- Optimism and pessimism over trade impacts commodity prices- Strength in the US dollar
- Precious metals post losses- Swap EXK or SILJ to diversify risk
- Crude oil edges higher while natural gas falls
- Cocoa rallies to a new high for 2019 and coffee holds its recent gains
- OPEC meeting on December 5 and 6 is the next significant event for the oil market
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 7, the US and China announced they had reached a deal to roll back tariffs, which sent stocks higher, bonds and precious metals lower, and the dollar higher. The “phase one” agreement is a significant step to de-escalate the trade war. Stocks moved higher to new record peaks on the back of the trade news. The US 30-Year bond futures contract fell over two full points as a trade deal lowers the potential for a Fed rate cut at the December FOMC meeting. The dollar index moved higher to just under the 98 level. Thursday was a risk-on day in markets across all asset classes. Grain prices moved higher across the board as corn, beans, and wheat are products in the crosshairs of the trade war. Crude oil rallied, products were mixed, and natural gas fell despite bullish inventory injection data from the EIA. The news on trade pushed gold and silver to the bottom ends of their respective trading ranges. Platinum moved lower, but palladium posted a marginal gain. Copper rose to a new high at $2.73 per pound on the December futures contract. Animal protein futures were quiet with marginal declines in feeder cattle and hogs, while live cattle were unchanged on the session. Sugar, cocoa, and lumber moved marginally lower, but cotton, FCOJ, and coffee prices moved to the upside. Bitcoin fell $140 to $9,220 per token.
On Friday, the USDA released its November WASDE report. Thursday’s news on trade trumped the WASDE report. Meanwhile, early Friday, President Trump threw some cold water on the optimism over trade when he said that he has not yet agreed to stop or walk back any tariffs on China. Time will tell if both sides are just positioning for the “phase one” agreement.
Stocks managed to post marginal gains on Friday, but bonds continued to drop, and the dollar rallied to over the 98 level. The WASDE report was a non-event as corn was slightly higher, and wheat and bean prices fell. Crude oil, oil products, and natural gas prices moved higher on the session. Hold, silver platinum and palladium continued to fall. The platinum group metals took the most significant hit on the final session of the week. Cattle and hogs did not move much, but beef edged higher following WASDE, while hogs drifted lower. The price of lumber fell, but all of the soft commodities moved to the upside on the final session of the week. Bitcoin declined $375 to $8845 per token.
On Monday, stocks did not move all that much as the market was waiting to hear more news on trade. With the earnings seasons over, there were not many inputs that drove stock prices higher or lower on the session. Grain prices moved lower in the aftermath of the November 8 WASDE report. Soybeans led the way on the downside, but corn and wheat prices followed with losses. Crude oil fell a touch with the price of gasoline, but heating oil futures posted a marginal gain. Natural gas fell sharply on the session as the market looked past the cold weather forecasts for the coming days. Gold and silver fell to lower lows, while platinum and palladium posted more significant losses. Palladium declined by over $50 per ounce on Monday. Cattle edged higher while lean hogs went the other way reflecting the forecasts from the USDA in the November WASDE report, Cocoa posted a gain on Monday and sugar was unchanged, but all of the other soft commodities and lumber moved lower. Bitcoin futures fell by around $95 to $8,750 per token.
On Tuesday, the DJIA was exactly unchanged, which is a rare event. The S&P 500, NASDAQ, and Russell 2000 posted marginal gains. The long bond futures were only up slightly, and the dollar index also posted a small gain. Soybeans were unchanged, but corn and wheat prices moved to the upside. Crude oil was slightly lower with products, and natural gas continued to edge lower. Fold and silver did not move all that much on the session, but platinum fell, and palladium moved higher. Cattle were close to unchanged, but lean hogs recovered a bit on the session. Lumber and coffee edged lower, but all of the other soft commodities posted gains. Cocoa was $100 per ton higher on the session as it led the soft commodities sector and broke out to the upside to a new high for 2019 at $2648 per ton and settled at $2633. Bitcoin was $85 higher to the $8,835 per ton level.
On Wednesday, the market became a bit more pessimistic when it comes to trade, as there has been no movement towards a “phase one” agreement. President Trump has said there is progress, but there is no sign that he and President Xi have plans to sign any deal. Meanwhile, public impeachment hearings began. At the same time, Fed Chairman Powell told the Senate Banking Committee that interest rates are not going to rise any time soon. Stocks did not move much with a gain in the DJIA and S&P 500 and small losses in the NASDAQ and Russell 2000. The long bond drifted higher, and the dollar index posted a marginal gain on the session. Grain prices edged lower, while crude oil, oil products, and natural gas moved higher. Precious metals posted gains led by gold and silver. Copper edged lower on concerns over the trade war. Meat prices moved lower across the board. Cotton was lower, but all of the other soft commodities moved higher. Cocoa rallied to a new high, sugar and coffee moved to the upside along with FCOJ. Lumber was only marginally higher. Bitcoin was down around $30 on the session on Wednesday.
Stocks and Bonds
The stock market continued to post gains over the past week. Lower interest rates, optimism over a “phase one” trade deal between the US and China and hopes that Brexit with a deal could come to pass by the end of January created a potent bullish cocktail for the stock market. Most of the leading indices have moved to new all-time peaks since the Fed cut the short-term Fed Funds rate by 25 basis points in October. Falling rates have fueled stocks, but the rising prospects for a trade deal could be the most significant factor boosting the equity market.
The S&P 500 rose by 0.56% since the previous report, while the NASDAQ moved 0.85% higher. The DJIA posted a 1.06% gain since the last report. Optimism has shifted to what could be extreme and buying could continue until the end of 2019. As we have learned, when the market becomes too optimistic or pessimistic, an event or news item has changed the tone of the market. The higher the stocks rise, the greater the chances of another correction if market participants become disappointed on trade, Brexit, or another issue. Moreover, with the US Presidential election now less than one year away, the potential for a sweeping change in policy could impact stocks over the coming weeks and months.
Chinese large-cap stocks underperformed US stocks over the past week, but they had done better than US stocks in the previous report.
As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $41.15 level on Wednesday, which was 3.61% lower than the closing level on November 6. 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 will depend on if the US and China sign a “phase one” trade deal. No date has been set for a meeting between President Trump and President Xi as of Wednesday.
US 30-Year bonds continued to fall over the past week. On Wednesday, November 13, the long bond was at the 157-08 level as it moved 0.96% lower since the previous report. The bond market has corrected lower as the market now expects the Fed to leave short-term interest rates unchanged for the rest of 2019.
Open interest in the E-Mini S&P 500 futures contracts rose by 2.64% since November 5. Open interest in the long bond rose by 2.88% over the past week. The VIX moved marginally higher even though the indices rose to new highs over the past week. The volatility index was at the 13.00 level on November 13, 3.01% higher over the period.
I continue to favor the long side when it comes to the VIX and VIX-related instruments. The current level of volatility is so low that risk-reward is 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 look 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 high levels. The current level of the VIX at 13 limits the downside potential for the instrument. I have been buying and stopping out of the VIX and VIXY for small losses over the past week.
The dollar and digital currencies
The dollar index moved above the 98 level on the nearby December futures contract over the past week. The contract posted a 0.48% gain over the period. The index fell to a low at 96.885 on October 21 and had moved away from that level on November 13, as it settled at 98.230. The dollar moved higher as US stocks rallied on the back of optimism over a trade agreement between the US and China. US interest rates moved to the upside as the prospects for another rate cut in December faded over the past week. Technical support is at the recent low with resistance is at 99.305 and 99.33 in the upside.
The euro currency was 0.65% lower 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, and the impeachment issue dominates the news cycle.
Over the past week, Bitcoin fell below $9000. Bitcoin was trading at the $8,823.44 level as of November 13, as it lost 5.47% compared to the value on November 6. Bitcoin had been rallying over the past weeks, but optimism over trade likely weighed on the cryptocurrency. Ethereum fell by 0.67% and was at $188.59 per token on Wednesday. The market cap of the entire asset class moved 4.20% lower after recent gains. The number of tokens rose by an incredible 1,715 since November 6 to 4798 tokens. The significant rise in the number of digital currencies dilutes the asset class, but it likely was the result of unreported cryptocurrencies in past reports. In late 2017 the overall market cap was at over $800 billion with far fewer tokens. Open interest in the CME Bitcoin futures fell by 12.19% since last week. The level to watch on the upside in Bitcoin is at around the $10,050 per token. Support is at $7,280.
The Canadian dollar moved 0.63% lower since last week. Open interest in C$ futures fell by 5.23% 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 expect the currency to make a higher low against the US dollar.
The Australian dollar is also a commodity-based currency with a high degree of sensitivity to China’s economy. The A$ fell by 0.73% since last week’s report.
The British pound posted a 0.13% loss since the previous report. The general election on December 12 will serve as a second Brexit referendum. Boris Johnson currently enjoys a substantial lead in the polls, but elections can be tricky. The UK and the US have become accustomed to election surprises since 2016. We could see increased volatility in the pound going into the election. However, a victory by the Prime Minister and deal on Brexit would likely cause the pound to rally and could take the British currency to the $1.40 level or higher against the US dollar.
The Brazilian real moved lower since November 6 and back below the $0.24 level as it fell by 2.57%. 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.
Optimism over trade caused gold, silver, platinum, and palladium prices to correct to the downside over the past week. The move in gold pushed the price to the bottom end of its recent trading range, but the yellow metal remained above its critical support level at $1377.50 per ounce.
Precious metals had a tough week with gold and silver falling to new short-term lows, and platinum and palladium prices declining. Only rhodium posted a gain over the past week. Optimism over a “phase one” trade agreement between the US and China removed some of the uncertainty that had been supporting the price of gold. Over the past months, escalations in the trade war have boosted the price of gold. The selling in the bond market also weighed on the prices of precious metals as market participants appear to be signaling that the US Fed is done with short-term interest rate reductions for 2019.
Gold fell 2.00% since last week, while silver corrected 3.89% lower. The price of December gold was just above the $1460 per ounce level on Wednesday, while silver was below the $17 level. December gold futures reached a peak at $1566.20 on September 4, and December silver climbed to $19.75 on the same day.
The price of platinum declined by 6.11% since last week and was just below $875 per ounce. The level of technical resistance is at the September 5 high at $1000.80 on September 5. January platinum futures were around the $874.80 level on Tuesday. 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 moved $180 higher since the previous report. The midpoint price of the metal was at $5350 per ounce on November 13. Palladium was 4.88% lower on the week. The price traded to a new peak at $1799.20 on October 30 and closed at the $1675.10 per ounce level on Wednesday.
Open interest in the gold futures market moved 2.65% higher over the past week and to a new record peak at over 708,000 contracts. The metric moved 1.22% lower in platinum while it was 7.66% lower in the palladium futures market. Silver open interest fell 2.37% over the period.
The return of some optimism over trade and Brexit is lowering some of the uncertainties that have faced the global economy. After three short-term interest rate reductions since July 31, the odds are favoring no further rate cuts in 2019. Bonds moved lower over the past week, and as interest rates moved higher further out along the yield curve, the price of gold and the other precious metals moved lower.
The silver-gold ratio moved higher since the last report as silver unperformed gold.
The daily chart of the price of December gold divided by December silver futures shows that the ratio was at 86.44 on Wednesday, up 1.74 from the level on November 6. 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 even more inexpensive. The ratio had dipped to a low at 79.30 on September 4 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 kept pace with the price of gold since the last report. While gold moved down by 2.00%, the GDX was 2.01% lower since November 6, and GDXJ fell 3.13% 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 did not yield any significant clues. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 3.83% loss since November, 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.
Platinum and palladium posted losses since November 6. December Palladium was trading at a premium over January platinum with the differential at the $800.30 per ounce level on Wednesday, which narrowed from the previous week but was still close to a new record level. January platinum was trading at a $588.50 discount to December gold at the settlement prices on October 29, which widened since the previous report. The price of rhodium, which does not trade on the futures market, moved $180 higher over the past week and was at $5,350 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 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 since October 29, as it was the only precious metal posting a gain since last week.
We are long the PPLT platinum ETF product, which moved 6.03% lower since November 6. 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 shares of Endeavour Silver Corp (EXK) at $1.86, and they closed on November 13 at $2.32 per share, a gain of almost 25%. The recent earnings for EXK were less than exciting, so I suggest taking a profit on EXK on the open on November 14. I am replacing the junior silver mining company with the ETFMG Prime Silver ETF (SILJ) to diversify risk. The top holdings of SILJ include:
Source: Yahoo Finance
SILJ has net asset of $110.84 million, trades almost 400,000 shares each day, and charges an expense ratio of 0.69%. SILJ closed at $10.36 per share on November 13, and I would buy SILJ on the opening on November 14 to replace the long position in EXK.
The rise in optimism over trade and Brexit, falling bonds, and less uncertainty that led to new highs in the stock market weighed on the price of gold and precious metals over the past week. As we have learned over the past months, optimism has a habit of changing quickly into pessimism, which could lead to a rebound in the sector. When it comes to gold, the long-term bull market in the yellow metal began in the early 2000s, and there is no reason that it is ending anytime soon.
Crude oil and ethanol prices moved higher over the past week, while natural gas and coal posted losses. Oil products moved in opposite directions with a marginal gain in gasoline and a small decline in heating oil futures. Both gasoline and distillate crack spreads fell since last week.
December NYMEX crude oil futures rose by 1.37% over the past week. January Brent futures moved 1.05% higher since November 6. December gasoline was 0.63% higher, and the processing spread in December posted a 2.93% loss since last week as gasoline underperformed the price of crude oil over the period. December heating oil futures moved 0.79% lower since the previous report, and the heating oil crack spread was 5.69% lower since last week.
Technical resistance in the December NYMEX crude oil futures contract is at $59.11 per barrel level, the high from September 23, with support at the $50.89 level. Crude oil open interest rose by 3.24% over the period. Trade and Iran continue to be the drivers of the path of least resistance for crude oil prices over the coming days and weeks. The de-escalation in the trade war between the US and China over recent weeks is a supportive factor for the price of the energy commodity. The Middle East has been quiet, which has taken some upside pressure off the price of crude oil. The next significant event will be the biannual OPEC meeting on December 5 and 6. The cartel will decide on oil production policy for the first six months of 2020. The market could see an additional production cut as Brent crude oil is trading at the bottom end of the Saudi’s desired range, which is between $60 and $70 per barrel. At the same time, the Saudi’s plans for an IPO of Aramco would benefit from a higher price of oil in early 2020. Russia will once again play a substantial role in OPEC output policy as the non-member has participated in past production cuts.
The 2020 Presidential election could turn out to be a referendum on US energy policy as the progressive wing of Democrats favors banning fracking. The US is the world’s leading oil producer these days. An end to fracking could return Russia and Saudi Arabia as the leading forces in oil production if the “Green New Deal” becomes US policy.
The spread between Brent and WTI crude oil futures in
January edged lower to the $5.17 per barrel level for Brent, which was $0.19 below the November 6 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 January contract reached a high at a lower level at $6.82 on the high when it comes to the spread. The spread found what looks like a significant bottom at $3.39 on September 3. The simmering tensions in the Middle East should keep somewhat of 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 is at $50 per barrel.
US daily production stood at 12.6 million barrels per day as of November 1, according to the Energy Information Administration, which was at the record peak for daily output. As of November 1, the API reported an increase of 4.26 million barrels of crude oil stockpiles, while the EIA said they rose by 7.90 million barrels for the same week. The API reported a decline of 4.0 million barrels of gasoline stocks and said distillate inventories fell 1.60 million barrels as of November 1. The EIA reported a fall in gasoline stocks of 2.80 million barrels and a decrease in distillates of 600,000 barrels. Rig counts, as reported by Baker Hughes, continued to decline and fell by seven last week to 684 rigs in operations as of November 8, which is 202 below the level operating last year at this time. The steady decline in the number of rigs with daily output at 12.6 million barrels per day level is a sign of the efficiency of the oil business in the US. The decline in the rig count is significant and could weigh on production and provide some degree of support for the price of oil. All eyes in the oil market will turn to the upcoming OPEC meeting as December 5 and 6 are just around the corner.
OIH and VLO shares moved lower since last week. OIH fell by 2.53%, while VLO moved 0.10% lower since November 6. The recent strength in VLO had been because of strong refining margins that go directly to the bottom line of processing companies. We are long two units of the OIH ETF product at an average price of around $13.40 per share. I believe the ETF that reflects the price of oil service company shares is far too low at its current price level. I intend to add to the position on further price weakness. Oil services stocks have done much worse than other oil-related equities over the past weeks. I will wait before adding any more shares to the position in OIH, given the price action last year at this time. 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 last week’s report, “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 1.82% lower since last week’s report. Any sector rotation that causes a recovery in shares within the oil patch could have explosive results for the ERX product over the coming weeks. I am using tight stops on a long position in the product and will re-enter if the market triggers stops. I expect to take small losses in the quest for a significant profit as I would ride a bullish wave with trailing stops in ERX. Nothing has changed since last week.
December natural gas futures were at $2.600 on November 13, which was 8.06% lower than on November 6. The futures contract traded to a high of $2.905 recently. Forecasts for cold temperatures across the United States provided support for the price of natural gas recently. Last week, the EIA reported a lower than expected injection of 34 bcf into storage, bringing the total amount of gas in storage to 3.729 tcf as of November 1. The low for the 2018/2019 withdrawal season was at 1.107 tcf in March. Last year stocks rose to a high at 3.247 before the start of the withdrawal season in November. Stocks had already moved above the late 2018 high in September. We are now at the very end of the 2019 injection season.
As the chart shows, stockpiles of natural gas are 16.6% above last year’s level and 0.80% above the five-year average as of November 1. This week, I expect the EIA to report an injection of around 10 bcf as the injection season winds down. This week could be the final injection of 2019. Open interest fell by 1.55% over the past week. Technical resistance is now at $2.905 per MMBtu level on the December futures contract with support at $2.388. The $2.187 and $2.135 per MMBtu levels stand as technical support on the continuous futures contract with resistance at $3.00 per MMBtu. As I wrote over recent weeks, “I continue to favor buying on price weakness but expect a significant recovery sooner rather than later in the natural gas futures market as November arrives this week.” I would look to take profits on existing long positions in natural gas, starting at the $2.90 level on a scale-up basis.
With approximately one to go before the beginning of the withdrawal season, we will likely see a peak in inventories around the 3.75 tcf level. While the amount of natural gas in storage around the US is significantly higher than last year, it will be the average temperatures that dictate the path of least resistance for the price of the volatile energy commodity.
I had favored buying call options with strike prices at the $2.80 to $3.00 per MMBtu for expiration in December 2019 through February 2020 in the natural gas futures options market on price weakness. The January $2.80 call at 15.50 cents was 13.50 cents lower since last week.
I had also been buying the leveraged GASL product on dips. In GASL, I will continue to work tight stops and look to take profits and re-establish long positions at a lower level if selling in natural gas, the stock market, or both weigh on the leveraged ETF. GASL was at the $7.32 level on Wednesday, down $0.84 on the week. I will not work any stops on the call option positions as I will at least hold them until the end of 2019. I am using tight stops on any long positions in the GASL product.
December ethanol prices moved 3.27% higher over the past week. Open interest in the thinly traded ethanol futures market fell by 21.19% over the past week. However, with only 517 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product moved 3.29% lower compared to its price on November 6, and the price of January coal futures in Rotterdam dropped by 1.20% over the past week.
The API reported that crude oil inventories fell by 500,000 barrels for the week ending on November 8. While the consensus estimate was for a 1.167-million-barrel rise in gasoline inventories, the API said they increased by 2.30 million. Distillate stocks rose by 800,000 barrels for the week ending on November 1, according to the API. The EIA data will come out on Thursday morning, November 14 because of the Federal holiday on November 11. The price of crude oil continued to drift higher after the API data.
The upcoming OPEC meeting is a reminder that Iran, a member of the cartel, is still a clear and present danger when it comes to global supplies of crude oil. The Middle East is home to over half the world’s oil reserves, so any hostilities or incidents that impact output, refining, or logistics could cause sudden rallies in the blink of an eye. The risk of a price spike in oil remains greater on the up than on the downside, given the deteriorating economic conditions in Iran.
In natural gas, the most recent volatile price action reflects the coming winter season and uncertainty of the average temperatures across the US in November through March. The cold forecast sent prices higher, and the prospects for warmer temperatures following the short-term freeze weighed on the market this week.
As the forward curve over the coming months shows, the peak price for this coming winter was at $2.692 in January, which was 21.5 cents per MMBtu lower than last week. I am sitting on positions in January through February call options with strike prices from the $2.70-$3.00 per MMBtu levels, and I am trading the GASL product from the long side. My stops and profit levels on GASL will be tight, given the volatile nature of the product. I continue to believe that natural gas will test $3 and perhaps higher over the coming days and weeks.
I have been tracking the price action in BG shares. Since November 6, the price of BG shares moved 0.02% lower to $55.20 per share on November 13. 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.
Aside from rig count, inventories, and trade, the Middle East remains on the center of the stage in the oil market. The potential for more incidents will keep a bid under the price of oil. While Iran is supportive when it comes to the supply side of the oil market, the US-Chinese trade war impacts the demand side. Recent progress towards a trade deal should improve economic conditions, which is bullish. However, the two sides have a long way to go when it comes to a comprehensive agreement.
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. I will continue to favor the long side of the market in crude oil and natural gas over the coming week. Nothing has changed when it comes to my opinion of the crude oil market over the past week. Meanwhile, we could see price volatility increase going into the early December OPEC meeting.
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 3.45% lower over the past week at $15.40 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.
I expect that 2020 could be a wild year when it comes to price variance in both crude oil and natural gas. The Presidential election is shaping up to look like a referendum on the futures on energy production in the US. “The Green New Deal” could eliminate or severely restrict oil and gas production in the US, but it will not eliminate worldwide demand for hydrocarbons. We could see the prices of both crude oil and natural gas futures move higher and lower with the political polls over the coming months and particularly during the second half of next year. Meanwhile, the OPEC meeting in early December and the average temperatures in the US over the coming weeks are likely to be the most significant factors for crude oil and natural gas prices. I remain cautiously bullish on both energy commodities for the coming week.
US Department of Agriculture released its November World Agricultural Supply and Demand Estimates report on Friday, November 8. The WASDE is the gold-standard when it comes to fundamental supply and demand data in the US and around the globe. Prices did not move all that much in the aftermath of the release of the monthly report. I reached out to my friend Sal Gilberte for his take on the USDA’s report. Sal is the founder of the Teucrium Family of grain ETF products, including the CORN, SOYB, and WEAT ETFs. Sal wrote to me that:
“This month’s WASDE report, while deviating slightly from market expectations, was largely a non-event. However, the USDA continues to confirm much lower soybean stocks than were anticipated only five months ago in the June WASDE. Projected United States soybean inventories are down about fifty five percent, and global soybean inventories are down fifteen percent from the June 2019 projections. More importantly, global soybean stocks are now projected to be 13% lower versus last year, and global corn inventories are now projected to be down over seven percent from last year. Continued projections of a tightening annual global balance sheet in both corn and soybeans, with no corresponding price reaction in either commodity, may be providing longer term investors and asset allocators with an opportunity to tactically add grains to their portfolios while prices are range-bound near their breakeven production costs. It could be that perceptions surrounding the trade war with China are suppressing the reality of a tightening balance sheet in grains in the minds of investors. All eyes will be on the trade war and on the December and January 2020 WASDE reports which will show final harvest numbers for the season.”
While global supplies are a year-by-year affair and depend on crop yields, the ever-growing world population continues to put upward pressure on the demand side of the fundamental equation for agricultural products. The bottom line is that more people, with more resources in the world translates to rising demand for food each day. The full November WASDE report is available via the following link:
The next WASDE report will be the final for 2019. The USDA will release the December WASDE on December 10 at noon EST. Over the coming weeks and months, the weather conditions in the southern hemisphere and the trade war between the US and China will dominate the price action in the futures market for most of the leading grains.
January soybean futures moved 1.32% lower over the past week and was at $9.1525 per bushel on Wednesday. Open interest in the soybean futures market rose by 5.53% since last week. Price momentum and relative strength indicators on the daily chart displayed oversold readings on November 13.
The March synthetic soybean crush spread moved higher over the past week and was at the $0.9325 per bushel level on November 13, up 8.75 cents since November 6. 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 was supportive of the price of the oilseed futures.
December corn was trading at $3.7525 per bushel on November 13, which was 0.92% lower on the week.
Open interest in the corn futures market rose by 0.07% since November 6. Technical metrics were falling towards oversold territory in the corn futures market as of Wednesday. The price of ethanol rose by 2.98% since the previous report on the back of strength in the gasoline and oil futures markets. December ethanol futures were at $1.4220 per gallon on Wednesday. The spread between December gasoline and ethanol futures narrowed to 21.45 cents per gallon on November 13, down 3.47 cents since last week.
December CBOT wheat futures declined by 1.50% since last week. The December futures were trading $5.0900 level on November 13. Open interest rose by 0.28% over the past week in CBOT wheat futures.
As of Wednesday, the KCBT-CBOT spread in December was trading at an 84.25 cents per bushel discount with KCBT lower than CBOT wheat futures in the December contracts. The spread narrowed by 4.75 cents since November 6. 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 close to the highest level in years.
My positions in the grain markets continue to be 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 be the most significant issues in the grain futures arena over the coming weeks.
At this time of the year, I like to begin to watch the new-crop corn-soybean ratio for the coming year. The long-term average for the 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.
The chart of the November 2020 soybean futures divided by December 2020 corn futures shows that the ratio currently stands at 2.40:1, but it has been trending higher. At a higher level next spring, farmers would plant more soybeans than corn because the oilseed’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.
Copper, Metals, and Minerals
The base metals sector of the commodities market had been stable in the face of optimism over a “phase one” trade deal between the US and China. However, the market will need to see a lot more meat on the bone before prices react significantly. As some pessimism creeped into the market over recent sessions, prices declined. Over the past week, all of the base metals and iron ore moved to the downside.
Lumber remained below the $400 per 1,000 board feet since last week. The Baltic Dry Index continued to fall as the winter months in the northern hemisphere have arrived. The demand for shipping tends to decline during the winter season. Only uranium posted a marginal gain since last week.
Copper moved 0.96% lower on COMEX, while the red metal posted a 0.93% loss on the LME since the last report. Open interest in the COMEX futures market moved 0.29% higher over the past week. Copper was trading at $2.6395 per pound level on the nearby December futures contract. Copper is one of the leading barometers when it comes to the trade war between the US and China. The de-escalation has been moderately bullish news for the red metal, which is the leading force in the base metals sector. However, the red metal will need to see more a lot more progress to move above the $2.70 per pound level. Little has changed in the copper market since last week.
Copper has been trading in a range from under $2.50 to around the $2.70 per ounce level. Over the past week, copper inventories fell on the LME, but stockpiles continued to rise on the COMEX. Political problems in Chile, the world’s leading copper-producing nation, could continue to provide support for the price of the red metal over the coming weeks. The price action in the copper market had been positive, but more progress on trade and good news on the Chinese economy is necessary for a substantial rebound.
The LME lead price moved lower by 3.97% since November 6. The rise in demand for electric automobiles around the world is supportive of lead as the metal is a requirement for batteries. The price of nickel fell 4.62% lower over the past week, even though China increased imports of ore ahead of the export ban in Indonesia that will start on the first day of 2020. The export ban is a highly supportive factor for the price of nickel. Tin drifted 0.30% lower since the previous report. Tin has been trading around $16,600 per ton level, which has become a pivot point for the base metal. Aluminum was 2.46% lower on the week even though inventories continued to decline. The price of zinc fell 1.97% since November 6, but stocks continued to decline, which could limit the downside when it comes to the price of the metal. Critical support is around $2355, with resistance at $2550 in the zinc market. Zinc is trading in the middle of its range. 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 $387.90 level, 2.05% lower since the previous report. Interest rates in the US will influence the price of lumber. Since it appears the US Fed is likely to pause at the December meeting and not lower the Fed Funds rate for the fourth time since July 31, the lumber market has drifted lower. Lumber is a requirement for new home construction, which is a function of the level of interest rates. The price of uranium for December was 1.65% higher at $24.65 per pound. The Baltic Dry Index plunged by another 18.24% since last week as the shipping rate reflects seasonal forces. December iron ore futures posted a 2.25% loss compared to the price on November 6. Open interest in the thinly traded lumber futures market fell by 7.02% over the past week, after declines over the past weeks.
LME copper inventories dropped by 7.52% to 229,350 metric tons since last week. COMEX copper stocks increased by 4.73% from last week to 38,812 tons. Lead stockpiles on the LME fell by 2.93%, while aluminum stocks declined by 0.96%. Aluminum stocks fell to the 942,125-ton level. Zinc stocks moved 0.51% lower since the previous report. Tin inventories moved 5.81% higher since last week to 6,470 tons. Nickel inventories were 5.85% lower compared to the level on November 5, in a continuation of the trend of falling stockpiles as the Indonesian export ban is set to take effect on January 1. Nickel stocks have been declining steadily over the past weeks. The drop in nickel inventories could turn out to be highly supportive of gains in the nickel market on the LME. 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 fear of war in the Middle East and Brexit could impact behavior in markets, and base metals are no exception. Over the past week, the news cycle provided conflicting signals some support for prices. In Chile, an increase in civil unrest that includes unions could reduce copper supplies and cause the price to rally above the resistance level at just over $2.70 per pound on the December futures contract on COMEX. However, trade is the leading issue, and the market is waiting for further progress in trade negotiations before buying returns to the metal markets. Nothing has changed since last week in the base metals arena.
We own two units of Energy Fuels Inc. (UUUU), a US producer of uranium and vanadium, at an average of $2.55 per share. We are working a stop at $1.19 and have an initial profit target at $6 per share. There is a double bottom on the long-term chart at the $1.29 level. I am giving this position plenty of room and plenty of time. If the shares continue to fall, I will add another one and possibly two units to this trade to average down the price on the long position. UUUU was trading at $2.05 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 $2.53 on November 6, up 34 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:
US Steel shares were at $13.42 per share and moved 4.52% higher on the back of a positive earnings report.
We own two units of FCX shares at an average of $10.56. The stock was trading at $10.84 on November 13, $0.20 higher since the previous report. I will maintain a small long position in FCX shares.
The base metals and other industrial commodities are likely to move higher and lower based on the news cycle on trade between the US and China. China is the demand side of the fundamental equation for the raw materials in the industrial sector. Any disappointment that leads to an escalation of protectionist policies would further weigh on the Chinese economy leading to selling in base metals and other industrial commodities. However, a “phase one” deal and further progress could light a bullish fuse under these raw materials and send prices appreciably higher.
Cattle and hog prices all moved lower over the past week. The USDA raised its price forecast for cattle in the November 8 WASDE report, while reduced the estimates for hog prices. Even though African Swine Fever has decimated the hog population in China, the world’s leading pork consuming nation, the trade war continues to distort the fundamentals for hogs. A surplus in the US and deficit in China exists, and only a trade deal that includes exports for US pork to China would lift US prices given the current supply situation. We are still in the offseason for the animal protein sector as the winter months have arrived. In early 2020, the cattle and hog markets will begin to look forward to the 2020 peak grilling season that will start in late May. The link to the USDA’s latest take on the meats is available via the following link:
December live cattle futures were at $1.18100 per pound level down 0.76% from last week. Technical resistance is at $1.20325 and $1.3000 per pound. Technical support stands at around $1.1000 per pound level, as the market continued to move to the upside over the past week. Price momentum and relative strength indicators are in overbought territory. Open interest in the live cattle futures market moved 0.88% higher since the last report. Last week, the total number of open long and short positions rose by over 10%. Rising price and increasing open interest tend to be a bullish sign in a futures market.
January feeder cattle futures underperformed live cattle as they fell by 1.11% since last week. January feeder cattle futures were trading at the $1.428250 per pound level with support at $1.38525 and resistance at $1.5000 per pound. Open interest in feeder cattle futures rose by 5.66% 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 fell over the past week. The price ran into selling at over 70 cents per pound in mid-October. The active month December lean hogs were at 63.125 cents on November 13, which was 2.55% lower on the week. Hog futures are drifting towards the bottom end of the recent trading range on Tuesday. The open interest metric fell by 1.34% from last week’s level. Price momentum and the relative strength index were in oversold territory. Support is at 62.925 cents with technical resistance on the December futures contract at 67.65 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 backwardation from November 2019 through January 2020, and contango from January 2020 through August 2020 when a slight backwardation returns until October 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 sign a deal. Optimism over trade has not translated into sustained buying in the lean hog futures market, but prices for June and July were at just over 92 cents per pound. We could see volatility on the back of trade news over the coming weeks and months.
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 December futures contracts moved higher as the price of live cattle outperformed lean hogs on a percentage basis.
Based on settlement prices, the spread was at 1.87090:1 compared to 1.83710:1 in the previous report. The spread increased by 3.38 cents as live cattle became more expensive compared to lean hogs on a historical basis. The spread moved away from the historical norm. The USDA report that raised the forecast for cattle prices and lowered hog price expectations caused the spread to move to the upside over the past week.
Trade is the most significant factor facing the animal protein sector over the coming weeks. However, production in Argentina and Brazil and any moves in the currency markets 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. In the heart of the offseason for animal protein demand, the price action over the past few weeks has been stable. Cattle prices have continued to climb over the past week. However, the risk of a correction increases with the price. Lean hog futures have corrected from over 70 cents per pound but have been consolidating between 63 and 67 cents since October 22. Hogs are not threatening to move below the bottom end of the range. While seasonality favors a quiet market throughout the rest of 2019, we could see price volatility on the back of developments in the trade war between the US and Chinese. The USDA report influenced prices, but trade is the most pressing issue. The price action in lean hogs is an example of how protectionism distorts fundamentals and prices in commodities markets. The surplus in the US and deficit in China in the hog market could create an opportunity if we see progress on trade over the coming weeks.
The prices of four of the five soft commodities moved higher over the past week. Cocoa was the best performing member of the sector as the price moved to a new high for 2019. Sugar, FCOJ, and cotton futures moved higher as of the close of business on November 13 compared to their prices on November 6. The price of coffee was only marginally lower since last week.
March sugar futures rose 2.31% lower since November 6, as the price of the sweet commodity was around the 12.85 cents per pound level. Technical resistance is at the October 2 peak at 12.93 cents with support at 12.05 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 moved lower since last week and was at the $0.23865 level against the US dollar, which was $0.00610 or 2.49% lower. The Brazilian currency remains near its multiyear lows, which is likely contributing to the overall weakness in the price of sugar and other commodities where Brazil is a leading producer and exporter. However, it has remained above the critical support level since 2015. 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 remained 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 fell by 1.76% 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.
December coffee futures corrected lower by 0.05% since last week’s report and were trading at the $1.0795 per pound level. Short-term support is at the August 20 low at $1.00 on the December futures contract. Resistance is at $1.1440. I continue to favor coffee on the long side, but it has been a bumpy ride in the soft commodity. Our stop on the long position in JO is at $27.99; we are long two units of the ETN at an average price at $34.92 per share. JO was trading at $35.79 on Wednesday. Open interest in the coffee futures market fell by 4.67% since last week. I have taken some profits but will keep 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 exploded higher since last week. On Wednesday, December cocoa futures were at the $2675 per ton level, 9.45% higher than last week. Open interest fell by 0.91%. Relative strength and price momentum moved to overbought territory on the daily chart. The price of cocoa futures rose to a new peak and the highest price since May 2018. We are long the NIB ETN product at $25.76. NIB closed at $31.05 on Wednesday, November 13. 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.
December cotton futures moved 0.83% higher over the past week. On August 26, the price fell to a low at 56.59 cents, less than one cent above the critical 2016 low at 55.66 cents per pound. December cotton was trading at 64.22 cents on November 13 after rising to a high of 65.99 on October 30. The next level on the upside above the recent high is at the 68.35 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 5.87% since November 5. Price momentum and relative strength metrics were turning towards neutral conditions 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. The November WASDE report contained few surprises for the cotton market. US stocks dropped, but global inventories remained around unchanged.
January FCOJ rose over the past week. On Wednesday, the price of January futures was trading around $1.0010 per pound. FCOJ nearby futures moved 0.86% higher over the past week. Support is at the 96.10 cents level. Technical resistance is at around $1.0705 per pound. Open interest fell by 1.47% since November 5. OJ tends to rally as the winter season approaches each year. In November 2016, FCOJ hit its all-time peak at $2.35 per pound.
The weak Brazilian real versus the US dollar currency pair is a warning sign for the sugar, coffee, and FCOJ futures markets. However, the foreign exchange market is only one of many factors when it comes to the path of least resistance of the prices of the three soft commodities. I continue to favor buying dips in all three markets as they are closer to the bottom than the top ends of their respective pricing cycles. When it comes to cocoa, the $400 per ton surcharge in the Ivory Coast, and Ghana should continue to limit the downside prospects for the primary ingredient in chocolate confectionery products. I would buy cocoa on price weakness and continue to look to take profits on rallies. In cotton, trade will remain the primary factor when it comes to the price direction of the fluffy fiber. However, at under 65 cents per pound, cotton remains closer to the bottom of its pricing cycle than the top.
A final note
The significant correction in the bond market since early September is a sign that the Fed will not reduce short-term interest rates further in 2019. I expect the Fed to pause and keep rates unchanged unless there are developments on trade or Brexit that alter the current optimism in markets dramatically. Gold and other precious metals have moved to new lows, but I continue to believe the global political and economic environments will lead to higher lows, and gold will not fall below the support level at $1377.50 per ounce.
In the oil market, the next significant event will be OPEC’s biannual gathering on December 5 and 6. We could see the price of oil lean higher as the potential for a further production cut will rise because of the price of Brent futures and the Saudi’s plans for an IPO of Aramco. In natural gas, the price will move with the weather forecasts over the coming weeks. I would continue to be a buyer on dips going into December, looking for sudden rallies that would be profit-taking opportunities.
It appears that the public impeachment hearings in the US that began this week will have little impact on markets. Market sentiment is that the House will vote to impeach the President, and the Senate will refuse to vote for a conviction that would remove President Trump from office. The 2020 Presidential election could be the most contentious in history. If the Democrats nominate a progressive candidate supporting a shift towards “Democratic Socialism” to challenge President Trump, the election will serve as a referendum on tax and energy policy, which could have a significant impact on markets across all asset classes.
Until next week,
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.