US. Therefore, I expect that the committee will deliver a one-quarter of one percent rate and wait to see the economic data over the coming weeks and months before making any other moves.

 

The leader of the digital currency asset class bounced and was trading at the $10,631.39 level as of September 4. Bitcoin and other digital currencies had been declining in value over recent weeks but reversed. Bitcoin was near the bottom of the $9000-$12,500 trading range. Bitcoin and gold both appreciated in the initial aftermath of the June Fed meeting. However, gold has kept its gains while the price of Bitcoin and other cryptocurrencies have been volatile. It seems to me that some Bitcoin enthusiasts believe that digital currencies are competitors with gold. However, I think they can coexist.

Moreover, digital currencies have only been around since 2010, while thousands of years of history make gold a means of exchange that is sewn into the fabric of humans around the world. The proponents of cryptos that compare it to gold cite the utility of Bitcoin and the other members of the assets class. However, central banks of the world hold the yellow metal and do not keep any significant reserves of digital currencies. While that may change over the coming years, the current digital currencies would not likely be the instruments of choice. A government-issued digital currency has the best potential for success. Bitcoin and the other tokens fly beneath the radar of governments and regulators, which is part of the attraction. However, it is also the reason why ubiquitous adoption is a challenge given government control of the money supply. We should expect lots of price variance in the asset class, which makes it interesting from a trading perspective. Some may call the cryptos noncorrelated assets; I like to think of them as nonproven trading sardines.

Bitcoin moved 9.08% higher since last week while Ethereum posted a 2.4% gain as it was at around $177.46 per token. The market cap of the entire asset class moved 6.99% higher as Bitcoin outperformed the other digital currencies. The number of tokens rose by 131 since August 28. The consistent rise in the number of digital currencies continues to dilute the asset class. In late 2017 the overall market cap was at over $800 billion with far fewer tokens. Open interest in the CME Bitcoin futures rose by 9.83% since last week in the cash-settled futures product.

Until an exchange can deal with custody issues and regulators approve ETF products that replicate the price action in Bitcoin and the other cryptos, wide market acceptance will remain a challenge. In China, Bitcoin has excellent utility for those looking to transfer and protect wealth. However, the Chinese government is not a fan and will do everything within its power to make sure Bitcoin does not allow wealth to flow out of the world’s most populous nation.

The Canadian dollar moved 0.63% higher since last week. Open interest in C$ futures rose by 5.06% 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. In a risk-off environment, all commodity prices could experience downdrafts.

The British pound posted a 0.12% gain since the previous report, but the fell to a new low below the $1.20 level before recovering. Prime Minister Boris Johnson has told the citizens of the UK that he will lead the nation out of the European Union by the October 31 deadline even if it means a hard Brexit. The pound remains near the low against the US dollar and euro as the world waits for news on the new leader’s plans for an exit from the EU. A hard Brexit is likely to lead to new lows in the pound if the price action since mid-2016 is a guide. The clock is ticking with just two months to go before the deadline. We could see lots of volatility in the British pound in September and October based on the daily flow from the news cycle over Brexit. After the Prime Minister moved to suspend the Parliament for five weeks at the end of August, the legislative body voted to prevent him from exiting the EU without an agreement. A snap general election that would take place on October 15 is now likely. We could see lots of market volatility come from the UK over the coming days, weeks, and months. The pound has been weak on the prospects for a hard Brexit. It rallied after the Parliament voted to put a roadblock in front of the Prime Minister on Wednesday.

The Brazilian real had been falling against the US dollar over the past weeks. Fires in the Amazon have been a problem for the Brazilian government. The Brazilian currency posted gains since late May, but the rally ran out of steam. Reforms by the Bolsonaro government should continue to support eventual gains in the currency that declined from over $0.65 to under the $0.24 level against the US dollar since 2011. The Brazilian currency fell recently on contagion from Argentina, but during risk-off periods emerging market currencies and asset prices typically move to the downside. Additionally, Brazil’s commodity exposure adds another level of risk to the currency as volatility grips the markets across the world. Over the past week, the Brazilian real bounced higher against the dollar with a 1.61% rise.

 

Gold is trading at new highs against all of the world’s leading currencies, except for the Swiss franc and the US dollar. The most recent currency to join the club where the yellow metal is at the highest price in history was the euro where gold rose above the 1377 euros per ounce level for the first time in August. A continuation of the bull market in gold could have significant ramifications for the world’s foreign currency markets as it is a continuing sign of the decline in value of government-issued legal tender.

 

Precious Metals

Gold moved a bit higher over the past week, as the price of the yellow metal remained north of $1550 per ounce. Meanwhile, all of the other members of the sector moved to the upside, platinum. The rhodium market has been on fire as the price moved to the $5,000 level over the past week before backing off.

Gold was 0.73% higher since August 28 while silver was up by 5.92% over the same period as it moved to over the $19.50 per ounce level. The price of December gold was just above the $1560 per ounce level on Wednesday while silver was around $18.30. December gold rose to a new high at $1566.20 on Wednesday, and December silver moved to another new high at $19.75 per ounce on the same day. The trajectory of gains increased the odds of corrective moves, but significant selling has yet to appear on the scene.

The price of platinum continued to move to the upside with an 8.29% gain since last week. Platinum moved to a high at $994.30 on September 4 with heavy volume in the futures market during the sessions when the price was moving to the upside. Rhodium is a byproduct of platinum, and the price of the metal has taken off like a rocket ship on the upside. After a 15.08% gain last week, rhodium gained another 6.90% since the previous report. The midpoint price of the metal rose to $4650 per ounce. Palladium also posted an impressive 5.95% gain on the week. Palladium and rhodium continue to be the star performers of the sector since early 2016. Platinum’s recent gains could be a sign that the leader of the PGM sector is about to join the bullish party.

Open interest in the gold futures market moved 0.29% lower. The metric moved 13.14% higher in platinum while it was 1.21% lower in the palladium futures market. Silver open interest fell by 5.95% over the period.

Technical resistance on the December gold futures contract is 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.  The turmoil surrounding Brexit could also add to the bullish price action since June. Gold rose to a high in July 2016 on the back of the Brexit referendum.

The silver-gold ratio continued to move to the downside over the past week as silver has been the stronger of the two precious metals.

Source: CQG

The daily chart of the price of December gold divided by December silver futures shows that the ratio was at 79.42 on Wednesday 4.55 lower than the level on August 28. 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 played catchup over the past week. The silver market is highly speculative, and gold fever appears to be lighting a bullish fuse under the silver market. If gold continues to post gains, silver will likely go along for the ride. At the $1560 per ounce level in gold, a return to the historical norm in the ratio would put the price of silver at $28.36 per ounce. Silver remains a bit under $9 undervalued at its current price level based on the long-term average of the price relationship between the two metals despite the move over the past weeks. When the precious metals are in bullish mode as they were in 1979/1980 and 2011, the ratio had moved well below the 55:1 average.

We are long the gold mining stock ETF products GDX and GDXJ, which outperformed the price of gold since the last report. While gold moved 0.73% higher, the GDX was 1.71% higher since August 28 and GDXJ was 1.47% above last week’s level. The mining stocks tend to outperform gold on the upside and underperform during corrective periods as it provides a leveraged return. The price action over the past week was typical of the relationship between the metal and the mining stocks. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product which posted a 6.81% gain since August 28 as it outperformed the price action in the silver futures market. Gold and silver remain in bullish price patterns. The risk of a correction will continue to increase as the prices rise.

Platinum group metals all posted gains since August 28. October platinum futures rose by 8.29% to the $984.20 per ounce level. Palladium posted a 5.95% gain as of the close of business on September 4 and was at the $1552.10 per ounce level. Palladium was trading at a premium over platinum with the differential at the $567.90 per ounce level on Wednesday, which narrowed over the past week. October platinum was trading at a $576.20 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 $300 higher over the past week and was at $4,650 per ounce on Wednesday. Rhodium probed above the $5000 per ounce level during the week, which was a new high. 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.

We are long the PPLT platinum ETF product which moved 9.55% higher since August 28. 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.

August was a bullish month for all of the precious metals, and the entire summer was a period where they all began to shine. Interest rates, trade, Brexit, and other issues facing markets all have the potential to keep the rallies going over the coming weeks and months. However, the risk rises with the price, and even the most robust bull markets experience sharp pullbacks at times. Buying rallies has been a prescription for losses for many years in the precious metals sector. Even the rallies in palladium and rhodium since early 2016 came with downdrafts in prices at times.

Meanwhile, gold is the leader of the pack, and the strong dollar during a bull market in gold is a sign of strength for the yellow metal. Gold is rallying in every currency in the world, which tells us that the value of fiat foreign exchange instruments is declining. The full faith in governments that print the banknotes is on the decline along with the credit ratings. Gold is the ultimate rating agency for foreign exchange instruments.

 

Energy Commodities

Since last week’s report, the prices of crude oil moved higher while and oil products were mixed. The crack or processing spreads for refining a barrel of crude oil into gasoline and distillate products moved to reflect seasonal factors as gasoline fell and distillates rose. Meanwhile, natural gas and coal prices rose while ethanol moved to the downside.

October NYMEX crude oil futures rose 0.86% since last week. November Brent futures moved 1.25% higher since August 28 as October rolled to November on the final day of August. October gasoline was 2.04% lower, and the processing spread in October posted an 18.55% lower since last week as gasoline underperformed 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. October heating oil futures moved 1.22% higher since the previous report, and the heating oil crack spread rose by 2.31% since last week.

Technical resistance in the October NYMEX crude oil futures contract is at $57.40 per barrel level with support at the $50.50 level. Crude oil open interest rose by 3.96% since last week. The escalation of the trade war between the US and China that threatens to send the world into a global recession continues to weigh on the price of the energy commodity while Iran and recent inventory reports have been supportive of the price. Bullish and bearish factors continue to pull the price of oil in opposite directions. On Wednesday, a more positive outlook for the Chinese economy lifted the price of crude oil.

The spread between Brent and WTI crude oil futures in November rose to the $4.58 per barrel level for Brent, which was $0.39 above the August 28 level. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. The spread peaked at the $5.34 level over the past week. The Brent premium traded as high as $11.59 per barrel in late May, but the November contract reached 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 12.5 million barrels per day as of August 23 according to the Energy Information Administration, which was a record peak for daily output. As of August 23, the API reported a decrease of 11.1 million barrels of crude oil stockpiles while the EIA said they fell by 10.0 million barrels for the same week. The API reported a decline of 349,000 barrels of gasoline stocks and said distillate inventories fell by 2.50 million barrels as of August 23. The EIA reported a drop in gasoline stocks of 2.1 million barrels and a decrease in distillates of 2.10 million barrels. Rig counts, as reported by Baker Hughes, fell by 12 last week to 742 rigs in operations as of August 30, which is 120 below the level operating last year at this time. The decrease in the number of rigs with daily output at a record 12.5 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 4.0%, and VLO moved 2.78% higher since August 28. 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 in the current environment.

September natural gas futures rolled to October since the last report. The October contract 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. Hurricane Dorian could have caused some short-covering in the natural gas futures market. The October futures were at $2.445 on September 4, which was 9.5% higher than on August 28. Last week, the EIA reported an injection of 60 bcf into storage brought the total amount of gas in storage to 2.857 tcf as of August 16. 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 is likely to be higher than last year.

Source: EIA

As the chart shows, stockpiles of natural gas are 14.6% above last year’s level but were still 3.4% under the five-year average as of August 16. Last week’s injection was around the level the market had expected. This week, I expect the EIA to report an injection of around 71 bcf as the flow into storage begins to increase over the coming weeks as cooler weather in September arrives. Open interest rose by 1.21% over the past week. Technical resistance stands at just over the $2.50 per MMBtu level on the continuous futures contract. $2.53 and $2.522 were the lows from 2018 and 2017 respectively. We will likely see a challenge of those levels when the 2019/2020 withdrawal season comes closer. 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.

With approximately 11 weeks to go before the beginning of the withdrawal season in November, stocks will need to climb by an average of 35.5 bcf each week to reach last year’s peak at 3.247 tcf in storage around the US. An average of 104 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.

$2 per MMBtu is a critical psychological target on the downside if natural gas moves to a lower low and towards the March 2016 bottom at $1.611 per MMBtu. As the days of summer are over, 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 25.7 cents was 8.4 cents higher over the past week. I am also looking to purchase the leveraged GASL product at prices below $9 per share. I will 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 establish long positions at a lower level if selling in natural gas, the stock market, or both continue to weigh on the leveraged ETF. I will not work any stops on the call option positions. The natural gas market has likely seen the lows for 2019 in early August.

October ethanol prices moved 2.3% lower on the October futures over the past week. Open interest in the thinly-traded ethanol futures market decreased by 15.72% over the past week. However, with only 520 contracts of long and short positions, the thinly-traded biofuel market is untradeable. The KOL ETF product rose by 4.92% compared to its price on August 28, and the price of October coal futures in Rotterdam increased by 7.93% over the past week. As I had been writing in recent weeks, coal could 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 rose by 401,000 barrels for the week ending on August 30. The EIA will report its weekly data on Thursday morning because of the Labor Day holiday on Monday. Analysts had expected a decline of 3.5 million barrels for the API report. When it comes to products, the API reported a decrease in gasoline inventories of 877,000 barrels and a fall in distillate stocks of 1.2 million barrels. The API inventory data was bearish 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. 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 natural gas, prices moved higher over the past week. While Hurricane Dorian did most of its damage in the Bahamas, it likely caused the short-covering that took the price to close to the level of technical resistance.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the peak price for this coming winter was at $2.728 in January, which was 16.6 cents per MMBtu higher than last week. I am looking at December through February call options with strike prices below the $2.80 per MMBtu level and the GASL product. I had been concentrating on the January $2.80 calls at the 20 cents level and below and picked up a few over the past weeks. I am taking my time accumulating a long position. I will be looking to buy the higher strike prices over the coming week on price dips.

I have been tracking the price action in BG shares. Since August 21, the price of BG shares moved 2.78% higher to $53.90 per share on September 4. We are working a stop on close in BG at $49.49 per share on the downside. Last week, we added another unit to our long position at $52.44 per share, which lowers the average cost of the shares to $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. 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 6.88% higher over the past week. 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.

We could see increased volatility in the crude oil market now that September has arrived. The price action since April has been a pattern of lower highs. Last October we witnessed a significant drop in the price of oil from $76.90 at the start of October to a low at $42.36 in late December. A risk-off environment because of trade could cause oil to test the $50 per barrel level or lower. Meanwhile, any hostilities in the Middle East would cause supply concerns and could lift the price of the energy commodity to $60 or above. The reaction to recent Chinese economic data is a sign that a trade deal could lift the price of oil. The crude oil market remains a victim of bullish and bearish influences. Natural gas could become volatile over the coming weeks. With almost two months left in the 2019 Hurricane season, the potential for storms is a bullish factor as is the approach of the winter months, which are the time of the year for peak demand. However, the price action remains bearish as natural gas futures have not traded above the level of critical resistance at just above the $2.50 per MMBtu level since the last week of May. Over the past week, natural gas moved towards the resistance level, and a break to the upside would set the stage for the upcoming peak season. I would not be surprised if natural gas runs into selling above $2.40 per MMBtu as it is only the beginning of September.

I will be observing the energy sector carefully over the coming week to see if any clues as to price direction develop. Meanwhile, energy-related equity prices remain incredibly depressed and could be overdue for a recovery rally if stocks continue to exhibit strength over the coming week. The price action on Wednesday was positive for many oil-related stocks.

 

Grains                                                             

Grain prices put in a mixed performance over the past week. Soybeans moved higher while corn and wheat posted over 3% losses. Now that we are in September, the 2019 harvest season is right around the corner. Grains have experienced selling pressure over the past weeks on the back of the escalation of the trade war between the US and China, the August WASDE report, weakness in energy prices, and a strong US dollar. The environment in August created almost a perfect bearish storm for agricultural commodities. The USDA will release its September World Agricultural Supply and Demand Estimates report on Thursday, September 12 at noon EST. Grain prices often experience plenty of price variance around the time of the monthly report that is the gold-standard for fundamentals in the agricultural commodities.

 

 

New-crop November soybean futures moved 1.13% higher over the past week. Open interest in the soybean futures market fell by 0.33% since last week. The December synthetic soybean crush spread moved lower and was at the $1.00 per bushel level on September 4, down 6.5 cents since August 28. 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 $3.5850 per bushel on September 4, which was 3.37% lower on the week. The August WASDE report was highly bearish for the price of corn and pushed the price to a low at $3.5650 on the December futures contract on September 4 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 the September WASDE. Open interest in the corn futures market fell by 4.17% since August 27 after a decline of almost 6% last week. The price of ethanol fell by 2.30% since the previous report. October ethanol futures were at $1.3160 per gallon on Wednesday. The spread between October gasoline and ethanol futures narrowed slightly to 21.69 cents per gallon on September 4, down 0.0009 cents since the prior week on weakness in corn and gasoline.

 

December CBOT wheat futures fell 3.05% since last week. The December futures were trading $4.6075 level on September 4. Open interest fell by 1.27% over the past week in CBOT wheat futures after a decline of almost 7.5% last week. The decline in open interest in all three grain markets could be the result of some farmers lifting hedges as prices have been weak.

 

As of Wednesday, the KCBT-CBOT spread in December was trading at a 76.25 cents per bushel discount with KCBT lower than CBOT wheat futures in the December contracts. The spread rose by 5.25 cents since August 28. 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 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 weather forecasts in the US grain belt and the growing regions in the northern hemisphere when it comes to wheat. However, the deterioration in the trade war is likely to continue to have the most significant impact on corn and bean prices over the coming weeks and months. Any positive news on the trade front could lift prices from the current levels.

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 will now wait until next Thursday before making any significant moves unless there is news on trade between the US and China.

 

Copper, Metals, and Minerals

 

Wednesday was a bullish day for copper and the industrial commodities. Since the LME data is delayed by one day, this week’s report does not reflect the higher levels on September 4.

Nickel continued to be the big mover on the upside over the past week as an export ban in Indonesia stoked fears of shortages for the nonferrous metal. The price of nickel probed over the $18,000 per ton level. Copper posted a loss on the LME as of September 3, while it moved higher on COMEX futures on Wednesday, September 4. Tin moved higher last week, but aluminum, lead, and zinc prices all moved to the downside. Meanwhile, the price of lumber fell while the Baltic Dry posted another significant weekly gain. The price of iron ore was higher since last week. Uranium futures were unchanged since the previous report.

Copper moved 1.19% higher on COMEX, while the red metal posted a 2.20% loss on the LME since the previous report. Open interest in the COMEX futures market moved 1.04% lower on the week. Copper was trading at $2.5950 per pound level on the nearby 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 probed below the $2.50 level on August 26, which was the lowest price since May 2017. Over the past week, copper inventories on the LME and COMEX moved in opposite directions.

LME lead moved lower by 4.54% since August 27, while the price of nickel exploded 13.09% to the upside over the past week. Tin posted a 6.01% gain since the previous report. Aluminum was 1.91% lower on the week. The price of zinc fell by 2.78% since August 27. On Wednesday, the nonferrous metals posted gains after the positive economic news out of China.

November lumber futures were at the $364.90 level, 2.59% lower since the previous report. The price of uranium for December delivery was unchanged at $25.50 per pound level. The Baltic Dry Index was 13.01% higher as it rose to the 2501 level after a more than 7% gain last week and a 10% gain the prior week. New fuel requirements have boosted the cost of shipping. October iron ore futures posted a 12.99% gain compared to the price on August 28. Open interest in the thinly-traded lumber futures market fell by 7.54% over the past week.

LME copper inventories fell by 1.18% to 330,050 metric tons since last week after rising steadily over recent weeks. COMEX copper stocks increased 3.06% since last week to 44,113 tons. With the LME considering new rules to improve transparency when it comes to stockpile data, the stock numbers could have a greater impact on short-term price volatility in the future without the specter of manipulation. However, the recent rise in stocks has been a bearish factor for the price of the leader of the LME metals.

Lead inventories on the LME fell by 1.85%, while aluminum stocks fell by 1.64%. Aluminum stocks moved to under the 914,000-ton level. Zinc stocks moved 4.48% lower since the previous report. Tin inventories moved 3.26% higher since last week to 6,975 tons. Nickel inventories were 1.72% higher compared to the level on August 27. 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. The trade war continues to be the most significant factor when it comes to the path of least resistance of LME metals over the coming weeks. Copper and many of the other base metals fell in the aftermath of the escalation of the trade war on August 23, which sent the price of copper below the $2.50 level, the lowest price in more than two years. Meanwhile, a continuation of positive economic news out of China will likely provide support for the price of industrial commodities. China is the demand side of the equation for the base metals sector.

We own two units of Energy Fuels Inc. (UUUU), a US producer of uranium and vanadium, at an average of $2.55 per share. We are working a stop at $1.19 and have an initial profit target at $6 per share. There is a double bottom on the long-term chart at the $1.29 level. I am giving this position plenty of room and plenty of time. If the shares continue to fall, I will add another one and possibly two units to this trade to average down the price on the long position. UUUU was trading at $1.8750 per share on Wednesday up 12 cents since last week.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $1.65 on September 4. 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 $9.29 on September 4, 34 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. I am looking to purchase another unit at close to the $8 per share level. I am keeping my position small in FCX to add on further price weakness over the coming weeks.

Trade remains the primary issue facing industrial metals and commodities, and that is likely to continue over the rest of 2019. A stronger dollar is also a weight around the neck of prices for the commodities in the sector. I am sitting with current positions and taking a cautious approach when it comes to the industrial sector.

 

Animal Proteins

With the Labor Day holiday weekend behind us, the meat futures are not at the start of the offseason for demand. Over the past week, live cattle futures posted a marginal loss while feeder cattle moved higher and lean hog futures were up by better than 5%.

October live cattle futures continued to trade at under $1 per pound and were at 99.025 cents per pound level down 0.18% from last week. Technical resistance is at $1.0485, which is the upper end of a recent gap on the October contract.  Technical support stands at 97.775 cents per pound level, which is the low from August 16. Price momentum and relative strength indicators crossed higher in oversold territory as the price is hovering around the $1 per pound level. Open interest in the live cattle futures market moved 3.09% higher since the last report.

October feeder cattle futures outperformed live cattle as they rose by 1.37% since last week. October feeder cattle futures were trading at the $1.33425 per pound level with support at $1.27325 and resistance at $1.36575 per pound. Open interest in feeder cattle futures rose by 1.47% 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 recovered after probing briefly below 60 cents per pound on August 23. October lean hogs were at 67.125 cents on September 4, which was 5.71% higher on the week. The open interest metric rose by 3.20% from last week’s level. Price momentum is rising towards overbought territory with the relative strength index. 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 December 2020. The Feeder cattle forward curve is in a backwardation from September through March 2020. From March 2020 through August 2020 a small contango returns.

In the lean hog futures arena, there is mostly contango from December until June 2020. There is a backwardation from October 2019 through December 2019 and from June through December 2020. 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 meats narrowed marginally in the October futures contracts as the price of hogs slightly outperformed cattle on a percentage basis.

Source: CQG

Based on settlement prices, the spread was at 1.4752:1 compared to 1.5622:1 in the previous report. The spread decreased by 8.7 cents as cattle became less expensive compared to hogs on a historical basis.

The next significant event for the animal protein sector will come on Thursday, September 12, when the USDA releases its September WADSE report.

 

Soft Commodities

While cocoa posted a gain since the previous report, all of the other members of the soft commodities sector moved lower. September 2018 was a month when coffee and sugar prices moved to multiyear lows, but they reversed and posted substantial gains last October. Time will tell if the same fate awaits the sector in 2019. The low level of the Brazilian real continues to weigh on the prices of coffee, sugar, and FCOJ futures. Brazil is the leading producer and exporter of the three soft commodities. Cotton remains near a multiyear low on the back of the trade war between the US and China. Cocoa futures have corrected from highs in early July and are now closer to the low for this year than the peak price.

October sugar futures fell 3.17% since last week. Sugar fell below technical support at 11.36 cents per pound, which was the late May low on the continuous futures contract. Technical resistance is at the August 12 peak at 11.96 cents. Nearby sugar futures traded to a low at 11.00 cents on September 4 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 $0.24315 level against the US dollar, which was $0.00385 or 1.61% higher. The recent fall in the Brazilian currency likely weighed on 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 rose by 1.23% over the past week to a new all-time high.

December coffee futures fell by 0.97% since last week’s report and were trading at the 96.60 cents per pound level. Short-term support is now 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 $32.09 on Wednesday. Open interest in the coffee futures market rose by 4.31% 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 recovered over the past week after the recent losses. On Wednesday, December cocoa futures were at the $2269 per ton level, 1.16% higher than last week. Open interest rose by 1.92%. 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. I favor buying cocoa on a scale-down basis around the current price level. We are long the NIB ETN product at $25.76. NIB closed at $25.90 on Wednesday, September 4. I may be adding another unit to the position over the coming weeks at a lower price and would post any change in the chat area if the market has another leg to the downside.

December cotton futures continue to sit near the recent low and were 0.89% lower 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 1.70% since August 27. Trade with China, the US dollar, and the weather across growing regions will be the primary drivers of the price of the fiber over the coming weeks. We are long two units at $37.90 per share. BAL was at $35.42 on September 4.

Price momentum and relative strength metrics displayed 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 lower over the past week in the aftermath of Hurricane Dorian. On Wednesday, the price of November futures was trading around $1.0275 per pound. FCOJ nearby futures moved 2.00% lower 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 7.05% since August 27.

We should keep in mind the price action that took the prices of coffee and sugar futures to lows last September and the significant price recoveries that followed. I will be watching the Brazilian real versus US dollar currency relationship as it tends to correlate with the price action in the two soft commodities. Coffee, sugar, FCOJ, and cotton are all at levels that are near the bottom end of pricing cycles. Time will tell if buying emerges over the coming weeks or if lower lows are on the horizon this month.

 

A final note

While some market participants will be on vacation until Monday, September 9, the fall season has arrived and should be chock full of events that impact prices of markets across all asset classes. Brexit and trade will be the leading issues in September and October. However, monetary policy moves by the ECB, and the US Fed could cause periods of price volatility. Iran remains a source of potential price variance for the oil market in the Middle East. Economic data from China will continue to have a significant impact on many commodity prices, especially industrial products.

When approaching markets over the coming days, make sure to have a plan that includes profit targets and stop levels that reflect a risk-reward profile that favors reward over risk.

 

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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