• OPEC cuts production stabilizing the price of crude oil- Natural gas falls as it trades like spring rather than winter is on the horizon
  • The Fed leaves interest rates unchanged
  • Gold and silver post small losses, but PGMs roar higher
  • The December WASDE is a non-event as grains drift lower
  • Coffee breaks out to the upside above the October 2018 high

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

A more detailed picture is available on the spreadsheet that is linked below.

 

Summary and highlights:

 

On Thursday, December 5, the Speaker of the US House of Representatives said that her body would proceed with a vote for the impeachment of President Trump. Meanwhile, the first day of the OPEC meeting in Vienna yielded no production decision as the cartel was waiting for input from Russia on December 6. The markets were waiting for Friday’s employment report on Thursday. Stocks edged a bit higher, and the VIX held steady at the 14.50 level. US 30 Year Treasury bond futures moved around 0-19 lower, and the December dollar index fell to 97.371. Soybeans recovered a bit and posted a gain on the session while corn and wheat futures moved a touch lower. Crude oil was quiet with the nearby January futures contracts settling at $58.43 per barrel as the market waits for a decision from OPEC. Product prices edged higher. Natural gas also moved a bit higher, despite a lower than expected withdrawal from the EIA. The market had expected a decline of 41 bcf in inventories, and the EIA said stocks dropped by only 19 bcf for the week ending on November 29. The four precious metals did not move all that month with gold and silver settling a bit higher, and platinum and palladium on either side of unchanged.  Live cattle moved a bit higher on the February contract, while feeder cattle edged lower. Lean hog futures moved a bit lower. Cotton posted a marginal loss, but all of the other soft commodities and lumber moved higher. Coffee and cocoa led the gainers on the session. Coffee traded to just under the October 2018 high. Bitcoin was $200 higher to $7420 per token.

On Friday, the November jobs report showed that payrolls surged by 266,000, and average hourly earnings rose by 3.1% lifted the stock market. At the same time, crude oil moved higher on the news that OPEC added another 500,000 barrels to its daily production cut, lifting it to 1.7 million barrels per day. The bottom line, with lower Saudi output, the market is interpreting the cut at around 2.1 million barrels per day. In a sign of good faith, China said it would wave some import restrictions on US exports of soybeans and pork. The move could cause the US to delay tariffs scheduled to take effect on December 15. All of the stock indices posted gains on Friday. Soybeans moved higher, while wheat posted a marginal gain, and corn was unchanged. Crude oil and oil products moved to the upside in the aftermath of the OPEC production cut, but natural gas drifted lower back towards the $2.30 level. Gold and silver declined, with silver falling to a new low and the lowest price since early August. Platinum and palladium prices were stable. Copper moved above the $2.70 level on optimistic news on the trade front. Hogs moved marginally lower, but live and feeder cattle were a bit higher on the session. Cotton, sugar, cocoa, and lumber posted gains on Friday. Coffee settled only one tick lower, but the soft commodities moved to a high at $1.2725 per pound, above the October 2018 high. FCOJ continues to slip. The dollar index was a bit higher, while the long bond slipped on the bullish economic data. Bitcoin futures were $40 higher to the $7460 per token level.

On Monday, the news that Paul Volker, the former Chairman of the Federal Reserve, passed away at 92 years of age over the weekend, stirred memories of the early 1980s. Chairman Volker raised interest rates to record levels to combat inflation. Concerns over the December 15 deadline for 15% tariffs on Chinese exports to the US weighed on stocks on Monday. All of the leading indices moved to the downside on the first trading day of the week. The VIX moved higher to the 15.69 level, up 2.07 on the session. US 30-Year March Treasury Bond futures were 0-11 higher to the 157-31 level. The dollar index in December was at the 97.609 level as it did not move much from the December 6 closing price. The grain and agricultural markets were waiting for Tuesday’s final WASDE report of the year on Monday. Soybean futures moved higher, but corn and wheat prices posted marginal losses. Crude oil slipped but remained around the $59 per barrel level on the NYMEX January futures contract.

Natural gas continues to fall like a stone, reaching a low at $2.158 per MMBtu, a new low, before settling at $2.232. Natural gas created a new gap on the daily and weekly charts from $2.27 to $2.258 to add to the island reversal that sits above the market. Gold and silver prices did not move much after last week’s losses. Platinum was a bit lower, while palladium rose to another record high at $1870 per ounce before pulling back to just above the $1860 level on the continuous contract. The price of physical palladium traded to a high at $1898 per ounce. Cattle and hog prices edged lower. Lumber, cocoa, and cotton posted small losses on the session, but sugar, coffee, and FCOJ moved higher. Coffee traded to a high at $1.32 on the March futures contract as the soft commodity continues to make higher highs. Coffee traded to its highest price since the first week of 2018. Bitcoin slipped by $140 to $7,320 per token.

On Tuesday, the USDA released its WASDE report. At the same time, the White House and Congress reached a deal on the USMCA trade deal between the US, Canada, and Mexico. The House Judiciary Committee also announced articles of impeachment against President Trump setting the stage for a fill vote on impeachment before the Christmas holiday. The stock market was down slightly on the session. WASDE was a non-event. Grain prices did not much before or after the report. Gold and silver edged higher, while platinum and palladium posted gains on the session. Crude oil was higher, while products were mixed with a small loss in gasoline and gain in heating oil. Natural gas edged higher and filled the gap on the chart created from last Friday to Monday. However, the price closed below the $2.30 per MMBtu level on January futures. Copper was sitting near the top end of its trading range. Live cattle were lows, but feeder cattle and lean hogs posted gains. Cotton was at just under 66 cents on the March contract. Cocoa and lumber fell while sugar, coffee, and FCOJ posted gains. Coffee traded to a high at $1.3440 and settled at close to the high of the session. Bitcoin was at the $7335 per token level.

On Wednesday, the FOMC announced its decision on monetary policy for the final time in 2019. As expected, the Fed left short-term rates unchanged at 1.50% to 1.75%. The statement and press conference that followed the meeting told markets the central bank would continue to follow the accommodative path to monetary policy. The statement said the current stance is “appropriate.” The Fed guided that there is not likely to be any rate hike in 2020. Stocks edged higher in the aftermath of the meeting. The dollar index declined to just over the 97 level on the December futures contract, and US 30-Year Treasury Bonds rose by 0-22 to around the 158-24 level. Grain prices drifted lower in the aftermath of Tuesday’s WASDE report. Crude oil also fell on the back of inventory builds from the EIA and API. Oil products moved lower with the raw crude oil. Natural gas drifted lower and settled at just below the $2.25 per MMBtu level. Gold and silver posted gains on the session and moved higher after the Fed meeting. Copper also posted a gain as the price of March futures is homing in on the $2.80 per pound level. Platinum and palladium also moved higher on the session with palladium rising to another new high on the March contract at $1892 per ounce. Cattle were a bit higher, while hogs settled down marginally on the session. Coffee futures moved to another new high at $1.3685 per pound and closed above the $1.35 level. Lumber was a bit higher, but cotton, FCOJ, sugar, and cocoa prices all fell. Bitcoin was $15 lower to $7200 per token.

 

Weekly Spreadsheet:

Copy of Spreadsheets for The Hecht Commodity Report December 11, 2019

Stocks and Bonds

The bullish employment report, other positive economic data, stable Fed policy, and lingering hopes over a de-escalation of trade tensions between the US and China lifted the stock market over the past week. The leading stock indices remain near the recent highs as 2019 winds down.

 

The S&P 500 moved 0.93% higher since the previous report, while the NASDAQ moved 1.02% to the upside. The DJIA posted a 0.95% gain since the last report. The risk of periodic selloffs continues to rise with the prices of stocks.

Chinese stocks outperformed US stocks since last week.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $41.98 level on Wednesday, which was 2.69% higher than the closing level on December 4. Technical support is at the recent low at $37.66 per share from August 14. Resistance stands at the July 1 high at $44.02 per share. The path of least resistance for FXI depends on the progress of the ongoing trade talks and relations between the US and China.

US 30-Year bonds were unchanged from last week on the back of robust US economic data and no changes in monetary policy from the Fed. On Wednesday, December 11, the March long bond futures contract was at the 158-24 level. As I wrote last week, “All signs are that the central bank will pause over the coming months, and perhaps until after the 2020 Presidential election before making any changes to monetary policy. There is always a chance that an event may trigger a move by the Fed. However, in the absence of any dramatic changes in the global economic or political landscapes, the US central bank appears to be finished with its adjustment to short-term interest rates. Meanwhile, the trend of lower global interest rates is likely to continue.”

Open interest in the E-Mini S&P 500 futures contracts rose by 2.37% since December 3, as investors continued to flock to the stock market in the face of low yields on fixed-income instruments. Open interest in the long bond fell by 0.96% over the past week. The VIX rose marginally since the previous report. The volatility index was at the 15.07 level on December 11, 0.87% higher over the period.

I continue to favor the long side when it comes to the VIX and VIX-related instruments. As we have witnesses, selling can return to the stock market in the blink of an eye on a news item. I view the current level of the VIX as too low in this environment. Nothing has changed over the past week, and I would continue to look for at least a 2:1 payoff ratio on short-term positions on the long side of price variance instruments like the VIX, VIXY, and others. The many issues facing markets have the potential to cause periods of selling in stocks, particularly with the leading indices at lofty levels. I have been trading from the long side in the VIX over the past week with very tight stops.

 

The dollar and digital currencies

The dollar index fell to just above the 97 level on the nearby December futures contract on December 11. The contract posted a 0.56% loss since last week. The index settled at 97.056 on Wednesday. Interest rate differentials continue to provide some support for the dollar index despite the reductions in the Fed Funds rate over recent months. Technical support is close by at 96.885, with resistance is at 99.305 and 99.33 in the upside. The dollar index weakened over the past week.

The euro currency was 0.53% higher against the dollar since last week’s report. We could see more volatility in the dollar index over the coming weeks and months as the 2020 Presidential election nears, which could change US policies starting in early 2021. I expect 2020 to be a volatile year in the currency markets. This week, the ECB meets with its new leader, Christine Lagarde, at the helm of the central bank at its meeting on Thursday.

 

Over the past week, Bitcoin edged lower after trading below the $7000 level in recent weeks and bouncing. Bitcoin was trading at the $7,208.07 level as of December 11, as it declined 2.26% compared to the value on December 4. The recent crackdown by the Chinese on digital currencies sent the price of Bitcoin and other cryptocurrencies to the lowest levels since May.  Ethereum fell by 4.39% and was at $143.18 per token on Wednesday. The market cap of the entire asset class moved 2.28% higher as it kept pace with the price action in Bitcoin. The number of tokens increased by 34 to 4917 tokens since December 4. The 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. On Wednesday, it stood at around $195.792 billion. Open interest in the CME Bitcoin futures fell by 2.28% since last week, adding to recent declines as investment interest dried up with the recent selling. The level to watch on the downside in Bitcoin is now at around the $6,510 per token level, the low from the past week. Resistance is at $8000 per token.

The Canadian dollar moved 0.20% higher since last week. Open interest in C$ futures fell by 8.06% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that also produces significant quantities of energy and agricultural products. The C$ put in a bearish reversal on the daily chart on October 29 and followed through on the downside. However, I expected the currency to make a higher low against the US dollar. The support level for the Canadian currency is at just below $0.75 against the US dollar, and it has held that level.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ rose by 0.53% since last week’s report.

The British pound posted a 0.80% gain since the previous report. The general election this Thursday will serve as a second Brexit referendum. The new deadline for Brexit is at the end of January 2020. A victory by Prime Minister Johnson that leads to a Brexit with an agreement with the US could boost the value of the pound to the $1.40 level against the US dollar. The polls are pointing to a significant victory for the Prime Minister, but elections can yield surprises as we have learned. The pound moved to the upside on the back of optimism over a win by the Tory Party next week. We could see lots of volatility in the pound versus both the dollar and the euro on Friday in the aftermath of the voting.

The Brazilian real moved higher since December 4 and drifted above the $0.24 level as it rose by 2.21%. Meanwhile, the real remains not far above its multiyear lows. The Brazilian currency is a critical factor when it comes to the commodities that the South American nation produces and exports to the world. Coffee, sugar, oranges, and a host of other markets are likely to move higher or lower with any significant changes in the direction of the Brazilian real over the coming weeks. Meanwhile, supply concerns over the Brazilian coffee and sugar crops caused the soft commodities to work to higher levels. Coffee traded above its October 2018 high at $1.2550 for the first time last week. Nearby sugar futures rose above the 13 cents per pound level.

 

Precious metals were mixed over the past week. December has been a historically bearish month for the sector over the past years. However, the final Fed meeting of 2019 was supportive of the price of gold.

 

Precious Metals

Gold and silver moved lower since last week, while platinum group metals posted gains. Silver was the leader on the downside as the price fell to a new short-term low. Platinum and palladium prices were strong. Rhodium moved higher since December 4.

Gold fell by 0.35% since last week, while silver was 0.40% lower. The price of February gold was just at the $1475 per ounce level on Wednesday, while March silver was at $16.849 per ounce. February gold futures reached a peak at $1571.70 on September 4, and March silver climbed to $19.87 on the same day.

The price of January platinum rose by 4.18% since last week was just below $940 per ounce. The level of technical resistance is at the September 5 high at $1006.10 with support at the November 12 low at $867.80 per ounce. Rhodium is a byproduct of platinum, and the price of the metal has been in a bull market since early 2016. The price of rhodium continued to march higher since the previous report. The midpoint price of the metal was at $5850 per ounce on December 11. Palladium rose by 2.15% on the week. The price traded to a new peak at $1892 on December 11 on the March futures contract and closed at the $1885.10 per ounce level on Wednesday. The demand for palladium-based catalysts continues to create a deficit in the palladium market that is likely to carry the price to the $2000 per ounce level or higher in 2020.

Open interest in the gold futures market moved 1.57% lower over the past week. The metric reached a new record peak at 719,211 contracts on November 19. The metric moved 4.32% higher in platinum while it was 2.05% higher in the palladium futures market. Silver open interest fell by 1.72% over the period.

The silver-gold ratio did not move much since the last report.

Source: CQG

The daily chart of the price of February gold divided by March silver futures shows that the ratio was at 87.43 on Wednesday, down 0.07 from the level on December 4. The long-term average for the price relationship is around the 55:1 level. The ratio remains at an elevated historical level. Silver remains historically cheap compared to gold, and over the past week, it got more inexpensive. The ratio had dipped to a low at 79.13 on September 4 on the active month contracts when both gold and silver were on the recent highs. The ratio tends to move lower during bull market periods and higher when there is bearish price action in the markets.

We are long the gold mining stock ETF products GDX and GDXJ, which moved lower since the last report. While gold moved down by 0.35%, the GDX was 0.84% higher since December 4, and GDXJ rose by 0.56% since the previous report. 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 bullish for the gold market. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 0.06% loss since December 4, outperforming the price action in the silver futures market. I continue to believe that both gold and silver will find short-term lows at higher levels during the current correction and consolidation period.

Platinum and palladium prices moved higher since December 4. March Palladium was trading at a premium over January platinum with the differential at the $945.60 per ounce level on Wednesday, which slightly widened from the previous week to a new record level. January platinum was trading at a $535.50 discount to February gold at the settlement prices on December 11, which narrowed since the previous report.

The price of rhodium, which does not trade on the futures market, moved $250 higher over the past week and was at $5,850 per ounce on Wednesday. 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 still almost double the current price. However, markets rarely move in a straight line. Rhodium has been then best-performing precious metal since 2016. The price has moved higher from a low at $575 per ounce. Nothing changed in the rhodium market, as it continues to exhibit strength.

We are long the PPLT platinum ETF product, which moved 5.06% higher since December 4. Platinum continues to offer the most attractive value proposition in the precious metals sector even after the recent rally. Platinum needs to make a move above the $1000 and $1200 resistance levels to break to the upside on a technical basis.

We are long the ETFMG Prime Junior Silver ETF (SILJ) product at $10.36 per share to diversify risk. SILJ was at $11.21 on December 11, up 9 cents per share since last week with the move to the downside in the silver futures market.

I have been writing, “I continue to be bullish on the prospects for all of the precious metals. The period of consolidation and correction continued over the past week and could go on for a time. I believe that any price weakness in the sector will create excellent buying opportunities.” My outlook has not changed over the past week. From a short-term trading perspective, we may continue to see prices fall, but I view weakness as an opportunity in precious metals for the long term. Over the past years, precious metals have exhibited weakness during the final month of the year. Gold and silver fell to lows at $1046.20 and $13.635 in December 2015, which have become critical long-term technical bottoms in the two leading precious metals. Most of the factors that lifted the prices of the precious metals remain intact as we head into the new decade. I continue to view price weakness as a buying opportunity.

 

Energy Commodities

Crude oil moved higher since last week with the Brent benchmark outperforming WTI futures. Oil product prices also moved to the upside since December 4. The gasoline crack spread strengthened over the past week, while the distillate spread moved a touch lower. Natural gas lost ground as the price of the volatile futures plunged again. Ethanol was lower, while Rotterdam coal fell since the previous report.

January NYMEX crude oil futures rose by 0.57% over the past week. February Brent futures moved 1.10% higher since December 4. January gasoline was 1.37% higher, and the processing spread in January posted a 6.46% gain since last week as gasoline outperformed the price of crude oil over the period. January heating oil futures moved 0.31% higher since the previous report, and the heating oil crack spread was 0.58% lower since last week.

Technical resistance in the January NYMEX crude oil futures contract is at $59.85 per barrel level, the high from December 6, with support at the $55.02 level. Crude oil open interest rose by 3.05% over the period. The price of crude oil rose after OPEC increased its production cut from 1.2. to 1.7 million barrels per day at last week’s meeting. The Saudis will add another 400,000 barrels to the cuts bringing it to a total of a 2.1 million barrel per day reduction in 2020. The price of crude oil and oil products edged higher after the move, which is a sign that if the cartel did not act, the price of oil would have headed down to the $50 level on nearby NYMEX futures or lower. The move by OPEC was supportive of crude oil.

Source: CQG

The daily chart of nearby NYMEX futures highlights that the energy commodity put in a bullish reversal on
Friday, December 6, as the price settled above the previous day’s peak after moving below its low. January futures settled at $59.20 per barrel at the end of last week, as the energy commodity traded at the highest price since mid-September.

Iran continues to pose a threat to production, refining, and logistical routes for crude oil in the Middle East. The potential for changes in US energy policy could cause volatility in the oil market in 2020 based on the outcome of the Presidential election. The US is currently the world’s leading producer of both crude oil and natural gas. OPEC is hoping that the US production of crude oil begins to decline in 2021. Meanwhile, the Saudi IPO of Aramco was on Wednesday on the local Saudi exchange. The shares rose the daily limit, which put the valuation of the world’s largest oil company at almost $1.9 trillion. Aramco is not the world’s largest publicly traded company. Additionally, the valuation makes Aramco worth more than all of the US oil companies that trade on exchanges combined.

The OPEC decision caused the spread between Brent and WTI crude oil futures in February to move higher to the $5.08 per barrel level for Brent, which was $0.38 above the level on December 4. The Brent premium tends to move higher during bullish periods in the oil market and vice versa. The Brent premium traded as high as $11.59 per barrel in late May, but the February contract reached a high at a lower level at $7.06 on the high in late April when it comes to the spread. The spread found what looks like a significant bottom at $3.79 on August 29 Tensions in the Middle East should keep a bid under the price of Brent crude oil and the spread between the two benchmarks. The critical level on the downside in NYMEX crude oil remains at $50 per barrel. Crude oil could continue to work its way higher in the aftermath of the OPEC meeting. Inventory data and the OPEC meeting on Wednesday and Thursday helped to lift the price of the energy commodity.

US daily production stood at 12.8 million barrels per day as of December 6, according to the Energy Information Administration, which was just 0.10 million below last week’s record peak for daily output. As of November 29, the API reported a decrease of 3.720 million barrels of crude oil stockpiles, while the EIA said they fell by 4.900 million barrels for the same week. The API reported a rise of 2.930 million barrels of gasoline stocks and said distillate inventories rose by 794,000 barrels as of November 29. The EIA reported an increase in gasoline stocks of 3.400 million barrels and an increase in distillates of 3.10 million barrels. Rig counts, as reported by Baker Hughes, continued to decline and fell by five last week to 663 rigs in operations as of December 6, which is 214 below the level operating last year at this time. The steady decline in the number of rigs with daily output at 12.8 million barrels per day level is a sign of the efficiency of the oil business in the US, which is a significant factor for the oil market. The decline in the rig count could weigh on future production and provide support for the price of oil, but it has yet to as of recent weeks.

OIH and VLO shares in opposite directions since last week. OIH rose by 5.53%, while VLO moved 0.34% lower since December 4. The recent strength in VLO had been because of strong refining margins that go directly to the bottom line of processing companies. Meanwhile, the shares of the refining company rose to a level that was unsustainable on the upside at over $100 per share in the current environment, leading to a downside correction. Lower crack spreads have weighed on the price of VLO stock. 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 remains too low at its current price level. I will consider adding to the position on further price weakness. Oil services stocks have done much worse than other oil-related equities over the past months. I will wait before adding any more shares to the position in OIH. I believe that crude oil-related equities are far too inexpensive at current levels and could experience a rebound as sector rotation in the strong stock market occurs. As I mentioned in the report over the past weeks, “I have been trading the Direxion Daily Energy Bull 3X Shares (ERX) from the long side of the market. ERX is a triple-leveraged product, so time and price stops are significant for managing risk. ERX holds leveraged positions in the leading energy companies.”

ERX was 3.91% higher since last week’s report. I continue to use tight stops on long positions in the ERX product and will re-enter if the market triggers stops. Oil and oil-related equities moved higher over the past week.

January natural gas futures were at $2.243 on December 11, which was 6.50% lower than on December 4. The futures contract traded to a high of $2.98 on November 5. Natural gas traded at its lowest price since August and at the lowest level at this time of the year since 2015, when it hit $2.158 on December 9.

Source: EIA

The EIA reported a lower than expected withdrawal of only 19 bcf bringing the total inventories to 3.591 tcf. As of November 29. Stocks were 19.7% above last year’s level, but 0.30% below the five-year average for this time of the year. The bearish data caused the price of January futures to fall after an attempt at a recovery. This week the market expects that the EIA will report a withdrawal of 55 bcf from storage for the week ending on November 29.

Open interest fell by 0.36% over the past week. Technical resistance is at $2.826 per MMBtu level on the December futures contract with support at $2.158. The $2.135 per MMBtu levels stands as technical support on the continuous futures contract with resistance at $2.738 per MMBtu. The island reversal on the daily and weekly charts is from $2.826 to $2.829 and $2.738 to $2.753, respectively, which are currently the critical technical levels on the upside. Natural gas put in a bearish reversal on the daily chart on November 25 and the weekly chart recently. The island reversal on the daily and weekly charts have been a powerful bearish force for the energy commodity. Natural gas gapped lower at the beginning of this week, creating another void on the chart.  I continue to hold call options for January and February expiration, but time is running short for those positions. The call options limit the risk of losses to the premium paid. The price action as of Wednesday makes the $2.80 call option for the end of December expiration a lotto ticket, but natural gas is a market that can always present volatile surprises. The futures market is in a significantly oversold condition, and a recovery is overdue, but attempts at a move higher have proved unsustainable. The GASL ETF product outperformed natural gas over the past week. GASL was trading at $7.08 per share on December 11, 15.69% higher from last week. Natural gas is due for a recovery, but the price action has been awful. I have been avoiding the market since last week and have only traded GASL.

January ethanol prices moved 3.57% lower over the past week. Open interest in the thinly traded ethanol futures market moved 5.36% lower over the past week. With only 654 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product was up 1.14% compared to its price on December 4, but the price of January coal futures in Rotterdam fell by 4.96% over the past week.

The API reported that crude oil inventories rose by 1.410 million barrels for the week ending on December 6, compared to a consensus estimate of a decline of 2.763 million barrels. While the consensus estimate was for a 2.533-million-barrel rise in gasoline inventories, the API said they increased by 4.900 million. Distillate stocks rose by 3.200 million barrels for the week ending on December 6, according to the API. The EIA said crude oil inventories rose by 800,000 barrels as of the end of last week. When it comes to gasoline and distillate stocks, the EIA reported an increase of 5.40 million and a rise of 4.10 million barrels, respectively. The EIA and API data were bearish for the price of crude oil, but the price did not decline all that much after last week’s OPEC production cuts.

The risk of a price spike in oil remains greater on the up than on the downside, given the continuing tensions with Iran. The mild reaction to the OPEC output cut is a flashing sign that the price of oil would have headed appreciably lower had the cartel failed to act to trim production.

In natural gas, the price action continues to be bearish.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the peak price at $2.243 in January, which was 15.60 cents per MMBtu lower than last week. With April futures below $2.15, if the current trend continues, we could see a return of sub-$2 prices over the coming months and a test of the March 2016 low at $1.611 per MMBtu. However, the oversold condition of the market could increase the chances of a recovery rally. Keep in mind that price action tends to fill the gaps created by the island reversals on the daily and weekly charts. The top end of the gaps could be a target for the price action if a recovery develops over the coming week. However, time is not a friend for natural gas bulls. The longer the price takes to recover, the lower the chances of any significant move to the upside.

I have been tracking the price action in BG shares. Since November 6, the price of BG shares moved 4.11% higher to $55.28 per share on December 11. We are working a stop on close in BG at $49.49 per share on the downside. Our average cost of the shares is at $54.82. I will continue to post weekly updates on this position.

I have been taking profits quickly and stopping losses looking for a 1:2 risk-reward ratio on forays into the crude oil futures market. UCO and SCO products can be helpful for those who do not trade futures. In natural gas, UGAZ and DGAZ have attracted lots of volume over the past week as the price of natural gas fell to new lows. I expect volatility to continue in both energy commodities. As of Wednesday, the path of least resistance in oil was higher while gas was lower. I continue to trade from the long side of the markets with tight stops on all risk positions.

We are holding 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 5.86% higher over the past week at $15.71 per share. I will add another unit at a much lower price to lower the average cost of the long position.

Crude oil could run into some selling at above the $60 per barrel level on the nearby NYMEX futures contract and north of $65 on Brent futures. However, the latest move by OPEC was supportive of the price of the energy commodity and will likely keep a bid under the market during any price weakness over the coming weeks.

 

Grains                                                             

The USDA released its final World Agricultural Supply and Demand Estimates on Tuesday, December 10. The report was mostly a non-event for the agricultural markets as we are now in the heart of the winter season in North America and the northern hemisphere. Adjustments in supply and demand data caused some marginal moves in the markets, but prices did not move all that much from the previous week in the aftermath of the report.

The weather in South America and trade are the leading factors when it comes to the path of prices over the coming weeks and into 2020. Early next year, the market will begin to prepare for the uncertainty of the 2020 crop in the northern hemisphere.

 

January soybean futures moved 1.77% higher over the past week and was at $8.9350 per bushel on Wednesday. Open interest in the soybean futures market rose by 1.52% since last week. Price momentum and relative strength indicators on the daily chart were on either side of neutral conditions on December 11. However, momentum crossed higher in oversold territory, increasing the potential for a price recovery. The USDA told the soybean market:

Total U.S. oilseed production for 2019/20 is forecast at 107.6 million tons, down slightly due to a decrease for cottonseed. Soybean supply and use projections for 2019/20 are unchanged from last month. The U.S. season-average soybean price for 2019/20 is forecast at $8.85 per bushel, down 15 cents. The soybean meal price forecast is reduced $15.00 to $310.00 per short ton. The soybean oil price forecast is unchanged at 31.0 cents per pound. Global 2019/20 oilseed production is forecast up 3.3 million tons to 574.6 million, with greater soybean, sunflowerseed, and peanut production partly offset with lower rapeseed and cottonseed forecasts. China’s soybean production is projected up 1.0 million tons to 18.1 million reflecting higher area and yield reported by the National Bureau of Statistics. Sunflowerseed production is forecast higher for Russia and Ukraine. Sunflower yields for both Ukraine and Russia established new record highs based on a continuing strong upward yield trend, seasonably cool temperatures, and timely mid-summer rainfall. Other changes include increased peanut production for India, lower rapeseed production for Canada, higher cottonseed production for Brazil, and lower cottonseed production for Pakistan.

Source: USDA December WASDE Report

US production fell a bit, and global production rose.

The March synthetic soybean crush spread moved lower over the past week and was at the $0.9925 per bushel level on December 11, down 5.75 cents since December 4. The crush spread is a real-time indicator of demand for soybean meal and oil. Therefore, price trends in the crush spreads can cause buying or selling in the raw oilseeds at times. Any significant moves in the crush spread are likely to translate into price movement in the soybean futures. The recent price action in the March crush spread is not supportive of the oilseed futures. Trade between the US and China is the most significant issue facing the soybean futures market.

March corn was trading at $3.7125 per bushel on December 11, which was 1.92% lower on the week. The USDA told the corn market:

This month’s 2019/20 U.S. corn supply and use outlook is unchanged from last month. The projected season-average farm price is unchanged at $3.85 per bushel. Global coarse grain production for 2019/20 is forecast 6.8 million tons higher to 1,401.7 million. The 2019/20 foreign coarse grain outlook is for larger production, increased consumption, and higher stocks relative to last month. Foreign corn production is forecast higher with increases for China and Bolivia more than offsetting a reduction for Canada. China’s corn production is raised, reflecting increases to both area and yield, based on the latest data from the National Bureau of Statistics. Canada’s corn production is lowered, as an increase in harvested area is more than offset by a reduction in yield. Corn exports are lowered for Canada, Laos, and Mexico. Foreign corn ending stocks are raised from last month, largely reflecting increases for China, Bolivia, and Taiwan that more than offset declines for Canada, Colombia, and Paraguay. Global corn stocks, at 300.6 million tons, are up 4.6 million from last month.

Source: USDA December WASDE Report

Corn inventories moved higher, but the USDA consumption of corn continued to rose in the details of the report.

Open interest in the corn futures market rose by 1.99% since December 3. Technical metrics were falling into oversold territory in the corn futures market as of Wednesday. The price of January ethanol futures fell by 3.57% since the previous report on the back of losses in corn futures. January ethanol futures were at $1.3220 per gallon on Wednesday. The spread between January gasoline and ethanol futures widened to 30.41 cents per gallon on December 11, up 7.09 cents since last week as corn fell and gasoline moved higher.

 

March CBOT wheat futures were 1.56% lower since last week. The March futures were trading $5.1925 level on December 11. Open interest rose by 1.94% over the past week in CBOT wheat futures. The USDA told the wheat market:

The outlook for 2019/20 U.S. wheat is for decreased supplies, higher exports, and lower ending stocks. Wheat imports are lowered 15 million bushels to 105 million on a slower than expected pace to date; Hard Red Spring (HRS) is down 5 million bushels and Durum is lowered 10 million. If realized, these would be the lowest imports in nine years. U.S. wheat exports are raised 25 million bushels to 975 million on a strong pace to date, more competitive prices, and reduced supplies from several major competitors. Hard Red Winter and Durum exports are each raised 10 million bushels, and HRS is raised 5 million. With reduced supplies and higher use, 2019/20 ending stocks are cut 40 million bushels to 974 million, the lowest in 5 years. Despite the tightening stocks, the season-average farm price is lowered $0.05 per bushel to $4.55 based on NASS prices to date and expectations of cash and futures prices for the remainder of the market year. The global outlook for wheat this month is for several mostly offsetting production changes, slightly lower global use and trade, and increased ending stocks. The Argentina and Australia wheat crops are cut 1.0 million tons and 1.1 million tons, respectively, both on continued drought conditions. The Argentina crop is now pegged at 19.0 million tons and Australia’s crop is estimated to be 16.1 million tons. This is Australia’s smallest crop since 2007/08. Canada’s crop is cut 0.7 million tons to 32.4 million on updated government data. Partly offsetting is a 1.6-million-ton production increase for China to 133.6 million on updated National Bureau of Statistics data. The EU and Russia crops are each raised 0.5 million tons reflecting updated harvest data. Projected 2019/20 global exports are reduced 0.9 million tons as reductions for Argentina, Australia, and Canada are partly offset by increases for Russia and the U.S. The U.S. has become more price competitive in some international markets, and increased sales are expected to continue in the second half of the market year from reduced competition. With global use down 1.4 million tons, world ending stocks are raised 1.2 million tons to a record 289.5 million tons. China’s 2019/20 ending stocks are raised 1.8 million tons to 147.5 million and account for 51 percent of the global total.

Source: USDA December WASDE Report

As of Wednesday, the KCBT-CBOT spread in March was trading at a 88.50 cents per bushel discount with KCBT lower than CBOT wheat futures in the March contracts. The spread widened by 1.50 cents since December 4. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.”  The spread continues to be at a level that is bearish for the wheat market. The spread is not far from the highest level in years. Meanwhile, a sudden problem in the wheat market that causes consumer hedging to increase could result in a dramatic change in the spread between the hard and soft winter wheat futures contracts.

My positions in the grain markets continue to be very small, 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 trade dispute between the US and China remains one of the most significant factors for the prices of soybeans and corn. Any news from the trade front between the US and China could cause increased volatility. The bottom line is that optimism over trade is bullish for the prices of agricultural commodities, while pessimism would continue to weigh on prices. The weather in South America and trade will continue to drive prices higher or lower.

The long-term average for the corn-soybean spread is around the 2.4 bushels of corn value in each bushel of soybean value level. When the spread is higher, farmers tend to plant more beans than corn, and when it is lower than the 2.4:1 average, they tend to plant more corn than soybeans on their acreage.

Source: CQG

The chart of the November 2020 soybean futures divided by December 2020 corn futures shows that the ratio moved higher over the past week and was at the 2.4205:1 level on December 11, up 0.0491 since last week. The ratio had been trending higher since before the summer of 2019, but it turned lower in November and has since bounced. The end of the year is an excellent time to put the corn-bean ratio on your radar as any significant moves in the spread could provide clues about the path of least resistance for the prices of the grain and the oilseed futures markets. On December 11, the spread was trending towards a level where farmers would plant more beans than corn in 2020.

I do not expect any significant price moves in the grain sector over the coming week unless we see substantial news on the trade war between the US and China. The December WASDE report did provide any earth-shattering news when it comes to the prices of the grains and oilseed futures.

 

Copper, Metals, and Minerals

Copper moved higher on both the COMEX and LME since last week’s report. The prices of aluminum and nickel fell since last week, but zinc, lead, tin, and iron ore were a bit higher. Lumber and uranium prices slipped since December 4. The Baltic Dry Index moved lower over the past week.

Copper moved 4.91% higher on COMEX, while the red metal posted a 4.30% gain on the LME since the last report. Open interest in the COMEX futures market moved 5.37% higher over the past week. March copper was trading at $2.7895 per pound level on Wednesday. Copper is one of the leading barometers when it comes to the trade war between the US and China. The de-escalation had been moderately bullish news for the red metal, which is the leading force in the base metals sector. However, the red metal needs to see progress on trade to move above the $2.80 per pound level. The momentum of truth could come this weekend on December 15 when the deadline for new tariffs on Chinese exports to the US is scheduled to take effect.

Copper had been trading in a range from under $2.50 to around the $2.70 per ounce level, but it broke higher over the past week. Since the previous report, copper inventories continued to fall on the LME, but stockpiles on the COMEX did not move all that much after the recent increases. While political and labor issues in Chile could impact production, the trade war is the most significant issue as it weighs on the demand side of the fundamental equation for the red metal.

The LME lead price edged higher by 0.42% since December 3. The rise in demand for electric automobiles around the world is supportive of lead in the long term as the metal is a requirement for batteries. The price of nickel fell 3.97% over the past week. Nickel has been correcting after significant gains over the past months on the back of the export ban in Indonesia that will begin on January 1, 2020. Tin rose by 3.75% since the previous report. Tin has been trading on either side of the $16,600 per ton level, which has become a pivot point for the base metal. Aluminum was 1.96% lower on the week. New tariffs on aluminum exports from Brazil and Argentina to the US could cause price distortions in the aluminum market. The price of zinc rose by 0.54% since November 26. Critical support was around $2355, with resistance at $2550 in the zinc market. Zinc moved below the bottom end of its recent trading range and tested the $2200 per ton level. Base metals will continue to be highly sensitive to any news and developments on trade between the US and China.

January lumber futures were at the $396.60 level, 1.02% lower since the previous report. Interest rates in the US will influence the price of lumber. The US Fed paused at the December meeting given recent economic data. Lumber is a requirement for new home construction, which is a function of the level of interest rates. The price of uranium for January delivery was down 0.38% at $26.00 per pound. The volatile Baltic Dry Index fell by 4.86% since last week to the 1528 level. December iron ore futures posted a 4.28% gain compared to the price on December 4. Open interest in the thinly traded lumber futures market rose by 1.09% over the past week.

LME copper inventories dropped by 10.21% to 185,200 metric tons since last week. COMEX copper stocks fell by 0.02 from last week to 40,097 tons. Lead stockpiles on the LME were up 0.41%, while aluminum stocks were 2.09% higher. Aluminum stocks rose to the 1,303,975-ton level. Zinc stocks moved 2.37% lower from the last report. Tin inventories moved .094% higher since last week to 6,460 tons. Nickel inventories were 21.08% higher compared to the level on December 3.

The dollar, US interest rates, trade, and the overall direction of the global economy are the primary factors when it comes to base metal prices. Trade and the Chinese economy are bound to have the most significant impact on the path of least resistance for the nonferrous metals. The industrial commodities sector continues to wait for news that could guide prices. We may not see any significant price volatility in the base metals until 2020.

We own two units of Energy Fuels Inc. (UUUU), a US producer of uranium and vanadium, at an average of $2.55 per share. We are working a stop at $1.19 and have an initial profit target at $6 per share. There is a double bottom on the long-term chart at the $1.29 level. I am giving this position plenty of room and plenty of time. If the shares continue to fall, I will add another one and possibly two units to this trade to average down the price on the long position. UUUU was trading at $2.11 per share on Wednesday, up 21 cents over the past week. Time will tell if a significant recovery is underway in UUUU shares.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $2.65 on December 4, up 22 cents since last week. 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

 

US Steel shares were at $13.90 per share and moved 4.20% higher on the week.

We own two units of FCX shares at an average of $10.56. The stock was trading at $12.84 on December 11, $1.73 higher since the previous report. I will maintain a small long position in FCX shares.

The base metals and other industrial commodities are likely to move higher and lower based on the news cycle on trade between the US and China. China is the demand side of the fundamental equation for the raw materials in the industrial sector. Any disappointment that leads to an escalation of protectionist policies would further weigh on the Chinese economy leading to selling in base metals and other industrial commodities. However, a “phase one” deal and further progress could light a bullish fuse under these raw materials and send prices appreciably higher. Industrial commodities continue to sit and wait for news as prices drift around within medium-term trading ranges.

As I wrote over the past two weeks, I do not expect much price action from this sector for the rest of this year unless we see significant developments on trade.

 

Animal Proteins

Since last week, live and feeder cattle prices moved a higher, while lean hogs declined. On Tuesday, December 10, the USDA released its December WASDE report. The USDA told the beef and pork markets:

The forecast for 2019 total red meat and poultry production is raised from last month on the current pace of beef, pork, and broiler production. For 2020, the total red meat and poultry forecast is increased from last month as higher broiler production more than offsets a lower beef production forecast. Beef production is reduced on slightly slower pace of both fed and nonfed cattle slaughter in the first half of the year. The pork and turkey production forecasts are unchanged. USDA will publish the Quarterly Hogs and Pigs report on December 23 which will provide an indication of producer farrowing plans for first-half 2020. Beef imports for 2019 and 2020 are raised from last month on trade data to date and expectations that demand for processing-grade beef will remain strong. Exports for 2020 are lowered to reflect a slightly weaker pace of sales; the forecast for 2020 is unchanged. Pork export forecasts for 2019 and 2020 are lowered to reflect slower-than-previously expected growth in exports to several markets although the recent trade agreement with Japan is expected to mitigate the decline in total exports. The cattle price forecast is raised for fourth-quarter 2019 based on recent data and the strength is expected to carry into 2020. The 2019 and 2020 hog price forecasts are reduced on current price weakness.

Source: USDA

The WASDE report validated the recent price trends in cattle and hog futures markets as the USDA raised its price forecast in beef and lowered it in pork. The USDA will publish its “Quarterly Hogs and Pigs report” on December 23 could provide more guidance for the pork market and hog futures going into 2020 as the trade war could be the most significant factor for the coming year.

February live cattle futures were at $1.25325 per pound level up 0.93% from last week. Technical resistance is at $1.2715 and $1.3000 per pound. Technical support stands at around $1.23125 per pound level, as the market continues to trade near the top end of its trading range. Price momentum and relative strength indicators continued to drift lower and were on either side of neutral readings on Wednesday. Open interest in the live cattle futures market moved 1.43% lower since the last report. The total number of open long and short positions in the live cattle futures market had been climbing since mid-October but has leveled off.

January feeder cattle futures outperformed live cattle as they rose 1.35% since last week. January feeder cattle futures were trading at the $1.42775 per pound level with support at $1.38275 and resistance at $1.47775 per pound. Open interest in feeder cattle futures rose by 2.11% 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 moved to the downside over the past week. The price ran into selling in mid-October. The active month February lean hogs were at 67.725 cents on December 11, which was 1.02% lower on the week. The open interest metric fell by 1.01% from last week’s level. Price momentum and the relative strength index were sitting below neutral readings on Wednesday. Support is at 65.400 cents with technical resistance on the December futures contract at 70.00 cents per pound level.

The forward curve in live cattle is in contango from December 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 April 2021. The Feeder cattle forward curve is in contango from January 2020 through September 2020 when a slight backwardation develops until November 2020.

In the lean hog futures arena, there is contango from December 2019 until July 2020. From July 2020 through December 2020, the curve is in backwardation, but contango returns from December 2020 through April 2021. The forward curves reflect the seasonal trading patterns in the meat markets. In lean hogs, the shortage in China could impact the forward curve over the coming weeks and months. China needs US pork exports given the current situation, and we could see purchases as a result of Chinese concessions as the nation continues to suffer from a severe shortage of pork. The hog market continues to wait for more progress on trade and the potential for Chinese buying of US pork. If there is no deal by the end of 2019 and no concessions, we could see pressure on the lean hog futures continue. Time is running out for an agreement this year.

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

Source: CQG

Based on settlement prices, the spread was at 1.85050:1 compared to 1.81480:1 in the previous report. The spread increased by 3.57 cents as live cattle became more expensive compared to lean hogs on a historical basis. The spread moved away from the historical norm.

Trade continues to be the significant factor facing the animal protein sector as we are now in the winter months, which is the height of the offseason for demand in the US. Production in Argentina and Brazil and any moves in the currency markets for the peso or the real could impact the prices of beef and pork. A rise in the Brazilian real and Argentine peso could provide support for meat prices, while lower values for the South American currencies would likely weigh on futures prices as they cause production costs to decline. However, the animal protein sector is now in the heart of the offseason. At the start of next year, the focus will begin to shift towards the peak season for demand that starts in late May.

The WASDE report was a non-event for the meat markets. Cattle continue to exhibit strength and hogs price weakness. The trade war between the US and China has distorted the prices in the pork market.

 

Soft Commodities

All of the five members of the soft commodities sector posted gains over the past week. Coffee continued to lead the way on the upside with a double-digit percentage gain as the price moved well above the October 2018 peak. Sugar futures also higher since last week with a just over 2.75% gain. Cocoa was up by just under 1%, while cotton and FCOJ futures posted respectable gains since December 4.

March sugar futures gained 2.76% since December 4, as the price of the sweet commodity was around the 13.42 cents per pound level. Technical resistance is at 13.78 cents with support at 13 cents. Nearby sugar futures traded to a low at 11.74 cents on September 12, which is another level of support. The value of the December Brazilian real against the US dollar rose over the last week and was at the $0.242550 level against the US dollar, up 2.21% since last week. The Brazilian currency remains near its multiyear lows, but the rebound was supportive of the price of sugar and other commodities where Brazil is a leading producer and exporter. The currency remained above the critical support level since 2015, during the recent period of weakness. The US tariffs on Brazilian steel and aluminum prices because of the weak currencies could cause volatility in the dollar versus real currency pair over the coming weeks. Anyone with a risk position in sugar should keep an eye on the price action in the Brazilian real. Price momentum and relative strength on the daily sugar chart were climbing in overbought territory as of December 11. The metrics on the monthly chart crossed higher from a neutral condition. Sugar is approaching its highs for 2019, which were at 13.50 at the start of the year on the continuous futures contract. Above there, the significant target on the upside is the October 2018 high at 14.24 cents per pound.  Open interest in sugar futures was up 0.52% since last week.

March coffee futures were once again the big winner of the week as they rose by 11.51% since last week. March futures were trading at the $1.3520 per pound level. Short-term support is at the November 19 low at $1.200 on the March futures contract. Resistance is at $1.3685, the December 11 high on the March contract. I continue to favor coffee on the long side. 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 $43.65 on Wednesday. Open interest in the coffee futures market fell by 0.10% since last week. I am holding a small long core position in the coffee futures market and the JO ETN product. Coffee moved above the $1.2550 level, which was a bullish technical sign for the soft commodity. Supply concerns over Brazilian production in the off-year for crops have been supportive of the price of the soft commodity since mid-October. Coffee has made higher lows since reaching 86.35 cents in mid-April. The ultimate target is the November 2016 high at $1.76 per pound. Coffee has moved into overbought territory on the short-term chart. On the monthly and quarterly charts, the price action remains bullish as price momentum crossed to the upside. The risk rises with the price in the volatile coffee futures market.

The price of cocoa futures bounced a bit higher over the past week. On Wednesday, March cocoa futures were at the $2568 per ton level, 0.82% higher than last week. Open interest rose by 2.78%. Relative strength and price momentum were below neutral territory on the daily chart. The price of cocoa futures rose to a new peak and the highest price since May 2018 at $2783 per ton on the December contract. We are long the NIB ETN product at $25.76. NIB closed at $29.81 on Wednesday, December 11. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their exports of cocoa beans, it should provide support to the cocoa market on price dips. The level to watch on the upside above the recent high is at $2914 per ton. On the downside, short-term technical support stands at $2529 per ton.

March cotton futures moved 1.82% higher over the past week. On August 26, the price of nearby futures fell to a low at 56.59 cents, less than one cent above the critical 2016 low at 55.66 cents per pound. March cotton was trading at 65.60 cents on December 11 after rising to a high of 67.13 on October 30. The next level on the upside above the recent high is at the 69.07 cents per pound level on the December contract, the July 1 peak. On the downside, support is at 60, 56.59, 56.19, and 55.66 cents per pound. Open interest in the cotton futures market rose by 0.06% since December 3. Price momentum and relative strength metrics were above neutral territory on Wednesday. The metric remains in an oversold condition on the monthly chart but was crossing higher. I continue to believe that the price level limits the downside prospects for the cotton futures market. In the December WASDE report, the USDA told the cotton market:

This month’s outlook for U.S. cotton in 2019/20 includes lower production and ending stocks compared with last month. Production is lowered 611,000 bales mainly due to a 500,000-bale decline in Texas. Domestic mill use and exports are unchanged. Ending stocks are 600,000 bales lower this month, at 5.5 million. Upland cotton’s season-average farm price is also unchanged at 61 cents per pound. The global 2019/20 cotton forecasts include lower beginning stocks and production, largely offset by lower consumption. A nearly 900,000-bale decline this month in beginning stocks is led by a 700,000-bale reduction in India, following a report by India’s Cotton Advisory Board that lowered India’s 2018/19 cotton crop by a similar amount. World cotton production in 2019/20 is projected at 121.1 million bales, down 830,000 from November, and 3.0 million higher than in 2018/19. Production changes for 2019/20 this month other than the United States include decreases of 800,000 bales for Pakistan, 500,000 for India, and smaller declines for Australia, Turkey, and Chad. Partly offsetting are a 900,000-bale increase in Brazil’s projected crop, a 500,000-bale increase for Uzbekistan, and several smaller gains. A 1.2-million-bale decline this month in projected world consumption is led by a 1.0-million-bale reduction for China, due in part to lower textile exports. The consumption forecasts for Vietnam and Pakistan were also reduced, offsetting a small increase for Uzbekistan. Global 2019/20 ending stocks are nearly 500,000 bales lower this month. At 80.3 million bales, total ending stocks are only projected about 600,000 bales higher than in 2018/19, but stocks outside of China are expected to rise 3.1 million bales from the year before.

Source: USDA

US production and ending stocks fell, but global inventories edged higher in the cotton market.

January FCOJ also rose over the past week. On Wednesday, the price of January futures was trading around 98.25 cents per pound. FCOJ nearby futures moved 2.93% higher over the past week. Support is at the 94.75 cents level after the futures fell to a new low at that level on December 6. Technical resistance is at around $1.0165 per pound. Open interest rose by 6.91% since December 3. OJ tends to rally as the winter season approaches each year, but that has not happened this year. In November 2016, FCOJ hit its all-time peak at $2.35 per pound. This year, the price of orange juice has been weak and remains below the $1 per pound pivot point. The price action in FCOJ futures could be a function of the low level of the Brazilian currency against the US dollar. There is still time for a rebound above the $1 level in the FCOJ market.

Soft commodities displayed signs of bullish life over the past week with coffee leading the way on the upside. This sector of the raw materials asset class has a long history of extreme volatility at times. We could be in for a wild ride in some of these markets over the coming weeks and into 2020. I remain bullish on most of the soft commodities.

 

A final note

OPEC’s decision to cut production should keep a bid under the price of the energy commodity. I continue to believe that the selling that has hit the natural gas market came too early in the peak season, with too many winter months left ahead. Tomorrow, the UK election that will decide the fate of Brexit could add some price volatility to markets if there is a surprise. Prime Minister Johnson is expected to win, but we have learned not to take anything for granted until the voting is over. The Fed’s decision on Wednesday could weigh on the dollar and support commodity prices.

Meanwhile, perhaps the most significant event for the commodities market will come on December 15, which is the deadline for 15% tariffs on another $150 billion in Chinese exports to the US. We will soon find out if the trade war will escalate or de-escalate, which is now in the hands of President Trump. Since commodities are in the crosshairs of the trade war, the President’s decision will determine the path of least resistance for prices over the coming weeks and into 2020.

With the holidays approaching, there is still the potential for lots of price action in commodities and markets across all asset classes. Approach markets with a plan when it comes to risk and reward. Let profits run but use trailing stops on successful positions. Remember to cut losses early. The next opportunity in volatile markets is always right around the corner.

 

 

 

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.