• OPEC meeting on Thursday and Friday and the monthly WASDE report comes out next Tuesday
  • The stock market falters from the recent new highs as the dollar declines
  • Precious metals move mostly higher, except for silver which posts a loss for the week
  • Oil moved slightly higher while products lag, and natural gas bounces after making lows during the week
  • Coffee and sugar display strength despite weakness in the Brazilian currency

 

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, November 28, US markets closed for the Thanksgiving holiday. On a holiday-

shortened day on Friday, November 29, there was lots of action in markets. Stocks fell with all of the leading indices posting losses. The dollar index edged lower, and 30-Year Treasury Bond futures rolled to March with the new active contract trading at just over the 159 level. Soybeans edged lower, but corn and wheat futures posted significant gains on the final trading day of November. Crude oil and natural gas prices dosed. January NYMEX crude oil settled $2.94 lower on the session. Brent also fell, but it outperformed the NYMEX futures since the biannual OPEC meeting is next week on December 5 and 6. Oil product prices suffered sharp declines on the session. Natural gas dropped to below the $2.30 per MMBtu level on the nearby January peak-season futures contract. Cold weather across the US did nothing to support the price of natural gas, which was trading more like it was entering into the spring than the winter season. At the lows, natural gas futures were over 20 cents lower on the session and at the lowest price since late October. All of the precious metals posted gains on Friday, but copper moved lower. Cattle prices edged to the downside, while lean hogs posted a gain. Cocoa, cotton, and FCOJ prices moved lower, but sugar and coffee were higher on the session. Bitcoin gained $175 to settle at the $7800 per token level.

On Monday, President Trump slapped steel, and aluminum tariffs on Brazil and Argentina blamed both nations for devaluating their respective currencies. At the same time, the President continued to push the US Fed to lower rates and loosen credit.

Source: Twitter

While the President slapped protectionist measures on the South American nations, he also took another shot at his favorite target, the US Federal Reserve. The stock market did not like that the President opened up new fronts on the trade war, and all of the leading indices fell on the first trading day of December. The VIX moved 2.29 higher to the 14.91 level, and the US dollar index fell by 411 points to 97.791 on the December futures contract. 30-Year US Treasury bonds fell by 1-07 to the 157-24 level. Soybeans continued to decline; wheat fell, but corn edged higher. Crude oil and distillates posted gains while gasoline fell marginally on the session. Natural gas moved a bit higher, but the price remained at a very low level for this time of the year, with the January contract settling at $2.329 per MMBtu. Palladium moved higher, while all of the other precious metals posted losses. Meat prices moved lower, with hogs falling more than cattle. All of the soft commodities and lumber posted losses, except for coffee futures, which rose to a new high above the $1.20 per pound level on the March futures contract. Bitcoin fell by $465 per token to $7335.

On Tuesday, selling hit the stock market again after President Trump said a “phase one” trade deal between the US and China might not occur until after the 2021 election. All of the leading stock indices fell during the session, and the probed above the 17 level almost reaching 18. March 30-Year Treasury bond futures exploded higher to the 160 level as they were 2-17 higher late in the day at 159-30. The dollar index edged lower to settle at 97.681 on the December contract. Gravity hit the March CBOT wheat futures as they fell 10 cents per bushel on the session. Corn was marginally lower, while soybeans moved only two ticks higher on the session. Energy commodities moved higher, except for ethanol. Crude oil and oil products posted gains, but the big winner was natural gas as the January futures contract recovered by around 11 cents per MMBtu. Precious metals all posted gains as fear and uncertainty over trade returned to markets, while copper fell to the $2.6230 level on the March contract. Palladium rose to a new and higher high at $1840 per ounce. Live cattle futures edged a touch lower, but feeder cattle and lean hog futures posted gains. Cotton and lumber prices declined, but the other soft commodities moved to the upside. Coffee futures in March traded to a high at $1.2475 per pound as they close in on technical resistance at $1.2550, the October 2018 peak. Cocoa, FCOJ, and sugar prices moved higher. Bitcoin was up just $10 to the $7345 level.

On Wednesday, as US President Trump was in the UK for the NATO meeting, the House Judiciary Committee began the next step in the impeachment inquiry with legal scholars testifying before the Congress. The stock market, which had been on shaky ground over the past sessions on the back of the trade war with China and new tariffs on Brazil and Argentina, moved higher. All of the leading indices posted gains on the session. March US 30-Year Treasury bond futures moved around 1-11 lower to the 158-24 level. The dollar index slipped to 97.602 on the December futures contract. While corn moved lower, soybean and wheat futures posted gains. Crude oil moved higher on the back of inventory declines and the OPEC meeting that begins tomorrow, on December 5. Products also moved higher, but both gasoline and distillate crack spreads declined as the products underperformed the crude oil. Natural gas edged lower to the $2.40 per MMBtu level on the January futures contract. Ethanol fell with corn. Gold declined, but silver moved significantly lower. Platinum declined, but palladium moved to the upside. Copper rebounded on the session to the $2.66 level on March futures. Cattle and hog prices fell. Lumber, cotton, and sugar moved higher, while coffee, cocoa, and FCOJ prices moved to the downside. Bitcoin slipped by $120 to $7,220 per token.

 

Weekly Spreadsheet:

Copy of Spreadsheets for The Hecht Commodity Report December 4, 2019

Stocks and Bonds

Stocks continued to move to new record highs until last Friday when selling hit the market. Over the past week, the market edged lower from the closing prices on November 27. Through the first two months of the final quarter of 2019, the price action has been the complete opposite of 2018.

 

The S&P 500 moved 1.30% lower since the previous report, while the NASDAQ moved 1.59% to the downside. The DJIA posted a 1.83% loss since the last report. The risk of a selloff rose with the level of the indices. Protectionism caused the stock market to decline.

Chinese stocks underperformed US stocks since last week as the prospects for a “phase one” agreement that would de-escalate the trade war dimmed. US support for the protesters in Hong Kong could derail the trade talks. Since the trade war weighs heavily on China’s economy, Chinese equities took more of a hit over the past week.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $40.88 level on Wednesday, which was 2.83% lower than the closing level on November 27. Technical support is at the recent low at $37.66 per share from August 14. Resistance stands at the July 1 high at $44.02 per share. The path of least resistance for FXI depends on the progress of the ongoing trade talks and relations between the US and China.

US 30-Year bonds edged lower over the past week. On Wednesday, December 4, the March long bond futures contract was at the 158-24 level as it moved 0.35% lower since the previous report. The Fed already cut the short-term Fed Funds rate three times by a total of 75 basis points in 2019. All signs are that the central bank will pause over the coming months, and perhaps until after the 2020 Presidential election before making any changes to monetary policy. There is always a chance that an event may trigger a move by the Fed. However, in the absence of any dramatic changes in the global economic or political landscapes, the US central bank appears to be finished with its adjustment to short-term interest rates. Meanwhile, the trend of lower global interest rates is likely to continue.

Open interest in the E-Mini S&P 500 futures contracts rose by 0.22% since November 27, as investors continued to flock to the stock market in the face of low yields on fixed-income instruments. Open interest in the long bond fell by 8.23% over the past week. The VIX rose after the selling hit the stock market. The volatility index was at the 14.94 level on December 4, 27.58% higher over the period.

I continue to favor the long side when it comes to the VIX and VIX-related instruments. The recent level of volatility was so low that risk-reward remains attractive. I would look for at least a 2:1 payoff ratio on short-term positions on the long side of price variance instruments like the VIX, VIXY, and others. I will continue to buy on dips and take profits on rallies. The many issues facing markets have the potential to cause periods of selling in stocks, particularly with the leading indices at record levels. The current level of the VIX at under 15 is still low given the potential for price variance in the stock market. I had been cautious with long volatility positions as the market had been moving higher in a straight line, but I was a buyer of VIX products at under the 12 level. Last week I wrote, “at under the 12 level, I will dip a toe back in the water of the long side of volatility next week.” I have been trading from the long side in the VIX over the past week.

 

The dollar and digital currencies

The dollar index fell below the 98 level on the nearby December futures contract on December 4. The contract posted a 0.70% loss over the period. The index had been trading around the 98 level since November 13 but settled at 97.602 on Wednesday. Interest rate differentials continue to provide support for the dollar index despite the reductions in the Fed Funds rate over recent months. Technical support is at 96.885, with resistance is at 99.305 and 99.33 in the upside. Nothing much changed in the dollar index over the past week.

The euro currency was 0.59% higher against the dollar since last week’s report. We could see more volatility in the dollar index over the coming weeks and months as the 2020 Presidential election nears, which could change US policies starting in early 2021. I expect 2020 to be a volatile year in the currency markets.

 

Over the past week, Bitcoin edged lower after trading below the $7000 level recently. Bitcoin was trading at the $7,374.72 level as of December 4, as it fell by another 2.63% compared to the value on November 27. The recent crackdown by the Chinese on digital currencies sent the price of Bitcoin and other cryptocurrencies to the lowest level since May.  Ethereum fell by 2.92% and was at $149.76 per token on Wednesday. The market cap of the entire asset class moved 2.42% lower as it marginally outperformed the price action in Bitcoin. The number of tokens increased by 16 to 4883 tokens since November 27. 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 $200.360 billion. Open interest in the CME Bitcoin futures fell by 16.07% since last week as investment interest dried up with the recent selling. The level to watch on the downside in Bitcoin is now at around the $6,510 per token level, the low from the past week. Resistance is at $8000 per token.

The Canadian dollar moved 0.67% higher since last week. Open interest in C$ futures rose by 9.99% over the period. The C$ is highly sensitive to commodity prices as Canada is a mineral-rich nation that also produces significant quantities of energy and agricultural products. The C$ put in a bearish reversal on the daily chart on October 29 and followed through on the downside. However, I expected the currency to make a higher low against the US dollar. The support level for the Canadian currency is at just below $0.75 against the US dollar, and it bounced from that level over the past week.

The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ rose by 1.06% since last week’s report.

The British pound posted a 1.40% gain since the previous report. The general election on December 12 is just around the corner and will serve as a second Brexit referendum. The new deadline for Brexit is at the end of January 2020. A victory by Prime Minister Johnson that leads to a Brexit with an agreement with the US could boost the value of the pound to the $1.40 level against the US dollar. The polls are pointing to a significant victory for the Prime Minister, but elections can yield surprises as we have learned. The pound moved to the upside on the back of optimism over a win by the Tory Party next week.

The Brazilian real edged lower since November 27 and remained below the $0.24 level as it fell by 0.53%. 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 crop caused the soft commodity to ignore the price action in the real as coffee futures have been moving to the upside over the past weeks. Sugar futures also moved to the upside over the past week.

 

Precious metals edged mostly higher over the past week. Gold, platinum, and palladium all moved higher, but silver slipped to the downside.

 

Precious Metals

Precious metals prices drifted mostly higher since November 27, with the only losses in the sector in the silver and rhodium markets. Palladium soared to a new record peak at $1850.50 on December 4. Gold and platinum prices edged higher, posting marginal gains over the past week, while silver fell.

Gold rose by 1.31% since last week, while silver was 0.82% lower. The price of February gold was just above the $1480 per ounce level on Wednesday, while March silver was at $16.916 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 0.72% since last week and at around $900 per ounce. The level of technical resistance is at the September 5 high at $1006.10 with support at the November 12 low at $867.80 per ounce. Rhodium is a byproduct of platinum, and the price of the metal has been in a bull market since early 2016. The price of rhodium edged slightly lower since the previous report. The midpoint price of the metal was at $5600 per ounce on December 4. Palladium continues to be a bullish beast and rose 2.09% on the week. The price traded to a new peak at $1850.50 on December 4 and closed at the $1845.40 per ounce level on Wednesday. The demand for palladium-based catalysts continues to create a deficit in the palladium market that could carry the price to the $2000 per ounce level or higher in 2020.

Open interest in the gold futures market moved 4.74% higher over the past week. The metric reached a new record peak at 719,211 contracts on November 19. The metric moved 0.49% higher in platinum while it was 1.39% higher in the palladium futures market. Silver open interest fell by 1.81% over the period.

The silver-gold ratio moved higher since the last report as gold futures rolled from December to February and silver from December to March on COMEX with silver underperforming the yellow metal.

Source: CQG

The daily chart of the price of February gold divided by March silver futures shows that the ratio was at 87.50 on Wednesday, up 1.84 from the level on November 27. The long-term average for the price relationship is around the 55:1 level. The ratio remains at an elevated historical level. Silver remains historically cheap compared to gold, and over the past week, it got more inexpensive. The ratio had dipped to a low at 79.13 on September 4 on the active month contracts when both gold and silver were on the recent highs. The ratio tends to move lower during bull market periods and higher when there is bearish price action in the markets.

We are long the gold mining stock ETF products GDX and GDXJ, which moved higher since the last report. While gold moved up by 1.31%, the GDX was 3.08% higher since November 27, and GDXJ rose by 5.40% 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 consistent with the historical trading pattern. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 0.51% loss since November 27, slightly outperforming the price action in the silver futures market. I continue to believe that both gold and silver will find short-term lows at higher levels during the current correction and consolidation period.

Platinum and palladium prices moved in posted gains since November 27. March Palladium was trading at a premium over January platinum with the differential at the $943.60 per ounce level on Wednesday, which widened from the previous week to a new record level. January platinum was trading at a $578.40 discount to February gold at the settlement prices on December 4, which widened since the previous report.

The price of rhodium, which does not trade on the futures market, moved $50 lower over the past week and was at $5,600 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 0.05% higher since November 27. 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. Platinum continues to be a highly frustrating trade on the long side.

We are long the ETFMG Prime Silver ETF (SILJ) product at $10.36 per share to diversify risk. SILJ was at $11.12 on December 4, up 87 cents per share since last week despite the move to the dowsnide in the silver futures market.

I have been writing, “I continue to be bullish on the prospects for all of the precious metals. The period of consolidation and correction continued over the past week and could go on for a time. I believe that any price weakness in the sector will create excellent buying opportunities.” My outlook has not changed over the past week. From a short-term trading perspective, we may continue to see prices fall, but I view weakness as an opportunity in precious metals for the long term. Central banks continue to favor gold. Poland recently repatriated gold reserves from the United Kingdom. The official sector will once again be a net buyer of gold in 2019.

 

Energy Commodities

Crude oil moved higher over the past week in choppy trading. Oil product prices went the other way as gasoline and distillates posted losses, which weighed on refining spreads. Natural gas fell to a new low, but trimmed losses as of the close of business on December 4. Ethanol edged higher, but coal prices moved to the downside since November 27.

January NYMEX crude oil futures rise by only 0.55% over the past week. January rolled to February in Brent futures, which moved 0.05% higher since November 27. January gasoline was 4.31% lower, and the processing spread in January posted a 26.81% loss since last week as gasoline underperformed the price of crude oil over the period. January heating oil futures moved 1.15% lower since the previous report, and the heating oil crack spread was 5.08% lower since last week.

Technical resistance in the January NYMEX crude oil futures contract is at $61.48 per barrel level, the high from September 16, with support close at the $55.02 level. Crude oil open interest fell by 1.07% over the period. The price of crude oil is likely to move in the aftermath of this week’s OPEC meeting. The cartel should extend its 1.2 million barrel per day production cut through the first half of 2020. However, a further cut could support the price of oil. If the only move is to extend the status quo, we could see further selling that takes the price of oil to the bottom end of its trading range after the recent bearish price action. Beyond OPEC, Iran continues to pose a threat to production, refining, and logistical routes for crude oil in the Middle East. Additionally, the potential for changes in US energy policy could cause volatility in the oil market in 2020 based on the outcome of the Presidential election. The US is currently the world’s leading producer of both crude oil and natural gas.

The spread between Brent and WTI crude oil futures in
February moved lower to the $4.70 per barrel level for Brent, which was $0.30 below the November 27 level. 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 traded in a choppy range over the past week. Inventory data and the OPEC meeting on Thursday and Friday lifted the price of the energy commodity on Wednesday.

US daily production stood at 12.9 million barrels per day as of November 29, according to the Energy Information Administration, which was at a record peak for daily output. As of November 22, the API reported an increase of 3.639 million barrels of crude oil stockpiles, while the EIA said they rose by 1.60 million barrels for the same week. The API reported a rise of 4.378 million barrels of gasoline stocks and said distillate inventories fell by 665,000 barrels as of November 22. The EIA reported an increase in gasoline stocks of 5.10 million barrels and an increase in distillates of 700,000 barrels. Rig counts, as reported by Baker Hughes, continued to decline and fell by three last week to 668 rigs in operations as of November 29, which is 219 below the level operating last year at this time. The steady decline in the number of rigs with daily output at 12.9 million barrels per day level is a sign of the efficiency of the oil business in the US, which is a significant factor for the oil market. The decline in the rig count could weigh on future production and provide support for the price of oil, but it has yet to as of recent weeks. The OPEC meeting on December 5 and 6 is now the factor that will drive prices over the coming days.

OIH and VLO shares moved in opposite directions since last week. OIH rose by 0.17%, while VLO moved 4.01% lower since November 27. 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 the current correction. Lower crack spreads have also weighed on the price of VLO stock. We are long two units of the OIH ETF product at an average price of around $13.40 per share. I believe the ETF that reflects the price of oil service company shares remains too low at its current price level. I will consider adding to the position on further price weakness. Oil services stocks have done much worse than other oil-related equities over the past months. I will wait before adding any more shares to the position in OIH. I believe that crude oil-related equities are far too inexpensive at current levels and could experience a rebound as sector rotation in the strong stock market occurs. As I mentioned in the report over the past weeks, “I have been trading the Direxion Daily Energy Bull 3X Shares (ERX) from the long side of the market. ERX is a triple-leveraged product, so time and price stops are significant for managing risk. ERX holds leveraged positions in the leading energy companies.”

ERX was 3.26% lower 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. While oil moved higher, the stock market declined.

January natural gas futures were at $2.399 on December 4, which was 4.08% lower than on November 27. 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 $2.27 on November 29.

Source: EIA

The EIA reported a lower than expected withdrawal of only 28 bcf bringing the total inventories to 3.610 tcf. As of November 22. Stocks were 17.9% above last year’s level, but 0.90% below the five-year average for this time of the year. The bearish data caused the price of January futures to fall below the $2.50 level during Wednesday’s trading session. This week the market expects that the EIA will report a withdrawal of 40 bcf from storage for the week ending on November 29.

Open interest rose by 5.77% over the past week. Technical resistance is at $2.826 per MMBtu level on the December futures contract with support at $2.27. The $2.187 and $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 $2.738 to $2.753, which is currently the first critical technical level on the upside. Natural gas put in a bearish reversal on the daily chart on November 25 and the weekly chart last week. 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 time is running short for those positions. The call options limit the risk of losses to the premium paid. The price action as of Wednesday makes the $2.80 call option for the end of December expiration a lotto ticket, but natural gas is a market that can always present volatile surprises. The futures market is in a significantly oversold condition, and a recovery is overdue, but it has yet to develop. When it comes to the GASL ETF product, I would only dip a toe into the water on the long side with a very tight stop at the current price level. GASL was trading at $6.12 per share on December 4, 3.93% lower from last week.

January ethanol prices moved 0.15% higher over the past week. Open interest in the thinly traded ethanol futures market moved 4.54% higher over the past week. With only 691 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product moved 3.22% lower compared to its price on November 27, and the price of January coal futures in Rotterdam fell by 4.41% over the past week.

The API reported that crude oil inventories fell by 3.72 million barrels for the week ending on November 29, compared to a consensus estimate of a decline of 1.798. million barrels. While the consensus estimate was for a 1.693-million-barrel rise in gasoline inventories, the API said they increased by 2.93 million. Distillate stocks rose by 794,000 barrels for the week ending on November 29, according to the API. The EIA said crude oil inventories fell by 4.90 million barrels as of the end of last week. When it comes to gasoline and distillate stocks, the EIA reported an increase of 3.40 million and a rise of 3.10 million barrels, respectively. The EIA and API data were marginally bullish for the price of crude oil, but the price rose on Wednesday as the market prepared for the OPEC meeting.

The risk of a price spike in oil remains greater on the up than on the downside, given the continuing tensions with Iran. OPEC is now on the center of the stage as we will hear the decision on output policy on Friday, December 6.

In natural gas, the price action has been more appropriate for the spring that the start of the winter season.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the peak price at $2.399 in January, which was 10.2 cents per MMBtu lower than last week. With April futures below $2.20, 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.

I have been tracking the price action in BG shares. Since November 6, the price of BG shares moved 0.66% lower to $53.10 per share on December 4. 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 of both oil and gas was lower, but both are in a position where the potential for recoveries is rising. I would only trade from the long side of the market with tight stops on all risk positions.

I continue to hold 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 0.27% lower over the past week at $14.84 per share. I will add another unit at a much lower price to lower the average cost of the long position. While I remain bullish on Brazil, contagion from Argentina and volatility in the overall stock market pushed the price of the shares lower over the recent weeks.

The OPEC meeting is the primary focus this week. Natural gas has fallen to a price that is far more appropriate for the spring than the beginning of the winter season. I have lowered my risk profile in both oil and gas to protect capital but would consider dipping a toe in on the long side of the markets at current price levels with very tight stops.

 

Grains                                                             

While the price of nearby soybean futures posted a loss, corn and wheat prices moved higher. The USDA will release its final World Agricultural Supply and Demand Estimates report next Tuesday, December 10, at noon EST. The weather in South America and trade are the leading factors when it comes to the path of prices over the coming weeks and into 2020. At the start of next year, the market will prepare for the uncertainty of the 2020 crop in the northern hemisphere.

 

January soybean futures moved 0.45% lower over the past week and was at $8.7800 per bushel on Wednesday. Open interest in the soybean futures market rose by 5.26% since last week. Price momentum and relative strength indicators on the daily chart remained in deeply oversold conditions on December 4, but were crossing higher, increasing the potential for a price recovery.

The March synthetic soybean crush spread edged higher over the past week and was at the $1.05 per bushel level on December 4, up 2.75 cents since November 27. The crush spread is a real-time indicator of demand for soybean meal and oil. Therefore, price trends in the crush spreads can cause buying or selling in the raw oilseeds at times. Any significant moves in the crush spread are likely to translate into price movement in the soybean futures. The price action in the March crush spread provides few clues about the price direction of the oilseed futures, but they have moved higher over the recent weeks as the price of soybeans futures. Trade between the US and China is the most significant issue facing the soybean futures market.

March corn was trading at $3.7850 per bushel on December 4, which was 1.41% higher on the week.

Open interest in the corn futures market fell by 3.73% since November 26. Technical metrics were rising from oversold territory in the corn futures market as of Wednesday. The price of January ethanol futures rose by 0.15% since the previous report. January ethanol futures were at $1.3710 per gallon on Wednesday. The spread between January gasoline and ethanol futures narrowed to 23.32 cents per gallon on December 4, down 7.43 cents since last week as corn rallied and gasoline declined.

 

March CBOT wheat futures were 0.14% higher since last week. The March futures were trading $5.2750 level on December 4. Open interest rose by 2.37% over the past week in CBOT wheat futures, which is a sign of more speculative activity in the wheat futures market.

 

As of Wednesday, the KCBT-CBOT spread in March was trading at a 87.00 cents per bushel discount with KCBT lower than CBOT wheat futures in the March contracts. The spread narrowed by 2.25 cents since November 27. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers. As I have been writing, “at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.”  The spread continues to be at a level that is bearish for the wheat market. The spread is not far from the highest level in years. Meanwhile, a sudden problem in the wheat market that causes consumer hedging to increase could result in a dramatic change in the spread between the hard and soft winter wheat futures contracts.

My positions in the grain markets continue to be very small, given the time of the year and the recent price volatility. I have minimal long core positions in futures and the CORN, WEAT, and SOYB ETF products. The trade dispute between the US and China remains one of the most significant factors for the prices of soybeans and corn. Any news from the trade front between the US and China could cause increased volatility. The bottom line is that optimism over trade is bullish for the prices of agricultural commodities, while pessimism would continue to weigh on prices. The weather in South America and trade will continue to drive prices higher or lower.

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

Source: CQG

The chart of the November 2020 soybean futures divided by December 2020 corn futures shows that the ratio did not move much over the past week and was at the 2.3714:1 level on December 4, down 0.01540 since last week. The ratio had been trending higher since before the summer of 2019, but it turned lower in November. At a lower level next spring, farmers would plant more corn than soybeans because corn’s price offers more economic incentives. 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 4, the spread was below the long-term average favoring corn planting.

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

 

Copper, Metals, and Minerals

Copper declines on the COMEX and LME since last week’s report. The prices of nickel, lead, and zinc fell since last week, but aluminum, tin, and iron ore were higher. Lumber and uranium prices slipped since November 27. The Baltic Dry Index continues to recover from its recent low.

Copper moved 1.46% lower on COMEX, while the red metal posted a 0.61% loss on the LME since the last report. Open interest in the COMEX futures market moved 1.34% higher over the past week. December copper rolled to March and was trading at $2.6590 per pound level on the now active March futures contract. Copper is one of the leading barometers when it comes to the trade war between the US and China. The de-escalation had been moderately bullish news for the red metal, which is the leading force in the base metals sector. However, the red metal needs to see progress on trade to move back above the $2.70 per pound level. The copper market drifted lower the past week. The lack of a “phase one” deal by the end of this year could cause selling to return to the red metal and threaten a return to under the $2.60 level.

Copper has been trading in a range from under $2.50 to around the $2.70 per ounce level. Since the previous report, copper inventories continued to fall on the LME, but stockpiles on the COMEX remained steady after recent increases. While political and labor issues in Chile could impact production, the trade war is the most significant issue as it weighs on the demand side of the fundamental equation for the red metal.

The LME lead price moved lower by 1.15% since November 26. The rise in demand for electric automobiles around the world is supportive of lead in the long term as the metal is a requirement for batteries. The price of nickel fell 5.48% over the past week. Nickel has been correcting after significant gains over the past months on the back of the export ban in Indonesia that will begin on January 1, 2020. Tin rose by 1.99% since the previous report. Tin has been trading on either side of the $16,600 per ton level, which has become a pivot point for the base metal. Aluminum was 2.58% 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 fell by 2.73% since November 26. Critical support was around $2355, with resistance at $2550 in the zinc market. Zinc moved below the bottom end of its recent trading range and is now testing the $2200 per ton level. Base metals will continue to be highly sensitive to any news and developments on trade between the US and China.

January lumber futures were at the $400.70 level, 3.70% lower since the previous report. Interest rates in the US will influence the price of lumber. The US Fed is likely to pause at the December meeting given recent economic data. Lumber is a requirement for new home construction, which is a function of the level of interest rates. The price of uranium for January delivery was down only 0.19% at $26.10 per pound. The volatile Baltic Dry Index rose by 12.62% since last week as the rebound from the recent lows continued. December iron ore futures posted a 3.91% gain compared to the price on November 27. Open interest in the thinly traded lumber futures market fell by 2.77% over the past week after an 8.9% rise last week.

LME copper inventories dropped by 3.71% to 206,250 metric tons since last week. COMEX copper stocks were unchanged from last week at 40,097 tons. Lead stockpiles on the LME fell by 0.37%, while aluminum stocks were 3.89% higher. Aluminum stocks rose to the 1,277,300-ton level. Zinc stocks moved 0.34% higher from the last report. Tin inventories moved 1,46% lower since last week to 6,400 tons. Nickel inventories were 1.71% higher compared to the level on November 26.

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

We own two units of Energy Fuels Inc. (UUUU), a US producer of uranium and vanadium, at an average of $2.55 per share. We are working a stop at $1.19 and have an initial profit target at $6 per share. There is a double bottom on the long-term chart at the $1.29 level. I am giving this position plenty of room and plenty of time. If the shares continue to fall, I will add another one and possibly two units to this trade to average down the price on the long position. UUUU was trading at $1.90 per share on Wednesday, down nine 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 $2.43 on December 4, down 20 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 $13.34 per share and moved 4.24% lower on the week.

We own two units of FCX shares at an average of $10.56. The stock was trading at $11.11 on December 4, $0.50 lower since the previous report. I will maintain a small long position in FCX shares.

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

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

 

Animal Proteins

Live and feeder cattle moved lower since last week’s report, while lean hog futures recovered. Trade remains a significant factor when it comes to the path of least resistance of meats. A continuation of weakness in the Brazilian real and Argentine peso continues to weigh on the prices of the animal proteins during the offseason for demand in the US. The low levels of the South American currencies decrease production costs in Brazil and Argentina.

February live cattle futures were at $1.24175 per pound level down 1.99% from last week. Technical resistance is at $1.2715 and $1.3000 per pound. Technical support stands at around $1.23125 per pound level, as the market continues to trade at the top end of its trading range. Price momentum and relative strength indicators turned lower from the lower region of overbought territory. Open interest in the live cattle futures market moved 0.42% lower since the last report. The total number of open long and short positions in the live cattle futures market had been climbing since mid-October.

January feeder cattle futures outperformed live cattle as they fell by 1.71% since last week. January feeder cattle futures were trading at the $1.40875 per pound level with support at $1.38275 and resistance at $1.47775 per pound. Open interest in feeder cattle futures rose by 4.40% 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 also moved to the upside over the past week. The price ran into selling in mid-October. The active month February lean hogs were at 68.425 cents on December 4, which was 1.90% higher on the week. The open interest metric rose by 0.35% from last week’s level. Price momentum and the relative strength index crossed higher from oversold territory over the past week. Support is at 65.400 cents with technical resistance on the December futures contract at 70.00 cents per pound level.

The forward curve in live cattle is in contango from December 2019 until April 2020. From April 2020 until August 2020, a backwardation or tight market returns to the forward curve for live cattle, but it shifts back to contango until from this August 2020 through April 2021. The Feeder cattle forward curve is in contango from January 2020 through September 2020 when a slight backwardation develops until November 2020.

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

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

Source: CQG

Based on settlement prices, the spread was at 1.81480:1 compared to 1.88680:1 in the previous report. The spread decreased by 7.20 cents as live cattle became a less expensive compared to lean hogs on a historical basis. The spread moved towards the historical norm.

Trade continues to be the significant factor facing the animal protein sector as we are now in the winter months, which is the height of the offseason for demand in the US. Production in Argentina and Brazil and any moves in the currency markets for the peso or the real could impact the prices of beef and pork. A rise in the Brazilian real and Argentine peso could provide support for meat prices, while lower values for the South American currencies would likely weigh on futures prices as they cause production costs to decline. On December 2, US President Trump slapped steel and aluminum tariffs on both Brazil and Argentina, which could cause volatility in the currencies of the South American nations. A rise in price variance in the real and peso could translate to more price movement in the meat markets, particularly in the cattle futures.

Next week, on Tuesday, December 10, at noon EST, the USDA will release its monthly WASDE report. The final World Agricultural Supply and Demand Estimate report of 2019 could impact meat prices if there are any significant changes in the supply and demand equation for beef and pork markets from the November report.

 

Soft Commodities

Three of the five members of the soft commodities sector posted losses over the past week. Coffee continued to lead the way on the upside as the price moved towards the October 2018 peak. Sugar futures moved higher since last week. Cotton, cocoa, and FCOJ futures all declined since the previous report with cocoa and FCOJ, both falling by over 3.7% on the week.

March sugar futures gained 2.11% since November 27, as the price of the sweet commodity was around the 13.06 cents per pound level. Technical resistance is at 13.25 cents with support at 12.29 cents. Nearby sugar futures traded to a low at 11.74 cents on September 12, which is another level of support. The value of the December Brazilian real against the US dollar fell over the last week and was at the $0.23380 level against the US dollar, down 0.53% since last week. The Brazilian currency remains near its multiyear lows, which likely contributing to recent weakness in the price of sugar and other commodities where Brazil is a leading producer and exporter. However, the currency has remained above the critical support level since 2015. 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 was climbing above neutral territory over the past week. The metrics on the monthly chart reflects a neutral condition. If sugar suffers a substantial decline, I will look to add to long positions, but that does not seem likely. Sugar open interest rose by 6.65% over the past week. I will be looking to add to the long position in CANE at lower levels. I expect the price of sugar to move higher over the coming weeks and months.

March coffee futures were the big winner of the week once again as they rose by 3.37% since last week after a 5.72% gain in the previous report. March futures were trading at the $1.21250 per pound level. Short-term support is at the November 19 low at $1.0580 on the March futures contract. Resistance is at $1.2550, the 2018 high. 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 $39.21 on Wednesday. Open interest in the coffee futures market rose by 3.23% since last week. I am holding a small long core position in the coffee futures market and the JO ETN product. Coffee needs to move above the $1.2550 level to change the tone of the 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 price of cocoa futures corrected lower over the past week. On Wednesday, March cocoa futures were at the $2547 per ton level, 3.74% lower than last week. Open interest fell by 1.38%. Relative strength and price momentum were declining below neutral readings on the daily chart. The price of cocoa futures rose to a new peak and the highest price since May 2018 at $2783 per ton on the December contract. We are long the NIB ETN product at $25.76. NIB closed at $29.64 on Wednesday, December 4. As the Ivory Coast and Ghana attempt to institute a minimum $400 per ton premium for their exports of cocoa beans, it should provide support to the cocoa market on price dips. The level to watch on the upside above the recent high is at $2914 per ton. On the downside, short-term technical support stands at $2430 per ton.

March cotton futures moved 0.32% lower 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 64.70 cents on December 4 after rising to a high of 67.13 on October 30. The next level on the upside above the recent high is at the 69.07 cents per pound level on the December contract, the July 1 peak. On the downside, support is at 60, 56.59, 56.19, and 55.66 cents per pound. Open interest in the cotton futures market fell by 1.03% since November 26. Price momentum and relative strength metrics were just below neutral territory on Wednesday. The metric remains in an oversold condition on the monthly chart but is attempting to cross higher. I continue to believe that the price level limits the downside prospects for the cotton futures market, and positive news on the trade front could ignite rallies as we witnessed recently.

January FCOJ fell over the past week. On Wednesday, the price of January futures was trading around 95.45 cents per pound. FCOJ nearby futures moved 4.36% lower over the past week. Support is close by at the 95.25 cents level. Technical resistance is at around $1.0165 per pound. Open interest rose by 5.09% since November 26. 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 fell below the $1 per pound pivot point. The price action in FCOJ futures could be a function of the low level of the Brazilian currency against the US dollar.

Coffee continued to be the star of the soft commodity sector over the past week. The price of coffee needs to move above the October 2018 high at $1.2550 per pound on the nearby futures contract to validate the current rally. Coffee can be a highly volatile agricultural commodity, and the risk of a correction has increased with the price. Sugar began to move higher on Wednesday, as the price rose above the 13 cents level. Cotton and FCOJ remain closer to the bottom end of their respective pricing cycles. Cocoa has corrected but should find support given the potential for a $400 per ton surcharge on exports of cocoa beans from the Ivory Coast and Ghana.

 

A final note

On Friday, we will hear from OPEC, which could impact the price of crude oil over the coming week. I expect the cartel to extend its production cut into 2020, but that may not be enough to provide significant support for the price of the energy commodity. The USDA will release its final WASDE report for 2019 on Tuesday, December 10. Next week, the UK election on Thursday, December 12, will dominate the news cycle and could impact currency markets.

The expansion of protectionist policies to cover steel and aluminum coming into the US from Brazil and Argentina because of the low level of their currencies is another destabilizing factor for commodities prices. Meanwhile, the impeachment inquiry in the US is now in the House Judiciary Committee, setting the stage for lots of political wrangling between the Democrats and Republicans. We could see a wild year in markets across all asset classes in 2020, as the US election will stand as a referendum for many issues when it comes to the policies from the world’s leading economy.

 

 

 

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.