• A “phase one” trade deal lifts the prices of many commodities
  • Markets ignore impeachment as trade progress trumps US domestic politics
  • Crude oil continues to post gains
  • Stocks rally to new all-time years
  • It is holiday time- Next week’s report will come out on December 24

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 12, the big news was the return of optimism over a trade deal between the US and China. Stocks exploded higher on the prospects of an agreement before the end of 2019. At the same time, the world awaited the results of the UK election, which will determine the fate of Brexit. Boris Johnson went into the contest with a comfortable lead in the polls. Stocks rallied on optimism that President Trump had approved a trade deal with China that would avoid the high tariffs due on December 15. The March long bond futures contract fell sharply to 156-24, down 2-05 on the session. The dollar index bounced to 97.384. Soybean, corn, and wheat prices rebounded on Thursday after recent losses. Crude oil moved higher along with products. Heating oil outperformed gasoline, reflecting seasonal demand factors. Natural gas bounded higher after the EIA reported a decline in inventories of 73 bcf for the week ending on December 6. Gold was close to unchanged, but silver posted a gain. Platinum and palladium rose on the session. Palladium moved to yet another record high at $1919.90 on the March futures contract. Copper moved above the $2.80 per pound level for the first time since early May on the back of optimism over a trade deal with China. Hog prices edged higher, but cattle posted marginal losses. Coffee rose to a new high at $1.39 per pound. Cotton, sugar, and lumber were higher. FCOJ and cocoa prices moved lower. Bitcoin was $90 higher to $7265 per token.

On Friday, the market reacted to lots of news. Boris Johnson won a massive victory in the UK, paving the way for Brexit. The pound versus the dollar currency pair rallied to a higher at just over $1.35 before pulling back to the $1.33-1.34 level. A “phase one” trade deal between the US and China lifted markets and injected holiday spirit into markets across all asset classes. The House Judiciary Committee voted to send two articles of impeachment to the floor of the House of Representatives. Stocks rose to new record highs, all of the leading indices posted gains. The dollar index sank to below the 97 level and settled at 97.171 as the pound and euro rallied in the wake of the UK election. US 30-Year Treasury bonds moved 1-11 higher to 158-04 on the March futures contract. Grain prices moved higher across the board on the back of the trade deal. Crude oil and product prices moved higher, but natural gas fell marginally to settle the week at just under the $2.30 per MMBtu level. Gold and silver were higher on the session, while platinum and palladium prices posted declines. Palladium rose to a new high at $1958.50 on the session. Copper probed above $2.80 on March futures and closed at just over $2.78 per pound. The meats moved higher across the board on the back of the trade deal. Coffee put in a bearish reversal on the final session of the week. After trading to a new high at $1.4030, selling hit the market and pushed it below $1.30 before the March contract settled at $1.3090 per pound. Cocoa and lumber prices posted gains, while sugar, FCOJ, and cotton were lower. Bitcoin futures were unchanged at $7265 per token.

On Monday, stocks moved higher to new record levels. The S&P 500 E-Mini futures contract rose to 3198.75, and all of the leading indices posted gains on the session. The March 30-Year Treasury Bond futures contract dropped by 1-01 to 157-06. The dollar index edged lower to the 96.965 level. Grains prices moved higher across the board in the aftermath of the progress on trade between the US and China late last week. Soybeans, the commodity in the crosshairs of the trade war, posted the most substantial gain on the session. Crude oil edged higher with the price of nearby NYMEX futures above the $60 per barrel level. Heating oil outperformed gasoline as the products reflected seasonal factors during the heart of the winter season. Natural moved away from the $2.30 level as January futures settled at $2.341 per MMBtu. Gold was marginally lower, but silver and platinum posted gains. March palladium futures rose to another new record high at $1969.80 as the $2000 level seems to be within reach before the end of 2019. Hogs moved higher, while cattle posted marginal losses. Sugar and cocoa moved lower, but FCOJ, coffee, and lumber prices moved to the upside. Coffee made back most of its losses from Friday and made a new high at $1.415 on the March futures contract. Bitcoin futures dropped back below the $405 level to $6860 per token.

On Tuesday, stocks edged a bit higher on the session to new record highs as the House of Representatives prepared to vote on two articles of impeachment that will lead to a trial in the Senate in early 2020. The US 30-Year Treasury Bond was virtually unchanged with a loss of only 0-01 at 156-26 in the March futures contract. The dollar index moved 0.197 higher to 96.777 on March futures. Grain prices continued to move higher in the wake of the “phase one” trade deal between the US and China. Soybeans and wheat led the way on the upside. Crude oil and products moved higher, but natural gas edged back towards the $2.30 per MMBtu level. Gold was close to unchanged, silver slipped a touch lower with platinum, and palladium moved $45 lower on the March futures contract after trading to a new high at $1974.60 per ounce. March copper futures settled at $2.81 per pound. Meat prices all dipped by under one cent, as cattle and hogs lost ground. All of the soft commodities and lumber moved lower, with the volatile coffee market leading the way on the downside with a loss of 5.25 cents to settle at $1.3370 per pound. Bitcoin continued to decline and fell $280 per token to settle at $6580.

On Wednesday, as markets awaited the impeachment of US President Donald Trump, stocks did not move all that much as the leading indices remained near all-time highs. US 30-year bond futures fell to the 156 level on the March futures contract, down 0-26 on the session. The March dollar index moved higher to just under the 97 level. Gain prices slipped with wheat leading the way on the downside, and smaller losses in corn and soybeans. Crude oil was virtually unchanged after rising to a higher high as January NYMEX futures roll to February. Oil products edged lower on the session, and the price of natural gas declined below the $2.30 per MMBtu level. Gold and silver were marginally lower, while platinum rose, and palladium fell below the $1900 level. Copper was above the $2.80 level on the March COMEX contract. Cattle posted marginal losses, but hogs were up modestly. Cocoa and coffee prices declined, but cotton, FCOJ, sugar, and lumber prices moved to the upside. Bitcoin rose by $555 to $7,135 per token, as the price hit a low of $6420.

 

Weekly Spreadsheet:

Copy of Spreadsheets for The Hecht Commodity Report December 18, 2019

Stocks and Bonds

Bullish economic data, no change in monetary policy from the US Fed, a “phase one” trade deal between the US and China, and Boris Johnson’s significant victory in the UK election combined to push the stock market to new highs over the past week. Stocks ignored the pending impeachment of US President Donald Trump as the odds of removal from office by a Republican-controlled Senate are virtually nil.

 

The S&P 500 moved 1.58% higher since the previous report, while the NASDAQ moved 2.01% to the upside. The DJIA posted a 1.18% gain since the last report. The stock market has lots of ammo to rise into the end of the year. Window dressing could push stocks even higher over the coming weeks before New Year’s Eve, but some profit-taking could emerge before the end of 2019.

Chinese stocks outperformed US stocks since last week on the back of the trade agreement that avoided the December 15 tariffs.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $43.00 level on Wednesday, which was 2.43% higher than the closing level on December 11. 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, which is within reach by the end of the year.

US 30-Year bonds moved lower from last week on the back of robust US economic data and no changes in monetary policy from the Fed. On Wednesday, December 18, the March long bond futures contract was at the 156-00 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.” Nothing has changed since the final Fed meeting of 2019 last week.

Open interest in the E-Mini S&P 500 futures contracts rose by 7.37% since December 10, as investors continued to flock to the stock market in the face of low yields on rose by 4.48% over the past week. The VIX moved lower since the previous report. The volatility index was at the 12.60 level on December 18, 16.39% lower over the period.

I have moved to the sidelines on VIX-related positions. I will likely remain out of the market for the rest of 2019. However, any dip down to 11 or lower on the VIX would be a tempting level to buy VIX-related products with a 2:1 reward-risk profile. The path of least resistance for the stock market remains higher, given all of the bullish news over the past week.

 

The dollar and digital currencies

The dollar index rolled from December to March futures and rose marginally since December 11. The contract posted a 0.27% gain since last week. The index settled at 96.963 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 96.295, with resistance is at 98.045 on the March futures and 99.33 on the continuous futures contract. The dollar index remained near the recent lows over the past week.

The euro currency was 0.19% lower against the dollar since last week’s report on the March futures contract. 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. Over the past week, the UK election boosted both the euro and the pound, but both drifted lower in the aftermath of Boris Johnson’s victory.

 

Over the past week, Bitcoin moved lower after trading to a new low at $6420. Bitcoin was trading at the $7,128.68 level as of December 18, as it moved 1.10% lower than the value on December 11. 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 8.49% and was at $131.02 per token on Wednesday. The market cap of the entire asset class moved 2.94% lower as it underperformed the price action in Bitcoin. The number of tokens increased by 29 to 4946 tokens since December 11. 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 $190.035 billion. Open interest in the CME Bitcoin futures rose by 31.73% since last week, as market participants could be buying the dip as the price action on the downside stalled. The level to watch on the downside in Bitcoin is around the $6,420 per token level, the recent low. Resistance is at $7,965 per token.

The Canadian dollar moved 0.43% higher since last week. Open interest in C$ futures rose by 11.96% over the period reversing last week’s losses in the metric. 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, which appears to have occurred. The support level for the Canadian currency is at just above $0.75 against the US dollar on the now active month March futures contract.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ fell by 0.36% since last week’s report.

The British pound posted a 0.87% loss since the previous report in the aftermath of Prime Minister Johnson’s impressive victory. The Prime Minister gained a majority in the House of Commons, which is likely to lead to Brexit before the end of January 2020 deadline. I had written that a Tory win would ignite the British pound. Over the past week, the pound versus the US dollar currency pair rose to just over $1.35, the highest level since May 2018. The pound rose to a peak at 1.20 against the euro, the highest level since the June 2016 initial Brexit referendum. I believe the pound could be heading for higher levels and would be a buyer against the dollar and the euro on any dips through the rest of 2019.

The Brazilian real moved a bit higher against the US dollar since December 11, as it rose by 1.44%. 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 over the past weeks. Coffee traded to a new high at $1.4245 on December 17, before correcting. Coffee can be a very volatile commodity.

 

Gold and silver posted marginal gains over the past week. Palladium rose to a new high, but platinum and rhodium prices moved marginally lower.

 

Precious Metals

Gold and silver moved a touch higher since last week. Platinum was the leader on the downside, but palladium rose to a new high and was approaching the $2000 level before correcting to just below the $1900 level on Wednesday. Rhodium moved marginally lower since December 11.

Gold rose by 0.25% since last week, while silver was 1.19% higher. The price of February gold was just at the $1478.70 per ounce level on Wednesday, while March silver was at $17.049 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 fell by 0.40% since last week was just below $936 per ounce. The level of technical resistance is at $959.90 with support at $886.40 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 remained strong since the previous report. The midpoint price of the metal was at $5840 per ounce on December 18. Palladium rose by 0.59% on the week. The price traded to a new peak at $1974.60 on December 17 on the March futures contract and closed at the $1896.20 per ounce level on Wednesday. I have been writing, “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.” Given the recent price action, $2000 is within reach in the palladium market.

Open interest in the gold futures market moved 3.91% higher over the past week. The metric reached a new record peak at 719,211 contracts on November 19. The metric moved 4.31% higher in platinum while it was 0.11% lower in the palladium futures market. Silver open interest rose by 2.00% over the period.

The silver-gold ratio moved a touch higher 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 86.69 on Wednesday, down only 0.04 from the level on December 11. 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 did not move much since the last report. While gold moved up by 0.25%, the GDX was 0.94% lower since December 11, and GDXJ fell by 1.57% 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 quiet. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 0.95% gain since December 11, underperforming 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 diverged slightly since December 11. March Palladium was trading at a premium over January platinum with the differential at the $960.50 per ounce level on Wednesday, which widened from the previous week to close to a record level. January platinum was trading at a $543.00 discount to February gold at the settlement prices on December 11, which widened since the previous report.

The price of rhodium, which does not trade on the futures market, moved $10 lower over the past week and was at $5,840 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 0.60% lower since December 11. 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 $11.32 on December 18, up 11 cents per share since last week as it outperformed 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 consolidation in most of the metals. I view any 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. While the trade deal and end to uncertainty over Brexit could weigh on the prices of metals, the Fed’s statement that its approach to monetary policy is “appropriate” is a sign that rates are not going higher any time soon. Lower interest rates should be supportive for the prices of gold and silver. When it comes to China, any economic strength on the back of the “phase one” trade deal could lead to an increase in the demand for precious metals. Physical investment demand for gold and silver in China, now that the country has tightened the restrictions on digital currencies could turn out to be a very bullish factor for the prices of the precious metals in 2020.

 

Energy Commodities

All members of the energy sector posted gains since December 11, except for coal that posted a marginal loss over the period. A combination of the OPEC production cut, a “phase one” trade deal, and declining concerns over a global recession lifted the prices of oil and oil products, natural gas, and ethanol over the past week. Crude oil processing spreads also posted gains that reflected seasonal factors.

January NYMEX crude oil futures rose by 3.69% over the past week. February Brent futures moved 3.80% higher since December 11. January gasoline was 3.55% higher, and the processing spread in January posted a 2.72% gain since last week as gasoline outperformed the price of crude oil over the period. January heating oil futures moved 4.74% higher since the previous report, and the heating oil crack spread was 7.62% higher since last week.

Technical resistance in the January NYMEX crude oil futures contract is at $61.18 per barrel level, the high from December 18, with support at the $55.02 level. Crude oil open interest fell by 2.84% over the period. The price of crude oil continued to rise after OPEC increased its production cut from 1.2 to 1.7 million barrels per day at its recent biannual 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. News that the US and China reached a deal on a “phase one” trade agreement pushed crude oil higher at the end of last week

Last week I highlighted that a bullish reversal on
Friday, December 6, following the OPEC meeting, could send the price of crude oil higher. Over the past week, the energy commodity followed through on the upside to above the $60 level for the first time since mid-September on the January NYMEX futures contract.

As we head into the next decade in a few short weeks, Iran will continue 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 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.

The spread between Brent and WTI crude oil futures in February moved higher to the $5.30 per barrel level for Brent, which was $0.22 above the level on December 11. 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 as a result of the de-escalation of the trade war between the US and China.

US daily production stood at 12.8 million barrels per day as of December 13, according to the Energy Information Administration, which was just 0.10 million below the record peak for daily output. As of December 6, the API reported an increase of 1.410 million barrels of crude oil stockpiles, while the EIA said they rose by 800,000 barrels for the same week. The API reported a rise of 4.90 million barrels of gasoline stocks and said distillate inventories rose by 3.20 million barrels as of December 6. The EIA reported an increase in gasoline stocks of 5.40 million barrels and an increase in distillates of 4.10 million barrels. Rig counts, as reported by Baker Hughes, experienced the first increase in quite some time as the rose by four last week to 667 rigs in operations as of December 13, which is 206 below the level operating last year at this time. The recent 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. US energy policy following the 2020 election is likely to have the most significant impact on output beginning in early 2021.

OIH and VLO shares moved higher since last week. OIH rose by 5.16%, while VLO moved 1.74% higher since December 11. 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 had weighed on the price of VLO stock over recent weeks. 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 8.57% 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 $2.286 on December 18, which was 1.92% higher than on December 11. 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. Natural gas has traded at its lowest level in December because of the high level of stockpiles at the start of the winter season.

Source: EIA

The EIA reported a lower than expected withdrawal of 73 bcf, bringing the total inventories to 3.518 tcf. As of December 6. Stocks were 20.3% above last year’s level, but 0.40% below the five-year average for this time of the year. This week the consensus expectations are that the EIA will report a withdrawal of 78 bcf from storage for the week ending on December 13.

Open interest rose by 0.88% over the past week. Technical resistance is at $2.377 per MMBtu level on the December futures contract with support at $2.158. The $2.135 per MMBtu levels stand 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, are currently the critical technical levels on the upside. Natural gas put in a bearish reversal on the daily chart on November 25 as well as on the weekly chart. 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 last week, creating another void on the chart.  Price action filled that void during the week. I continue to hold call options for January and February expiration, but they have become lotto tickets with very low odds of paying off. The daily chart is in an oversold condition, and a recovery is overdue, but attempts at a move higher have proved uninspiring. The GASL ETF product continued to outperform natural gas over the past week. GASL was trading at $9.03 per share on December 18, 27.54% higher from last week. Natural gas is due for a recovery, but the price action has been awful. I have been trading from the long side with a tight stop on all risk positions over the past week and will continue over the coming week with the same strategy. GASL profits have covered losses in other products and futures.

January ethanol prices moved 2.72% higher over the past week. Open interest in the thinly traded ethanol futures market moved 11.93% lower over the past week. With only 576 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product was up 2.91% compared to its price on December 11, but the price of January coal futures in Rotterdam fell by 0.18% over the past week.

The API reported that crude oil inventories rose by 4.70 million barrels for the week ending on December 13, compared to a consensus estimate of a decline of 1.288 million barrels. While the consensus estimate was for a 2.178-million-barrel rise in gasoline inventories, the API said they increased by 5.60million. Distillate stocks rose by 3.70 million barrels for the week ending on December 13, according to the API. The EIA said crude oil inventories fell by 1.10 million barrels as of the end of last week. When it comes to gasoline and distillate stocks, the EIA reported an increase of 2.50 million and a rise of 1.50 million barrels, respectively. The EIA and API data were bearish for the price of crude oil, but the price made higher highs after the OPEC cut and trade deal.

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. However, the risk of a correction in the oil market will rise with the price.

In natural gas, the price action continues to be bearish for this time of the year.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the peak price at $2.286 in January, which was 4.30 cents per MMBtu higher than last week. With April futures at under $2.17, 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. BG is a significant producer of ethanol in Brazil. Since December 11, the price of BG shares moved 1.56% higher to $56.14 per share on December 18. 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 still 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 1.08% higher over the past week at $15.88 per share. I will add another unit at a much lower price to lower the average cost of the long position.

With only two weeks left in 2019, the weather forecasts will drive natural gas prices. When it comes to crude oil, lower OPEC production, and the de-escalation of the trade war is supportive of prices going into 2020.

 

Grains                                                             

There was not much price action following the release of the December 10 WASDE report from the USDA. Prices edged to the downside following the last report of the decade. However, news of a “phase one” trade agreement at the end of last week caused prices to move to the upside. The US is a leading producer of agricultural products, and China is the world’s most populous nation. The trade war had distorted prices as tariffs and retaliatory measures prevented the free flow of the commodities that feed the world from points of production to consumption. A deal between the US and China was welcome news for the sector of the commodities that had been in the crosshairs of the trade war since 2018.

 

January soybean futures moved 3.92% higher over the past week and was at $9.2850 per bushel on Wednesday. Open interest in the soybean futures market fell by 6.62% since last week. Price momentum and relative strength indicators on the daily chart were rising in overbought conditions on December 18.

The March synthetic soybean crush spread moved a bit higher over the past week and was at the $1.0675 per bushel level on December 18, unchanged since December 11. 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 marginally supportive of the oilseed futures.

March corn was trading at $3.87 per bushel on December 18, which was 4.24% higher on the week.

Open interest in the corn futures market rose by 0.39% since December 11. Technical metrics were crossed higher and were heading for overbought territory in the corn futures market as of Wednesday. The price of January ethanol futures rose by 2.72% since the previous report on the back of gains in gasoline and corn futures. January ethanol futures were at $1.3580 per gallon on Wednesday. The spread between January gasoline and ethanol futures widened to 32.58 cents per gallon on December 18, up 2.17 cents since last week.

 

March CBOT wheat futures were 5.59% higher since last week. The March futures were trading $5.4825 level on December 18. Open interest rose by 4.86% over the past week in CBOT wheat futures. Technical metrics were rising above neutral territory on December 18.

As of Wednesday, the KCBT-CBOT spread in March was trading at an 86.00 cents per bushel discount with KCBT lower than CBOT wheat futures in the March contracts. The spread narrowed by 2.50 cents since December 11. 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 but edged towards the long-term norm over the past week. 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 deal resulting in a de-escalation of the trade war is supportive of the prices of grains. The weather in South America will drive prices higher or lower over the coming weeks.

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 2.4157:1 level on December 18, down 0.0048 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 18, the spread was a bit above the long-term norm, if it continues to move higher farmers around likely to favor beans over corn when it comes to planting for the 2020 crop year.

A trade deal is a bullish factor for agricultural commodities. With Chinese buying, we could see prices trend higher over the coming weeks and months. The “phase one” trade deal trumped the December WASDE report since last week.

 

Copper, Metals, and Minerals

The trade deal is a bullish factor for the prices of industrial commodities. Many of the members of the sector posted gains over the past week. Recent weakness in the US dollar is also a support factor for base metals and the other industrial products that are the building blocks for infrastructure. Global economic growth would likely push prices higher over the coming weeks as we move into the new decade.

Copper moved 0.83% higher on COMEX and above the $2.80 per pound level, while the red metal posted a 1.81% gain on the LME since the last report. Open interest in the COMEX futures market moved 14.20% higher over the past week. March copper was trading at $2.8125 per pound level on Wednesday. The price has been rising over the past weeks. Rising price and increasing open interest tend to be a validation of a bullish trend in a futures market. Copper is one of the leading barometers when it comes to the trade war between the US and China. The “phase one” agreement pushed the price of the red metal higher and above the $2.80 level, as copper is the leading force in the base metals sector.

Copper had been trading in a range from under $2.50 to around the $2.70 per ounce level, but it broke higher on December 6. Since the previous report, copper inventories continued to fall on the LME, and stockpiles on the COMEX moved marginally lower. While political and labor issues in Chile could impact production, the trade war had been the most significant issue as it weighed on the demand side of the fundamental equation for the red metal.

The LME lead price moved lower by 0.74% since December 10. 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 rose 8.41% over the past week. Nickel had 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. Nickel posted the most significant gain over the past week. Tin fell by 0.81% since the previous report. Tin had been trading on either side of the $16,600 per ton level, which has become a pivot point for the base metal. The illiquid metal recently moved back above $17,000 per ton. Aluminum was 0.83% higher 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 3.33% since December 10. 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, but the price bounced higher. Base metals will continue to be highly sensitive to any news and developments on trade between the US and China. The path of least resistance of the US dollar could also impact prices.

January lumber futures were at the $406.80 level, 2.57% higher since the previous report. Interest rates in the US will influence the price of lumber. The US Fed paused at the December meeting. 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 2.12% at $25.45 per pound. The volatile Baltic Dry Index fell by 16.17% since last week to the 1281 level as shipping demand tends to decline during the winter months in the northern hemisphere. December iron ore futures posted a 0.07% loss compared to the price on December 11. Open interest in the thinly traded lumber futures market fell by 3.13% over the past week.

LME copper inventories dropped by 12.41% to 162,225 metric tons since last week. COMEX copper stocks fell by 0.25% from last week to 39,990 tons. Lead stockpiles on the LME were up only 0.11%, while aluminum stocks were 10.76% higher. Aluminum stocks rose to the 1,444,300-ton level. Zinc stocks moved 5.45% lower from the last report. Tin inventories moved 8.05% lower since last week to 5,940 tons. Nickel inventories were 55.92% higher compared to the level on December 10, which did not stop the price from rising significantly over the past week.

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 trade deal could provide support for the sector for the rest of 2019 and into 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 $1.86 per share on Wednesday, down 25 cents over the past week.

We own the January 2021 $15 call on X shares at $3.30 per share, and it was trading at $2.30 on December 18, down 35 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 $13.61 per share and moved 2.09% lower on the week.

We own two units of FCX shares at an average of $10.56. The stock was trading at $12.98 on December 18, 14 cents 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 weigh on the Chinese economy leading to selling in base metals and other industrial commodities. However, the “phase one” deal and further progress should send prices higher. The recent events should support the prices of industrial commodities over the coming weeks.

 

Animal Proteins

Cattle and hog prices moved higher over the past week. Lean hog futures led the way on the upside as the “phase one” trade agreement between the US and China opened the door for potential pork exports from the US to China, where there is a severe shortage of the meat.

February live cattle futures were at $1.261250 per pound level up 0.64% from last week. Technical resistance is at $1.2790 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 stabilized above neutral readings on Wednesday. Open interest in the live cattle futures market moved 2.50% higher since the last report. The total number of open long and short positions in the live cattle futures market moved higher since mid-October but had leveled off.

January feeder cattle futures outperformed live cattle as they rose 1.24% since last week. January feeder cattle futures were trading at the $1.44550 per pound level with support at $1.38275 and resistance at $1.47775 per pound. Open interest in feeder cattle futures rose by 4.17% 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 outperformed the cattle futures over the past week in the wake of the announcement of the “phase one” trade deal. The active month February lean hogs were at 69.90 cents on December 18, which was 3.21% higher on the week. The open interest metric fell by 4.73% from last week’s level, as shorts could be covering risk positions. Price momentum and the relative strength index moved above neutral readings on Wednesday. Support is at 65.400 cents with technical resistance on the February futures contract at 71.55 cents per pound level, the December 13 high.

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 October 2020 when a slight backwardation develops until November 2020.

In the lean hog futures arena, there is contango from February 2019 until June 2020. From June 2020 through December 2020, the curve is in backwardation, but contango returns from December 2020 through June 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 now that the trade war appears to have de-escalated. 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.

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 lower as the price of live cattle underperformed lean hogs on a percentage basis.

Source: CQG

Based on settlement prices, the spread was at 1.80440:1 compared to 1.85050:1 in the previous report. The spread declined by 4.61 cents as live cattle became less expensive compared to lean hogs. The spread moved towards the historical norm.

Trade had been the most significant factor facing the animal protein sector. 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. At the start of next year, the focus will begin to shift towards the peak season for demand that starts in late May.

The agreement between the US and China that could open the door for pork exports could be extremely bullish for the lean hog futures market in the US.

 

Soft Commodities

Three of the five members of the soft commodities sector posted losses over the past week. Sugar and cotton prices posted gains since last week’s report. Coffee, cocoa, and FCOJ futures declined since December 11.

March sugar futures rose 0.08% since December 11, as the price of the sweet commodity was around the 13.43 cents per pound level. Technical resistance is at 13.67 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 January Brazilian real against the US dollar rose over the last week and was at the $0.246050 level against the US dollar, up 1.44% since last week. The Brazilian currency remains near its multiyear lows, but the rebound could be 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 crossing lower in marginally overbought territory as of December 18. The metrics on the monthly chart crossed higher from a neutral condition. Sugar made a new high in 2019 on the continuous futures contract at 13.67 cents per pound last week. 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 down 0.65% since last week.

March coffee futures were volatile over the past week as they rose to a new high and wound by falling by 1.48% since last week. March futures were trading at the $1.3320 per pound level. Short-term support is at around $1.200 on the March futures contract. Resistance is at $1.4245 the December 17 high on the nearby 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 $43.83 on Wednesday. Open interest in the coffee futures market fell by 3.44% since last week. I am holding a small long core position in the coffee futures market and the JO ETN product. Last Friday, coffee put in a bearish reversal on the daily chart, but the price came storming back on Monday, December 16. Volatility has increased in the coffee futures market. 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 and crossed lower. 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. We should expect wide intraday trading ranges in the coffee futures market.

The price of cocoa futures edged lower over the past week. On Wednesday, March cocoa futures were at the $2506 per ton level, 2.41% lower than last week. Open interest fell by 2.16%. Relative strength and price momentum were in oversold territory on the daily chart on December 18. 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 $28.96 on Wednesday, December 18. 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 now stands at $2430 per ton.

March cotton futures moved 1.31% 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 66.74 cents on December 18 after rising to a high of 67.80 on December 13. The next level on the upside above the recent high is at the 69.07 cents per pound level on the March 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 5.77% since December 10. Price momentum and relative strength metrics were above neutral territory on Wednesday. The metric remains in an oversold condition on the monthly chart but crossed higher. I continue to believe that the price level limits the downside prospects for the cotton futures market. The “phase one” trade agreement between the US and China was a bullish factor for the price of the fiber futures.

January FCOJ edged lower over the past week. On Wednesday, the price of January futures was trading around 97.70 cents per pound. FCOJ nearby futures moved 0.56% lower 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 1.07% since December 10. 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 Brazilian currency could support the price of FCOJ futures if it continues to post gains against the US dollar. $1 per pound is a critical level for the OJ futures market.

The tariffs on Brazilian steel and aluminum exports to the US could lead to a deal that causes a rally in the Brazilian real versus the US dollar. A rising real would provide support for sugar, coffee, and FCOJ futures as the South American nation is the leading producer of the three agricultural products. When it comes to cocoa, the potential for a $400 per ton surcharge for cocoa from the Ivory Coast and Ghana is likely to provide support for the price of the primary ingredient in chocolate. The world’s leading cocoa consuming companies support the surcharge as it would improve sustainability and limit child labor problems in West Africa. When it comes to cotton, the de-escalation of the trade war is a bullish factor for the price of the fluffy fiber.

 

A final note

Protectionist policies tend to distort commodity prices. The “phase one” trade deal between the US and China is a bullish development for the raw materials sector. The falling dollar index in the aftermath of the UK election should also provide some support for the commodities asset class.

Next week, I will be publishing the weekly report on Tuesday as Wednesday is the Christmas 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.