Hecht Commodity Report

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August 28, 2019

  • Silver plays catchup with gold
  • Platinum soars to over $900 per ounce on the back of new highs in rhodium
  • Crude oil rallies on inventory declines from both the API and EIA
  • The dollar sits at above the 98 level on the dollar index as Bitcoin falls below $10,000
  • Have a great Labor Day weekend- Market volatility should continue in September

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

Summary and highlights:

 

On Thursday, August 22, conflicting interviews from Jackson Hole caused a bit of two-way volatility in markets. Some of the Federal Reserve members expressed that economic conditions do not support interest rate cuts, while others said that the international environment, inflationary pressures, and manufacturing data in the US require the Fed to get ahead of the curve and cut rates. The bottom line is that the market was waiting to hear from Chairman Powell on Friday. While the DJIA moved 49.51 points higher, the S&P 500 declined by only 1.48 points and the NASDAQ sunk by 28.82 points. Grain prices edged higher except for soybeans, but crude oil and natural gas posted small losses on the session. The inventory injection in the natural gas market at 59 bcf was around the level the market had expected, but the price edged lower. Gold and silver edged lower, but platinum and palladium posted gains. Cattle futures moved a bit higher, but selling pressure continued in the lean hog futures market. While FCOJ and cotton posted marginal losses, the other soft commodities moved higher on the session. The price of lumber fell after recent gains. The dollar index fell but still settled over the 98 level. Bitcoin was trading at the $10,275 level.

On Friday, while the market was digesting Fed Chairman Jerome Powell’s message that the Fed will act as appropriate to sustain economic growth. President Trump said:

Source: Twitter

Immediately following the Chairman’s speech, China escalated the trade war with the US by slapping tariffs on $75 billion in US exports, including automobiles. Stocks moved lower as President Trump huddled with advisors to discuss a response to China’s move. The leading equity indexes fell by between 2% and 3% on the final session of last week. Crude oil fell sharply on the session along with oil product prices, and natural gas was virtually unchanged. Gold and silver exploded higher with December gold at almost the $1540 level and silver at just above $17.40 per ounce. Agricultural commodities did not fare well on the escalation of the trade dispute as corn and beans fell. Wheat bounces, as the US is not the world’s leading producer of the grain. Copper fell to a new low for the year on the back of the trade war, and meat prices also fell. Cocoa posted a marginal gain, but the other soft commodities fell as the Brazilian real decline versus the US dollar. Meanwhile, the dollar index fell by 0.534 points as the market was concerned that the US could intervene in the global currency markets given the administration’s disappointment with the Federal Reserve. Bitcoin edged higher to over the $10,500 level.

Late in the day, President Trump answered China by lifting tariffs on October 1 on $250 billion in Chinese exports from 25% to 30% and on the $300 billion scheduled for September 1 from 10% to 15%. The trade war is becoming like a tennis game with the US answering China’s serve on the same day. The next move in the high-stake chess game is for the Chinese unless President Trump decides his move late Friday was not a sufficient answer. Perhaps the most controversial statement of the day was when the President said, “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.

 

On Monday, after no significant issues at the G7 meeting in France, President Trump appeared to calm markets. In comments to the press, he said that China and the US continue to work towards a trade deal and that “China wants a deal badly.” The reduction in negotiating fire and brimstone statements lifted the stock market. The DJIA rose by almost 270 points, with gains of 1.1% and 1.32% respectively in the S&P 500 and NASDAQ indices. The dollar index rose towards the 98 level and was over 0.450 points higher on the session. Bitcoin was quiet at just under the $10,500 level. Gold had a volatile day as the yellow metal rose to a new high at $1565 on the December futures contract before settling at $1537.20, virtually unchanged from Friday’s close. Silver was the most significant mover as it posted over a 20 cents per ounce gain to settle at $17.641 on the September futures contract. Platinum and palladium prices moved to the upside. Copper fell below $2.50 for the first time in over two years but bounced back to close at $2.5435 per pound on September futures. Crude oil was below $54 per barrel as it fell together with oil products.

Meanwhile, natural gas rallied by over 7 cents to the $2.233 per MMBtu level. Soybeans recovered, while corn and wheat posted small losses for the first session of the week. Meats were higher across the board. Lumber edged higher along with coffee and FCOJ futures. Cotton, sugar, and cocoa prices fell on August 26. The USD 30-year Treasury bond rallied to a new high at 167-15, the highest level in over three years before pulling back to just over 165 when markets calmed. Monday was a busy day in markets following Friday’s fireworks, but the rest of the week could see narrower ranges as the market prepares for the end of the summer holiday weekend. The only real contentious issue during the G7 meeting, aside from the surprise arrival of the Iranian Foreign Minister, was a dispute between the leaders of France and Brazil. The Brazilian President Bolsonaro was arguing with French President Macron over social media on August 26. The Brazilian leader took the French leader to task over his comments on aid for Brazil to assist with the fires in the Amazon that threaten the global environment. President Bolsonaro scolded Macron over treating his nation like a “colony” when it comes to comments and offers of assistance. However, the situation turned personal when the Brazilian President made public comments about the appearance of Macron’s wife, who is 28 years older than the French leader. The French President took great offense at the comments. Social media is the new bully pulpit in the world. Teddy Roosevelt coined the term at the turn of the last century, but I doubt he envisioned the technology as a pulpit with which to bully opponents.

Tuesday was not a huge day in the stock market, but prices moved lower late in the session as the yield curve inverted once again. Bonds rallied and were at the 166-15 level on the September contract late in the day. News that Iran rejected any discussions until the US removes sanctions sent the price of crude oil higher. Natural gas moved the other way as the price slipped below the $2.20 per MMBtu level. Gold moved higher on the session to around the $1550 level on December futures. However, silver was the big mover as the price of gold’s little brother blew through the $18 per ounce level and the level of technical resistance at the 2018 high at $17.705 per ounce. Platinum and palladium moved higher on Tuesday. Wheat was marginally higher while corn and soybeans declined on the session. Animal protein prices posted across the board losses. Sugar fell to a new low for the year on the weak Brazilian real and coffee edged lower. Cotton, FCOJ, and cocoa all posted marginal gains. The price of lumber edged higher on the session. Bitcoin did not move much as the price was around the $10,285 level.

On Wednesday, UK Prime Minister Boris Johnson suspended the Parliament in September which sets the stage for a hard Brexit if he cannot receive concessions from the EU. The Queen rubber-stamped the request. The move limits the number of times the Parliament will meet before the Brexit deadline, and the Prime Minister could face a no-confidence vote as early as next week. The British pound continues to sit not far off its post-referendum lows. Stocks rallied on Wednesday in the up and down saga of the equities market as falling interest rates combat the ongoing trade war. Grains were mixed with wheat posting a marginal loss, and soybeans and corn moving higher. After putting in a new low on the daily chart, corn reversed and put in a bullish reversal, which could lead to more gains in the coming days. Crude oil and oil products rallied with the stocks market as inventory reports from both the API and EIA provided support for the energy commodity. Natural gas also moved to the upside along with the price of ethanol futures. Gold did not move much on Wednesday, but the rally in silver continued taking the price to a high at just under $18.50 per ounce. Platinum was the star performed rallying by over $35 per ounce to over $900. Platinum moved higher as the price of rhodium rose to a new high above the $4200 per ounce level. The price of palladium slipped lower on the session. Copper moved marginally higher on the session. In the animal protein sector, cattle posted marginal losses and hogs were slightly higher. Lumber futures moved higher to over the $380 level. Sugar made a new low at 11.09 cents but closed higher on the session. Coffee did not move much despite the weaker Brazilian real. Cocoa was marginally higher, and cotton and FCOJ futures posted gains. FCOJ posted a healthy gain on the session. The dollar index moved to over the 98 level, and Bitcoin fell below $10,000 per token.

Stocks and Bonds

The frenetic stock market hit the skids once again last Friday. While Fed Chairman Jerome Powell made a generally dovish speech at Jackson Hole, tariffs on $75 billion of US exports to China overshadowed the Fed. President Trump immediately dispatched a slew of tweets criticizing both China and the US central bank. Stocks all moved appreciably lower in the final session of last week. After the market closed last Friday, the leader of the US retaliated swiftly by bumping up US tariff rates on Chinese goods coming into the United States. The trade war escalated significantly over the past week, and the stock market was a victim of the new wave of protectionism. However, stocks recovered over the past days limited losses on the week.

The S&P 500 fell by 1.25% over the past week, while the NASDAQ moved 2.04% lower. The DJIA posted a 0.64% loss since the previous report. We have witnessed increased volatility in the stock market in August this year, which is typically a quiet month. The volatility continues to churn the stomachs of many market participants.

As US stocks fell, Chinese large-cap stocks followed. The trade issues are weighing on China’s economy, but both sides appear to be digging in their respective heels.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $38.85 level on Wednesday, which was 1.27% lower than the closing level on August 21. Technical support is at the recent low at $37.66 per share from August 14.

After the recent round of escalation, optimism over a trade deal drained from the market.

US 30-Year bonds moved to a new high at 167-18 on the September futures contract on August 28 and were not far below that level at 166-30 on Wednesday as they moved 1.48% higher since the previous report. The strength in the bond market comes from the trend of lower global interest rate and a flight to quality as volatility increases in the stock market. Rallies in stocks have been selling opportunities and dips in bonds buying opportunities over the past weeks.

Open interest in the E-Mini S&P 500 futures contracts rose by 0.95% since August 20. Open interest in the long bond fell by 0.28% over the past week. The VIX moved higher as stocks fell over the past week. The volatility index was at the 19.35 level on August 28, an increase of 22.47% 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.” Nothing has changed since last week’s report. 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 uncertainty created by the trade and currency war, the prospects for a hard Brexit, and many other issues facing the world create a potent cocktail for continued volatility in the stock and bond markets in the United States.

The many factors facing markets should continue to foster wide price variance at times. The stock market stalled near the recent highs at the end of July, which is a pattern since early 2018. Each time the stock market reached a record, substantial corrections have followed. When it comes to the bond market, expectations for significant interest rate cuts in the US have grown to a level where if the Fed does not act aggressively, the potential for disappointment and selling in the stock market have increased. I believe we will continue to see wide price variance in the stock and bond markets over the coming weeks and months. I have been buying VIXY when stocks recover and taking profits during downdrafts. The strategy has been working like a charm over the past month.

 

The dollar and digital currencies

The dollar index fell only 0.06% since August 21. The index made a new and higher high at 98.700 on August 1 before correcting the to the downside. Even though the Fed will likely cut rates in the US, the rising potential of currency intervention is weighing on the greenback. President Trump restated his desire for a lower dollar, which led to the selloff in the aftermath of the escalation of the trade war with the Chinese. At first, the dollar was a beneficiary of the fears of a global recession, but the potential for intervention had more influence over the past week than the flight to quality buying. Moreover, as the dollar index was not far below the recent high, it has some technical room for a downside correction.
The policies by the US Fed remain a lot tighter than counterparts around the world when it comes to the availability of credit, which is a supportive factor for the dollar versus other currency instruments. If the Fed moves slower than other central banks to cut interest rates, the dollar could remain strong and on its bullish path. However, the President now considers the central bank an enemy and could take the dollar hostage by instructing the Treasury to intervene in the market. A currency and trade war will add volatility to markets across all asset classes, and the foreign exchange market is no exception.

The euro currency was 0.12% lower against the dollar since last week’s report. Increased volatility in the currency market is also likely to come from the many issues facing the world from both a political and economic perspective. When it comes to the euro, Brexit and Italy remain concerns.

The pressure will be on the Fed to cut the Fed Funds rate by 50 basis points at the September meeting. However, the central bank may take a prudent approach and only move by half that amount. A 25-basis point cut or less would likely further infuriate the President and could lead to intervention in the currency market. The conflict between the US and China is one issue, but the division between the administration and the central bank complicates matters.

 

The leader of the digital currency asset class was trading at the $9,746.07 level as of August 28. Bitcoin and other digital currencies have been consolidating over recent weeks. Bitcoin settled into a $9000-$12,500 trading range. The escalation of the trade dispute and the potential for a currency war had lit a fire under the price of Bitcoin, at first. Chinese devaluation of the yuan had caused Bitcoin and other members of the asset class to move higher as the Chinese buy the digital currency to protect assets and shelter wealth. However, the Chinese government will likely crackdown on the purchase of digital currencies as they will seek to control the nation’s economy and individual wealth.

Protests in Hong Kong continues, and the threat of a military crackdown by Beijing also increase the demand for vehicles that can transfer wealth from China and Hong Kong to other parts of the world during periods of uncertainty. Bitcoin and gold have been two such vehicles. A risk-off environment could weigh on the prices of all assets, and digital currencies and gold could become susceptible to periods of selling and lower prices. Significant price dips are likely to be buying opportunities so long as rates head lower and the trade war continues. However, the digital currency asset class had a bad week, while precious metals went the other way. Bitcoin moved 3.37% lower since last week while Ethereum posted a 6.07% loss as it was at around $173.30 per token. The market cap of the entire asset class moved 3.87% lower as Bitcoin underperformed the other digital currencies. The number of tokens rose by 26 since August 21. Open interest in the CME Bitcoin futures declined by 8.79% since last week in the cash-settled futures product.

The decline in fiat currencies continues to support both digital currencies and gold, the ultimate foreign exchange product. The reason gold is the leading form of money is that central banks hold the precious metal and its role as a means of exchange over thousands of years.

The Canadian dollar moved 0.18% lower since last week. Open interest in C$ futures rose by 1.94% 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 0.66% gain since the previous report as the currency continued to drift away from the $1.20 level, which is critical technical support. 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. On Wednesday, the Prime Minister moved to suspend the Parliament for five weeks, which could lead to a no-confidence vote as a soon as next week and more volatility in the British pound.

The Brazilian real tanked by 3.10% against the US dollar over the past week. Fires in the Amazon have been a problem for the Brazilian government. The Brazilian currency had been posting 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.

 

Gold has been the flight to quality currency since June when the yellow metal broke out to the upside above the 2016 high at $1377.50 in US dollar terms. While gold in dollar remains over $370 away from its all-time peak, it has already moved to record highs against a slew of currencies. Over the past week, gold rose to a new all-time high in the European currency. Surpassing that level is a significant statement for the yellow metal and the euro currency.

 

Precious Metals

Gold and silver prices moved higher over the past week as the escalation of the trade war increased fear and uncertainty across all markets. The dovish tone of Fed Chairman Powell’s speech at Jackson Hole, Wyoming, and the potential for more rate cuts around the world sent both gold and silver close new highs. Silver was the star performer compared to gold over the past week.

Gold was 2.20% higher since August 21 while silver was up by 6.80% over the same period and moved over the $18 per ounce level. The price of December gold was just below the $1550 per ounce level on Wednesday while silver was around $18.30. December gold rose to a new high at $1565.00 on August 26, and September silver moved to a high at $18.475 per ounce on August 28. The current global interest rate environment and the economic and political landscapes are supportive of the prices of the two precious metals.

The price of platinum exploded 5.92% higher since last week with the gain coming on Wednesday. Platinum moved over $900 per ounce to a high at $912.20 on August 28 on heavy volume in the futures market. Rhodium is a byproduct of platinum, and it is likely that new highs in the rhodium market lit a bullish fuse under platinum. Rhodium rose by an incredible 15.08% to a new high as the price was at the $4350 per ounce level. Palladium fell only 0.32% on the week. Palladium and rhodium continue to be the star performers of the sector since early 2016. Platinum remained the laggard when it comes to price performance until Wednesday when the price moved over $40 higher on the session.

Open interest in the gold futures market moved 6.96% higher since the previous report to a new all-time high at over the 636,000-contract level. The metric moved 1.20% higher in platinum while it was 9.31% lower in the palladium futures market. Silver open interest rose by 0.79% over the period.

Technical resistance on the December gold futures contract is at $1565.00 per ounce, the August 26 high. Gold has been moving higher in all currency terms since the early 2000s, which is a sign of overall strength for the yellow metal and weakness for fiat foreign currency instruments. The breakout to the upside in June was another leg in a long-term bull market for gold. Nothing changed over the past week as the path of least resistance in the gold futures market remains higher. Gold rose to a new record peak in euros, which I view as a significant event.

The silver-gold ratio moved lower over the past week as silver took the bullish baton from gold.

Source: CQG

The daily chart of the price of December gold divided by December silver futures shows that the ratio was at 83.97 on Wednesday, 3.82 lower than the level on August 21. 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 $1550 per ounce level in gold, a return to the historical norm in the ratio would put the price of silver at $28.18 per ounce. Silver remains a bit under $10 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 week.

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 2.20% higher, the GDX was 6.03% higher since August 21 and GDXJ was 6.20% 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 6.98% gain since August 21 as it outperformed the price action in the silver futures market. Gold and silver remain in bullish price patterns. The price patterns in both precious metals remain bullish, but the risk of a correction will continue to increase as the prices rise.

Platinum moved higher while palladium was little changed since August 21. October platinum futures rose by 5.92% to the $908.90 per ounce level. Palladium posted a 0.32% loss as of the close of business on August 28 and was at the $1460.80 per ounce level. Palladium was trading at a premium over platinum with the differential at the $551.90 per ounce level on Wednesday, which narrowed over the past week. October platinum was trading at a $640.20 discount to December gold at the settlement prices on August 28 which narrowed since the previous report. The price of rhodium, which does not trade on the futures market moved $570 higher over the past week and was at $4,350 per ounce on Wednesday., 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.

We are long the PPLT platinum ETF product which moved 5.46% higher since August 21. Platinum continues to offer the most attractive value proposition in the precious metals sector. Platinum need to move above $1000 and $1200 resistance levels to break to the upside on a technical basis.

As we move into September next week, the markets will look forward to the next Fed meeting and lower interest rates in the United States. A continuation of low rates in Europe has pushed the price of gold to a new high in euro currency terms. The break to a new high is another in a series of bullish events for the gold market. When it comes to silver, the price has followed gold on the upside and is now taking the bullish baton as it outperformed the yellow metal over the past week. A shift in sentiment can always cause surprises in silver. The next target in silver on the upside is the 2017 high at $18.655. Above there, the 2016 peak at $21.095 will come into play. Platinum remains cheap but it could be starting to gain some upside momentum. Palladium and rhodium prices could finally be having an impact on the price of platinum, which can be a substitute for the metals and also has a history as a financial asset and store of value. I continue to believe that precious metals offer one of the most attractive investment opportunities in markets across all asset classes in the current environment. We could be in for a wild ride that is just at the beginning stages.

 

Energy Commodities

The escalation of the trade war at the end of last week weighed on the prices of most energy commodities over the past week, but inventory reports and a rebound in the stock market lifted prices over the recent trading sessions. Crude oil and oil product prices did not change much since last week, and natural gas edged higher. Ethanol was unchanged and coal prices moved lower. After falling to the lowest level since March 2018, the Brent-WTI spread edged a bit higher over the past week.

October NYMEX crude oil futures rose only 0.18% since last week. October Brent futures moved 0.35% higher since August 21. October gasoline was 0.06% higher, and the processing spread in October posted a 0.71% gain since August 21 as gasoline marginally outperformed the price of crude oil over the period. The gasoline crack spread is coming into a seasonally weak period of the year as the driving season ends with the summer. October heating oil futures moved 0.35% lower since the previous report, and the heating oil crack spread fell by 1.73% 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 only 160 contracts since last week. The escalation of the trade war between the US and China that threatens to send the world into a global recession weighed on the price of oil last Friday, but inventory reports supported the price of the energy commodity.

The spread between Brent and WTI crude oil futures in October rose to the $4.68 per barrel level for Brent, which was $0.11 above the August 21 level. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. I had been writing that the recent pressure on the spread could be a buying opportunity for Brent compared to WTI, given the potential for a flare-up of incidents or hostilities in the Middle East. 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 October contract reached a lower level at $7.91 on the high when it comes to the spread. Brent will roll from October to November futures this Friday while NYMEX WTI futures have already rolled from September to October. The roll periods can cause distortions in the spread between the two benchmark crude oils at times. The spread found at least a temporary bottom at $3.48 on August 20 and has moved higher since then. At the end of this week, Brent futures will roll from October to November.

US daily production stood at 12.5 million barrels per day as of August 23 according to the Energy Information Administration, which is 0.20 million higher than last week and a new record peak for daily output. As of August 16, the API reported a decrease of 3.450 million barrels of crude oil stockpiles while the EIA said they fell by 2.700 million barrels for the same week. The API reported a decline of 403,000 barrels of gasoline stocks and said distillate inventories rose by 1.806 million barrels as of August 16. The EIA reported a rise in gasoline stocks of 300,000 barrels and an increase in distillates of 2.60 million barrels. Rig counts, as reported by Baker Hughes, fell by 16 last week to 754 rigs in operations as of August 23, which is 106 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 lower since last week with selling in the oil and stock markets. OIH fell by 3.11%, and VLO moved 7.19% lower since August 21. 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 hit the low so far in 2019 on August 5 at $2.029 per MMBtu. Over the past week, the price moved higher. The approaching hurricane could have caused some short-covering in the natural gas futures market. The September futures were at $2.2510 on August 28, which was 3.73% higher than on August 21. Last week, the EIA reported an injection of 59 bcf into storage brought the total amount of gas in storage to 2.797 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 15.2% above last year’s level but were still 3.6% 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 60 bcf as the hot conditions during the final days of the summer season continue to increase the demand for electricity to power air conditioners, limiting the amount of natural gas flowing into storage across the United States. Injections should increase over the coming weeks as cooler weather in September arrives. Open interest fell by 3.84% over the past week. Technical resistance stands at $2.277 on the September contract and 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. The September futures are rolling to October, and the spread between the two contracts is virtually zero meaning longs and shorts can roll risk positions without much of a cost or credit.

With approximately 12 weeks to go before the beginning of the withdrawal season in November, stocks will need to climb by an average of 37.6 bcf each week to reach last year’s peak at 3.247 tcf in storage around the US. An average of 100.3 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 3.5-3.7 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 almost 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. The January $2.80 call at 17.3 cents looks attractive from a risk-reward perspective. 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.

October ethanol prices were unchanged on the October futures over the past week. Open interest in the thinly-traded ethanol futures market increased by 7.30% over the past week. However, with only 617 contracts of long and short positions, the thinly-traded biofuel market is untradeable. The KOL ETF product fell by 1.10% compared to its price on August 21, and the price of October coal futures in Rotterdam declined by 5.13% over the past week. 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 Tuesday, the API reported that oil inventories fell by 11.1 million barrels for the week ending on August 23, and the EIA said they decreased by 10.0 million barrels on Wednesday. Analysts had expected a decline of 2.112 million barrels for the API report. When it comes to products, the API reported a decrease in gasoline inventories of 349,000 barrels and a fall in distillate stocks of 2.50 million barrels. On Wednesday, the EIA said that gasoline stocks fell by 2.10 million barrels and distillate inventories decreased by 2.10 million barrels for the week ending on August 23. The inventory data was extremely 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 week. Iran refused to meet with the US until sanctions are removed. Bullish and bearish factors continue to pull the price of crude oil in opposite directions. Nothing has changed since the previous report as oil remained above the $50 support and below the $60 resistance. The rise in the Brent-WTI spread is marginally supportive for the price of the energy commodity as was the most recent inventory data.

In natural gas, prices continue to be at low levels for the coming peak season, which begins in mid-November.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the peak price for this coming winter was at $2.562 in January, which was 3.00 cents per MMBtu higher than last week. I had been patiently waiting to buy call options for a spike to the downside. Last week, I began nibbling on some small long positions, leaving plenty of room to add on price weakness. I am looking at December through February call options with strike prices below the $2.80 per MMBtu level and the GASL product. I have been concentrating on the January $2.80 calls at the 17.0 cents level and below and picked up a few over the recent sessions before Wednesday’s rally.

I have been tracking the price action in BG shares. Since August 21, the price of BG shares moved 4.13% lower to $52.44 per share on August 28. I am lowering the stop on the position in BG to $49.49 per share on the downside on a closing basis and adding another unit this week at around the closing price from Wednesday. I will continue to post weekly updates on this position. BG dropped on weakness in the stock market and the Brazilian real over the past week.

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.  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 5.29% lower 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.

While Iran remains a potentially bullish factor in the background, the escalation of the trade war is weighing on the global economy and threatens a risk-off period. Crude oil typically does not do well during recessions, and when the stock market is falling. Therefore, the odds of a test of the $50 per barrel level on nearby NYMEX crude oil futures have increased. A move below that level could open the floodgates to trend-following and speculative selling in the energy commodity. I would use lots of caution when approaching oil over the coming week. Natural gas could be running out of time when it comes to a test of the $2 per MMBtu level or lower. While there are never any rules in the volatile natural gas market, the market’s focus will begin to shift to the withdrawal season and rising demand over the winter months.

 

Grains                                                             

The United States is a world leader in the production of many agricultural commodities, and China is a significant consumer. Therefore, it should come as no surprise that some of the agricultural products are in the crosshairs of the trade dispute between the two countries, and those prices dropped since last week. The price of soybeans moved to the downside, but corn posted a marginal gain. The US is the leading producer and exporter of the oilseed and grain. While the US is an exporter of wheat, it does not have the dominant role it possesses in corn and beans, so the price of the primary ingredient in bread moved a bit higher since the previous week.

As September arrives this weekend, the harvest season for the 2019 crop is just around the corner. Aside from news on trade and the weather conditions at the end of the growing season, the next significant event for the agricultural products will come on September 12 when the USDA releases its monthly WASDE report. The August WASDE sent prices lower.

 

 

New-crop November soybean futures moved 0.83% lower over the past week. Open interest in the soybean futures market rose by 0.21% since last week. The December synthetic soybean crush spread edged lower and was at the $1.0650 per bushel level on August 28, down 1.50 cents since August 21. 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.

New-crop December corn was trading at $3.7100 per bushel on August 28, which was 0.20% higher on the week. The WASDE report was highly bearish for the price of corn and pushed the price to a low at $3.6420 on the December futures contract on August 28 as the selling continued to weigh on the price of corn over the past week. However, corn turned higher from the lows and put in a bull reversal on the daily chart on Wednesday, which could lead to a price recovery. Open interest in the corn futures market fell by 5.97% since August 20. The price of ethanol did not move over the past week. October ethanol futures were at $1.3470 per gallon on Wednesday. The spread between October gasoline and ethanol futures widened slightly to 21.78 cents per gallon on August 28, up 0.0009 cents since the prior week.

 

December CBOT wheat futures gained 1.55% since last week. The December futures were trading $4.7525 level on August 28. Open interest fell by 7.44% over the past week in CBOT wheat futures as September rolled to December.

 

As of Wednesday, the KCBT-CBOT spread in December was trading at a 71.00 cents per bushel discount with KCBT lower than CBOT wheat futures in the December contracts. The spread fell by 3.50 cents since August 21. 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.

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.

 

Copper, Metals, and Minerals

 

Europe tends to close for business in August, but the escalation of the trade dispute between the US and China weighed on three of six members of the nonferrous metals sector. Lead, nickel, and zinc posted gains over the past week, but copper, aluminum, and tin prices moved to the downside since the previous report. Meanwhile, the price of lumber moved higher while the Baltic Dry posted another significant weekly gain. The price of iron ore edged higher since last week. Uranium futures were marginally higher since the previous report.

Copper moved 0.81% lower on COMEX, while the red metal posted a 0.73% loss on the LME since the previous report. Open interest in the COMEX futures market moved 6.77% lower as September futures rolled to December. Copper was trading at below the $2.57 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 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 continued to move higher, which also weighed on the price of the nonferrous metal.

LME lead moved higher by 2.20% since August 21, while the price of nickel edged 0.19% to the upside over the past week. Tin posted a 4.70% loss since the previous report. Aluminum was 0.45% lower on the week. The price of zinc rose by 1.14% since August 21.

September lumber futures were at the $379.30 level, 12.76% higher since the previous report. The price of uranium for December delivery edged only 0.39% higher to the $25.50 per pound level. The Baltic Dry Index was 7.48% higher as it rose to the 2213 level after a more than 10% gain last week. October iron ore futures posted a 0.63% gain compared to the price on August 21. Open interest in the thinly-traded lumber futures market fell by 7.08% over the past week.

LME copper inventories rose 1.33% to 333,975 metric tons since last week after rising over 20% in the previous report. COMEX copper stocks increased 2.96% since last week to 42,804 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 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 2.12%, while aluminum stocks fell by 2.71%. Aluminum stocks moved to under the 930,000-ton level. Zinc stocks moved 2.82% lower since the previous report. Tin inventories moved 9.39% higher since last week to 6,755 tons. Last week, tin stocks increased by over 25%. Nickel inventories were 0.53% higher compared to the level on August 20. 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.

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 $1.7550 per share on Wednesday up 1.5 cents since last week.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $1.50 on August 28. 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 $8.95 on August 14, 19 cents lower 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 is the primary issue impacting industrial commodities. The threat of a risk-off period in markets is bearish for the sector. However, with many market participants on vacation in late August, we will need to wait until early September and monitor the dollar and global economy to get a feel for the path of least resistance for the prices of nonferrous metals and the other industrial commodities.

 

Animal Proteins

As the peak season for demand of animal proteins ends this weekend on the Labor Day holiday, the futures market in cattle and hogs has been under pressure over the past weeks. Since the last report, live cattle and feeder cattle moved lower and lean hog futures posted a minimal gain.

October live cattle futures continued to trade at under a buck a pound and were at 99.20 cents per pound level down 1.02% 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 around the $1 per pound level. Open interest in the live cattle futures market moved 0.95% higher since the last report.

October feeder cattle futures underperformed live cattle again last week as they fell by 2.17% since last week. October feeder cattle futures were trading at the $1.31625per pound level with support at $1.27325 and resistance at $1.36575 per pound. Open interest in feeder cattle futures rose by only 0.29% 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 edged a bit higher after probing briefly below 60 cents per pound on August 23. October lean hogs were at 63.50 cents on August 28, which was 0.32% higher on the week. The open interest metric rose by 1.31% from last week’s level. Price momentum remains is attempts to cross higher, while relative strength has moved towards a more neutral condition. 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 has moved into a backwardation from August through March 2020. From March 2020 through May 2020 a small contango returns.

In the lean hog futures arena, there is contango from October until July 2020. There is a backwardation from July 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 widened marginally in the October futures contracts as the price of beef slightly outperformed pork on a percentage basis.

Source: CQG

Based on settlement prices, the spread was at 1.5622:1 compared to 1.5833:1 in the previous report. The spread decreased by 2.11 cents as cattle became slightly less expensive compared to hogs on a historical basis.

The end of the peak season is on Monday, September 2. The next significant event for the animal protein sector will come on September 12 when the USDA releases its September WADSE report.

 

Soft Commodities

Three of the five members of the soft commodities sector posted gains over the past week with FCOJ the market moving over 4% higher. Cotton plunged to a new low on the back of the escalation of the trade dispute between the US and China. Cotton moved to within striking distance of its critical level of technical support at the March 2016 low at 55.66 cents per pound. Sugar was marginally lower while coffee and cocoa posted small gains.

October sugar futures fell only 0.18% 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 11.09 cents on August 28 which is now the level of short-term support. The value of the Brazilian real against the US dollar moved lower over the last week and was at the $0.240400 level against the US dollar, which was $0.00770 or 3.10% lower. The fall in the Brazilian currency likely weighed on the price of sugar over the recent weeks.

Price momentum and relative strength on the daily sugar chart continue to lean towards oversold territory. The metrics on the weekly and monthly charts are declining below neutral territory. If sugar suffers a substantial decline, I will look to add to long positions. Sugar open interest rose by 2.83% over the past week to a new all-time high.

December coffee futures rose by 0.93% since last week’s report and were trading at just above the 97.50 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 $32.17 on Wednesday. Open interest in the coffee futures market fell by 1.83% 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 edged higher over the past week after the recent losses. On Wednesday, December cocoa futures were at the $2243 per ton level, 1.63% higher than last week. Open interest rose by 3.69%. Relative strength and price momentum crossed higher in deeply oversold territory after an extended string of losses in the futures market that began in late July. 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 $25.41 on Wednesday, August 28. 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 plunged after the latest news on the trade war and were 2.02% lower over the past week. Cotton is trading near its lowest price since March 2016 when the price found a bottom at 55.66 cents per pound. Over the past week, the price fell to a low at 56.59 cents on August 26, 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 2.68% since August 20. Trade with China 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 $35.76 on August 28.

Price momentum and relative strength metrics were moving lower 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 exploded higher over the past week as a hurricane approaches Florida. On Wednesday, the price of November futures was trading around $1.0485 per pound. FCOJ nearby futures moved 4.38% 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 4.85% since August 20.

When it comes to sugar, coffee, and FCOJ, the price action in the currency relationship between the US dollar and the Brazilian real could impact prices over the coming week. The cotton market is likely to move higher or lower with news on trade between the US and China. I believe that the price of cocoa has declined back into the buy zone. FCOJ could be volatile depending on where the storm makes landfall over the weekend.

 

A final note

Markets will likely be quiet over the rest of this week as the many market participants are vacationing during the last days of August. Next week will mark the beginning of September with many events on the horizon that could cause even more volatility than we witnessed in August. The market will be watching the US Fed to see if the central bank cuts short-term interest rates by 25 or 50 basis points. The move could depend on the next action by the ECB and news on trade. The Fed will also be watching the latest economic data before making their next monetary policy decision.

Trade will be the primary issue as the ups and downs of negotiations and rhetoric between Washington and Beijing will dominate the headlines. Meanwhile, the end of this month means we are only two months away from the line in the sand on Brexit. Prime Minister Boris Johnson pledged the UK would walk away from the EU even if there is no agreement between the parties. The closing of Parliament for five weeks could lead to a no-confidence vote over the coming week. Those and many other issues face the world as the summer of 2019 draws to a close this weekend. Expect markets to continue to move higher and lower in wide ranges based on the latest item from the news cycle over the coming weeks.

I wish everyone a happy, healthy, and safe Labor Day weekend holiday!

 

 

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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