• Stocks continue to rise to record levels
  • Gold back at the $1500 level and silver posts gains
  • Gravity hits palladium, but the price recovers
  • Strength in crude oil and products, but weakness in natural gas
  • Merry Christmas and Happy Hanukkah to all!

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 19, in what is becoming a pattern, one day after being impeached by the US House of Representatives on two articles that will now head to the Senate for trial, President Trump chalked up another trade victory. The US House voted in favor of the USMCA trade agreement that replaces NAFTA by an overwhelming margin. Stocks rose on Thursday, with all of the leading indices moving to record levels. The March 30-Year Treasury Bond future was up only 0-01 at the 156-02 level. The dollar index did not move much as was sitting at just below the 97 level on the March futures contract. Grains prices edged lower across the board after recent gains. Crude oil rose to a new high at $61.40 on the February NYMEX contract. Products also moved higher along with refining spreads. The EIA reported a withdrawal of 107 bcf from storage, but the price of natural gas remained below the $2.30 per MMBtu level. All four of the exchange-traded precious metals posted gains on the session, and March copper settled at $2.8265 per pound, near the high of the session. Live cattle slipped, while feeder cattle posted a marginal gain. Lean hogs moved higher to over the 70 cents per pound level on the February futures contract. Coffee corrected lower, cocoa prices fell, but cotton, FCOJ, sugar, and lumber moved higher. Bitcoin was at $7165, up $30 on the session.

On Friday, stocks rose in new all-time peaks in what has become a broken record of breaking records. Bonds were stable, and the dollar index edged higher on triple-witching day with stocks posting massive volumes. Grains were quiet, with a small loss in wheat and marginal moves to the upside in corn and beans. Crude oil corrected lower after six consecutive sessions of gains. Product prices moved lower with crude oil. Natural gas moved higher and closed the week at over the $2.30 per MMBtu level. Gold edged lower, but silver posted a gain. Platinum fell on the back of a significant decline in palladium, which settled over $90 per ounce lower on the final session of the week. Live cattle moved higher, but feeder cattle and lean hogs posted marginal losses. Coffee, FCOJ, and cotton prices moved higher, but sugar, cocoa, and lumber fell. Bitcoin was up $65 per token to $7230.

On Monday, stocks rose as news of more progress on trade talks between the US and China lifted all of the leading indices to new record levels. New highs in stocks kept the VIX at the 12.61 level. Grain prices edge higher across the board as optimism over trade rose. Crude oil and oil products moved higher, but natural gas slumped to the $2.20 per MMBtu level on warmer weather forecasts. Precious metals prices moved higher across the board. Palladium rose after the price carnage on December 20. Cattle and hog prices edged lower after the USDA released its Quarterly Hogs and Pigs report. Coffee fell to the $1.25 per pound level as the correction from over $1.40 continued. Sugar edged lower, but cotton, FCOJ, and cocoa posted small gains on the session. Lumber fell by $5.50 per 1,000 board feet, but the price of wood futures remained over the $400 level. Bitcoin was $180 higher at the $7,410 per token level.

On Tuesday, markets closed early for Christmas Eve. The stock market was quiet and remained near record highs. The 30-Year Treasury Bond futures in March were 0-18 higher to the 156-18 level. The March dollar index was a touch higher to 97.265. Grain prices did not move much with marginal gains in beans and wheat, while corn edged a bit lower. Crude oil and oil products moved to the upside, but natural gas continued to decline as the nearby January futures contract settled below the $2.20 per MMBtu level. Gold and silver prices took off on the upside on Tuesday with an over $15 gain in the yellow metal that pushed the price of February futures back over $1500 per ounce for the first time since early November. March silver settled at its highest level since early November at $17.853 per ounce. Platinum and palladium posted small gains on Christmas Eve. Copper was trading near its recent high at over $2.82 per pound on Tuesday. Meat futures prices did not move all that much on December 24. Coffee moved higher towards the $1.30 level and was the leader of the soft commodities, while cotton and cocoa posted a gain. FCOJ, sugar, and lumber prices edged lower. Bitcoin was $180 per token lower at $7275.

 

Weekly Spreadsheet:

Copy of Spreadsheets for the The Hecht Commodity Report December 24, 2019

Stocks and Bonds

The stock market bull kept on rolling uphill over the past week. The impeachment of US President Trump did nothing to stop the ascent of the stock market fueled by low interest rates, economic growth, a de-escalation of the trade war, and what appears to be a smooth path towards Brexit in January. A Santa Claus rally took the prices of all of the leading indices to new highs over the past week.

 

The S&P 500 moved 1.01% higher since the previous report, while the NASDAQ moved 1.42% to the upside. The DJIA posted a 0.98% gain since the last report. 2019 is shaping up to be a record year in the stock market and a continuation of a bull market that dates back more than a decade.

Chinese stocks underperformed US stocks since last week, but still posted a gain on the week.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $43.12 level on Wednesday, which was 0.28% higher than the closing level on December 18. 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.

US 30-Year bonds edged higher from last week. On Tuesday, December 24, the March long bond futures contract was at the 156-14 level, up 0.28%. As I wrote since the last Fed meeting, “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 over the past week.

Open interest in the E-Mini S&P 500 futures contracts fell by 17.59% since December 17, after triple-witching on Friday, December 20. Open interest in the long bond futures rose by 0.43% over the past week. The VIX edged a touch higher since the previous report. The volatility index was at the 12.67 level on December 24, 0.56% higher over the period.

As I wrote last week, “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 weeks.” Meanwhile, a move to below the 11 level on the VIX could tempt me into a long position over the final sessions of 2019.

 

The dollar and digital currencies

The March dollar index rose marginally since December 18. The contract posted a 0.31% gain since last week. The index settled at 97.265 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. The index moved away from technical support at 96.295, while resistance is at 98.045 on the March futures and 99.33 on the continuous futures contract. The dollar index stabilized over the past week.

The euro currency was 0.30% 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 pound continued to correct towards the $1.30 level in the aftermath of the rally that followed the December 12 UK election.

 

Bitcoin bounced after trading to a new low at $6420. Bitcoin was trading at the $7,282.43 level as of December 24, as it moved 2.16% higher than the value on December 18. The recent crackdown by the Chinese on digital currencies put pressure on cryptocurrency prices.  Ethereum fell by 1.79% and was at $128.68 per token on Wednesday. The market cap of the entire asset class moved 1.15% higher as it underperformed the price action in Bitcoin. The number of tokens increased by 14 to 4960 tokens since December 18. 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 $192.228 billion. Open interest in the CME Bitcoin futures fell by 8.02% since last week. 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 0.31% lower since last week. Open interest in C$ futures fell by 16.87% 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, 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$ rose by 1.02% since last week’s report as the progress on trade provided a boost for the Australian currency.

The British pound posted a 0.92% loss since the previous report in the aftermath of Prime Minister Johnson’s impressive victory. The pound rose to just over $1.35, the highest level since May 2018, but pulled back. I continue to believe the pound could be heading for higher levels and would be a buyer against the dollar and the euro on any dips.

The Brazilian real moved marginally higher against the US dollar since December 18, as it edged higher by only 0.02%. 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. Sugar was at the 13.50 cents per pound level. After discussions with Brazil’s President Bolsonaro, President Trump decided not to proceed with tariffs in aluminum and steel exports to the US from the South American nation.

 

Gold and silver posted gains over the past week. Platinum rose and palladium prices fell, with a significant correction in palladium on Friday, December 20.

 

Precious Metals

Gold and silver moved higher since last week. Palladium was the leader on the downside, but platinum rose despite the significant decline in palladium on December 20 that caused the price of palladium to post a loss on the week. Rhodium moved lower since December 18. The final month of the year tends to be a weak period for gold and silver prices, but impressive rallies on December 24 pushed prices higher on a weekly basis.

Gold rose by 1.77% since last week, while silver was 4.72% higher. The price of February gold was just at the $1504.80 per ounce level on Wednesday, while March silver was at $17.853 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 1.23% since last week was just above $947 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 $5780 per ounce on December 24. Palladium fell by 2.44% 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 $1849.90 per ounce level on Wednesday. Palladium fell by over $90 per ounce on December 20 as gravity hit the bullish palladium market. Palladium had suffered setbacks in the past, and time will tell if the pullback was another buying opportunity in the metal that has been a bullish beast since early 2016.

Open interest in the gold futures market moved 2.38% higher over the past week. The metric reached a new record peak at 734,030 contracts on December 23. The metric moved 1.12% lower in platinum while it was 6.95% lower in the palladium futures market. Silver open interest rose by 5.08% over the period.

The silver-gold ratio moved lower 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 84.28 on Wednesday, down 2.41 from the level on December 18. 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 rose since the last report. Gold moved up by 1.77%, the GDX was 4.41% higher since December 18, and GDXJ rose by 5.72% 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 pattern held over the past week. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 4.28% gain since December 18, marginally underperforming the price action in the silver futures market. I continue to believe that both gold and silver prices will head higher.

Platinum and palladium moved in opposite directions since December 18. March Palladium was trading at a premium over January platinum with the differential at the $902.70 per ounce level on Wednesday, which narrowed from the previous week to close to a record level. January platinum was trading at a $557.60 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 $60 lower over the past week and was at $5,780 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 1.07% higher since December 18. 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 $12.24 on December 24, up 92 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. 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. The price action in gold and silver on Christmas Eve was impressive.

 

Energy Commodities

Crude oil prices posted modest gains since last week, while products and crack spreads moved higher. Brent crude oil outperformed WTI. Natural gas fell, and coal prices continued to slip. Ethanol posted a gain on the week.

January NYMEX crude oil futures rolled to February and rose 0.51% over the past week. February Brent futures moved 1.54% higher since December 18. February gasoline was 2.18% higher, and the processing spread in February posted a 12.23% gain since last week as gasoline outperformed the price of crude oil over the period. February heating oil futures moved 0.89% higher since the previous report, and the heating oil crack spread was 2.21% higher since last week.

Technical resistance in the February NYMEX crude oil futures contract is at $61.40 per barrel level, the high from December 19, with support at the $55.01 level. Crude oil open interest fell by 2.60% over the period. The price of crude oil continued to grind higher after OPEC increased its production cut from 1.2 to 1.7 million barrels per day at its recent biannual meeting. The Saudis added 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 was 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. However, the oil market has been taking the stairs up. The potential for an elevator ride to the downside rises with the price of the energy commodity.

2019 has been a year where oil-related equities have underperformed both crude oil and the stock market. Sector rotation could cause value-seeking market participants to flock to the inexpensive shares in the current environment. Meanwhile, Iran continues to pose a clear and present danger in the oil market. Therefore, any price spikes are most likely to come on the upside, as we witnessed in mid-September with the attack on Saudi oilfields that temporarily knocked out production.

As we head into the next decade, 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 oil cartel will review its current production cut in early March.

The spread between Brent and WTI crude oil futures in February moved higher to the $6.06 per barrel level for Brent, which was $0.76 above the level on December 18. 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 and $66.60 on the upside. 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 13, the API reported an increase of 4.70 million barrels of crude oil stockpiles, while the EIA said they fell by 1.10 million barrels for the same week. The API reported a rise of 5.60 million barrels of gasoline stocks and said distillate inventories rose by 3.70 million barrels as of December 13. The EIA reported an increase in gasoline stocks of 2.50 million barrels and an increase in distillates of 1.50 million barrels. Rig counts, as reported by Baker Hughes, increased for the second consecutive week as they rose by 18 last week to 685 rigs in operations as of December 20, which is 198 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 was a sign of the efficiency of the oil business in the US, which is a significant factor for the oil market. However, the steady oil price has encouraged an increase in the rig count over the past two weeks. While the OPEC cut and de-escalation of the trade war between the US and China are supportive of the price of crude oil, US inventories and rig counts are not.

OIH and VLO shares moved higher since last week. OIH rose by 1.43%, while VLO moved 0.62% higher since December 18. 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. However, shares in the refining company stabilized over the past two weeks. Rising crack spreads are supportive of 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 5.38% 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. Trading ERX from the long side has been profitable.

January natural gas futures were at $2.172 on December 24, which was 4.99% lower than on December 18. 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 and a general tone of bearish sentiment in the market.

Source: EIA

The EIA reported a higher than expected withdrawal of 107 bcf, bringing the total inventories to 3.411 tcf. As of December 13. Stocks were 22.1% above last year’s level, but 0.30% below the five-year average for this time of the year. While natural gas stocks are significantly higher than last year at this time, they are a bit lower than this time of the year in 2015-2017. This week the consensus expectations are that the EIA will report a withdrawal of 118 bcf from storage for the week ending on December 20.

Open interest fell by 3.02% over the past week. Technical resistance is at $2.377 per MMBtu level on the January 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. I continue to hold call options for January and February expiration, but they have become lotto tickets with very low odds of paying off. Price momentum and relative strength on the daily chart remains below neutral conditions.

Meanwhile, attempts at any substantial price recovery have proved uninspiring. The GASL ETF product continued to outperform natural gas over the past week. GASL was trading at $9.89 per share on December 24, 9.52% higher from last week after a better than 27.5% gain in the previous report. 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 more than covered losses in other natural gas products and call futures.

February ethanol prices moved 2.38% higher over the past week. Open interest in the thinly traded ethanol futures market moved 13.54% higher over the past week. With only 654 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product was down 11.23% compared to its price on December 18, and the price of February coal futures in Rotterdam fell by 4.36% over the past week.

The API and EIA oil and natural gas inventory numbers for the week ending on December 20 will come out after the Christmas holiday.

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. The risk of a correction in the oil market will rise with the price as the energy commodity tends to take the stairs higher, and the elevator to the downside.

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 $2.183 in January, which was 10.30 cents per MMBtu lower than last week. With April futures at under $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. BG is a significant producer of ethanol in Brazil. Since December 11, the price of BG shares moved 1.62% higher to $57.05 per share on December 24. 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. UGAZ underwent a reverse split. I expect volatility to continue in both energy commodities. As of December 24, the medium-term path of least resistance in oil was higher while gas was still lower over the past week. I continue to trade from the long side of both 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 0.06% lower over the past week at $15.87 per share. I will add another unit at a much lower price to lower the average cost of the long position.

With only one week left in 2019, the markets will move on the back of inventory data and weather reports barring any significant events.

 

Grains                                                             

The price of nearby March wheat futures on the CBOT fell by just over 1% over the past week, while corn and soybeans posted marginal gains.
The “phase one” trade deal was bullish for the prices of agricultural products, and the approval of the USMCA trade deal that replaces NAFTA by the House of Representatives was another welcome development for grain prices.

 

January soybean futures moved 0.86% higher over the past week and was at $9.3650 per bushel on Wednesday. Open interest in the soybean futures market fell by 4.84% since last week. Price momentum and relative strength indicators on the daily chart were rising in overbought conditions on December 24.

The March synthetic soybean crush spread moved lower over the past week and was at the $1.0450 per bushel level on December 24, down 2.25 cents since December 18. 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 was not supportive of the oilseed futures.

March corn was trading at $3.8750 per bushel on December 24, which was 0.13% higher on the week.

Open interest in the corn futures market fell by 1.27% since December 18. 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 2.38% since the previous report on the back of gains in gasoline futures. February ethanol futures were at $1.4190 per gallon on Wednesday. The spread between January gasoline and ethanol futures narrowed to 30.84 cents per gallon on December 24, down 1.74 cents since last week.

 

March CBOT wheat futures were 1.32% lower since last week. The March futures were trading $5.4100 level on December 24. Open interest rose by 2.46% over the past week in CBOT wheat futures. Technical metrics were above neutral territory on December 24.

As of Wednesday, the KCBT-CBOT spread in March was trading at an 80.50 cents per bushel discount with KCBT lower than CBOT wheat futures in the March contracts. The spread narrowed by 5.50 cents since December 18. 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 2.4133:1 level on December 24, down 0.0024 since last week. The ratio had been trending higher since before the summer of 2019, but it turned lower in November and then 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 24, the spread was at the long-term norm, providing few clues about planting behavior for the 2020 crop year.

We are now in the heart of the winter season in the grain markets in the northern hemisphere. The weather south of the equator could cause prices to move, but trade issues continue to be the most significant factor for the prices of these agricultural products.

 

Copper, Metals, and Minerals

Copper edged a touch lower over the past week on the LME while it rose on COMEX. The prices of all of the other base metals that trade on the London Metals Exchange rose. Iron ore fell, as did uranium, but lumber was unchanged since the previous report. The Baltic Dry Index continued to fall as it posted a double-digit percentage loss during the heart of the winter season as shipping activity tends to fall during the coldest months of the year in the northern hemisphere.

Copper moved 0.53% higher on COMEX and remained above the $2.80 per pound level, while the red metal posted a 0.40% gain on the LME since the last report. Open interest in the COMEX futures market moved 1.61% higher over the past week. March copper was trading at $2.8275 per pound level on Wednesday. The price of the red metal rose 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. Stanley Druckenmiller, the legendary hedge fund manager, recently told Bloomberg that he is long copper going into 2020.

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 a touch 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. Since mid-December, copper moved above the top end of its trading range on the back of the news of a “phase one” trade agreement.

The LME lead price moved higher by 1.27% 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 by on 1.90 % over the past week after a more than 8% loss last 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. Tin rose by 0.96% 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 1.73% 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 0.46% since December 17. 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 but was below the first level of support at $2355, which has become resistance on December 23. 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, unchanged 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. Low rates are likely to support the price of wood in 2020. The price of uranium for January delivery was down 1.57% at $25.05 per pound. The volatile Baltic Dry Index fell by 13.90% since last week to the 1103 level as shipping demand tends to decline during the winter months in the northern hemisphere. The BDI fell by over 16% last week. December iron ore futures posted a 1.66% loss compared to the price on December 18. Open interest in the thinly traded lumber futures market rose by 1.90% over the past week.

LME copper inventories dropped by 6.86% to 151,100 metric tons since last week. COMEX copper stocks fell by 0.08% from last week to 39,958 tons. Lead stockpiles on the LME were down 0.74%, while aluminum stocks were 2.86% higher after an almost 11% gain last week. Aluminum stocks rose to the 1,485,625-ton level. Zinc stocks moved 4.12% lower from the last report. Tin inventories moved 24.24% higher since last week to 7,380 tons. Nickel inventories were 7.79% higher compared to the level on December 17, after a rise of around 56% last week, which did not stop the price from rising over the past two weeks. The export ban from Indonesia takes effect next 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 provided some support for the sector as we head 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 $1.88 per share on Wednesday, up two 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 $1.52 on December 24, down 78 cents since last week after US Steel issues a warning on earnings. 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 $11.89 per share and moved 12.64% lower on the week after the company’s warning.

We own two units of FCX shares at an average of $10.56. The stock was trading at $12.99 on December 24, one cent 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 over the coming months. 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. I am cautiously bullish on the prospects for base metals and industrial commodities prices going into 2020.

 

Animal Proteins

Cattle edged lower while hog prices posted a gain over the past week. 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. The African Swine Fever has killed off a significant percentage of the Chinese pig population and spread beyond China’s borders to neighboring countries in 2019. After dipping into strategic frozen pork reserves in 2019, China will need to import pork to meet the 2020 requirements. The de-escalation of the trade war and optimism over shipments of agricultural products from the US to China has lifted the price of lean hog futures since the early December low at around the 65 cents per pound level on the nearby February futures contract.

February live cattle futures were at $1.258250 per pound level down 0.24% 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 were at neutral readings on Wednesday. Open interest in the live cattle futures market moved 1.40% lower 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 recently leveled off.

January feeder cattle futures marginally underperformed live cattle as they fell by 0.68% since last week. January feeder cattle futures were trading at the $1.435750 per pound level with support at $1.38275 and resistance at $1.47775 per pound. Open interest in feeder cattle futures rose by 1.37% 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 for the second consecutive week in the wake of the announcement of the “phase one” trade deal. The active month February lean hogs were at 70.70 cents on December 24, which was 1.14% higher on the week. Price momentum and the relative strength index remained 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 1.7797:1 compared to 1.80440:1 in the previous report. The spread declined by 2.47 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. The all-time high in the lean hog futures market came in 2014 when the PED virus killed over seven million pigs in the US, lifting the price of nearby futures to a peak at $1.33875 per pound.

 

Soft Commodities

Two of the five members of the soft commodities sector posted gains over the past week. Cotton and FCOJ prices moved higher since last week’s report. Sugar, coffee and cocoa futures prices declined since December 18. The most significant percentage move came in the coffee futures market.

March sugar futures fell 0.45% since December 18, as the price of the sweet commodity was around the 13.37 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 a critical level of support. The value of the January Brazilian real against the US dollar rose slightly over the last week and was at the $0.244610 level against the US dollar, up 0.02% since last week. The Brazilian currency remains near its multiyear lows, which is a factor for 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 extended 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 24. 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 in mid-December. Above the recent high, the significant target on the upside is the October 2018 high at 14.24 cents per pound.  Open interest in sugar futures was 0.67% lower since last week.

March coffee futures continued to be volatile over the past week as they fell by 2.85% since last week. March futures were trading at the $1.2940 per pound level. The first level to watch on the continuous contract is $1.2490, the recent low. Below there, 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 $41.86 on Wednesday. Open interest in the coffee futures market rose by 1.53% since last week. I am holding a small long core position in the coffee futures market and the JO ETN product. On Friday, December 13, coffee put in a bearish reversal on the daily chart, but the price came storming back on Monday, December 16. Since then, coffee has been running into selling above the $1.30 level. 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. The ICO has warned that a deficit between supply and demand could be in the cards for the market because of the 2019/2020 crop year. 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 had moved into overbought territory on the short-term chart and crossed lower. Price momentum and relative strength were on either side of neutral readings on Wednesday. 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 moved lower over the past week. On Wednesday, March cocoa futures were at the $2443 per ton level, 2.51% lower than last week. Open interest fell by 9.58%. Relative strength and price momentum were in oversold territory on the daily chart on December 24 and were falling below neutral readings on the weekly 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 $27.86 on Wednesday, December 24. 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 $2388 per ton. I would add to long positions if the selling continues into the end of 2019.

March cotton futures moved 2.94% 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 68.70 cents on December 24 after rising to a high of 68.75 on December 23. 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 3.16% since December 17. Price momentum and relative strength metrics were rising in overbought 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 moved higher and probed above the $1 per pound level over the past week. On Wednesday, the price of January futures was trading around 99.85 cents per pound. FCOJ nearby futures moved 2.20% higher over the past week. Support is at the 96.65 cents level. Technical resistance is at around $1.0150 per pound. Open interest fell by 10.95% since December 17 as futures rolled from January to March. 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 around 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 decline in the price of cocoa over the past could be a buying opportunity for 2020. I continue to believe that a surcharge for beans from the Ivory Coast and Ghana will provide support for the price of cocoa. Moreover, a move to the upside in the British pound on the back of Brexit could cause cocoa to stabilize and move higher as London is the hub of international cocoa trading. Many physical contracts use the pound as a pricing mechanism, and a higher British currency is likely to provide support for the price of cocoa in US dollar terms. Coffee should continue to experience volatility, and the sugar market has displayed strength over the recent weeks. When it comes to cotton, the de-escalation of the trade war is bullish for the price of the fiber. OJ prices at above $1 per pound reflect the winter season, and a price recovery from under one buck is long overdue.

 

A final note

I wish everyone a happy, healthy, and safe holiday season. I do not expect much from markets over the coming week as many market participants will take vacation and recharge their batteries for the coming year. I will return on Tuesday, December 31, with my weekly report.

Starting on January 2, I will be posting my comprehensive quarterly reports and outlook for Q1 2020. While I will publish a weekly report on December 31, I will not post a report the following week because of the work involved in the quarterlies. However, I will return on Tuesday, January 14, with the first weekly report of 2020 and will issue the next on Wednesday, January 22, to return to the Wednesday schedule. The January 14 report will cover the price action from December 31 through January 14.

If there are any questions about anything, please do not hesitate to email me at any time!

 

 

 

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.