• Precious metals decline, but palladium rises to a new high above $1800 per ounce
  • Record highs in the stock market
  • Strength in crude oil ahead of the OPEC meeting- Natural gas falls to the lowest price since August
  • A mixed bag in industrial and agricultural commodities, but coffee moves higher
  • Happy Thanksgiving!

 

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 21, US stocks edged lower as the impeachment inquiry continued. Meanwhile, in a more hopeful sign on the trade front, China invited US negotiators to Beijing for further talks. The US 30-Year bond futures fell below the 160 level to around 159-24. The dollar index was marginally higher to settle at 97.899 on the session. Soybeans edged lower to the $9 level on the back of disappointment over trade, but corn and CBOT wheat futures posted marginal gains. Crude oil moved over $1 per barrel higher on the session as choppy trading conditions continued. News that OPEC would extend the current production cuts supported the price of the energy commodity. Oil product prices moved higher with heating oil futures outperforming gasoline. Natural gas moved a bit higher but remained below the $2.60 per MMBtu level on December futures despite a bullish inventory report from the EIA, which showed that stocks dropped by 94 bcf for the week ending on November 15. Precious metals prices declined with all members of the sector posting losses. Feeder cattle fell, but live cattle and lean hogs moved a touch higher. Coffee was the bullish beast in the soft commodities sector as the price rose by 5.55 cents on the December futures contract and 5.30 cents on the March futures. Concerns over the growing conditions in Brazil caused the bullish price action in the coffee futures market. Cocoa and lumber edged higher, but sugar, cotton, and FCOJ futures all moved to the downside. Bitcoin futures fell $540 to the $7,570 level despite hopes that the regulators would approve a Bitcoin ETF product.

On Friday, stocks rebounded in the final session of the week as the US and China made positive comments on the potential for a trade deal. Manufacturing output accelerated in November to the fastest pace in seven months, and services activities picked up more than expected, causing buying in stocks. The 30-Year Treasury bond futures remained just below the 160 level on the December futures contract, and the dollar index climbed to over the 98 level. Soybean futures fell to under $9 per bushel, but wheat and corn prices posted small gains. Crude oil and product prices moved to the downside in the final day of a week that saw prices move up and down like a yo-yo. Natural gas climbed to the $2.665 per MMBtu level. Gold was little changed, while silver slipped a few pennies to $17 per ounce. Platinum fell almost $25 on the session, but palladium posted a gain. Live cattle fell, but feeder cattle futures declined more. Lean hogs rebounded slightly after losses earlier in the week. Coffee and cocoa moved to the downside, but cotton, FCOJ, sugar, and lumber posted gains. Bitcoin futures continued to and were $260 lower on the session to the $7355 level. Bitcoin is close to its critical technical support level, as China may be cracking down on the cryptocurrencies.

On Monday, stocks moved higher, the long bond futures contract climbed back above the 160 level, and the December dollar index marginally higher at the 98.238 level. CBOT wheat was up by 14-15 cents per bushel on the December and Mach futures.

Soybeans moved 4.5 cents lower and further away from $9 per bushel, while March corn was up just 2.25 cents. Crude oil was higher, both gasoline and heating oil futures moved to the upside, but the distillates outperformed the gasoline as the products reflected seasonal influences. Natural gas fell sharply on warmer weather forecasts, but the price stopped short of reaching a lower low. The first level of technical support is at $2.501, and the December futures fell to a low at $2.51 per MMBtu. Ethanol moved to the upside. Gold and silver fell, but platinum and palladium prices rose. Live and feeder cattle prices moved to the upside, but lean hogs did not move much on the session. Sugar futures moved only one tick lower, but cocoa fell. Cotton, FCOJ, coffee, and lumber futures all posted gains. Coffee moved to a new high at $1.1905 on the March futures contract. Bitcoin probed below the $7000 level, but closed the day at $7190 per token, down $165.

On Tuesday, stocks moved higher to new record levels as President Trump and the Chinese made some constructive statements on trade. President Trump pardoned turkeys during the traditional pre-Thanksgiving ceremony as the markets prepared for the holiday on Thursday. The long bond futures posted a gain and remained above the 160 level. The dollar index edged lower but stayed above the 98 level on the December futures contract. Grains edged lower across the board, while crude oil and oil products moved high. Natural gas fell like a stone on warmer weather forecasts. The price of January futures fell to a low at $2.50, the lowest level for the peak winter contract since August. Gold and silver moved to the upside along with platinum and palladium prices. Live cattle were a touch higher, while feeder cattle and lean hog futures posted marginal losses. Cotton, FCOJ, and cocoa futures moved to the upside. Sugar, coffee, and lumber posted losses on the session. The pressure continued in the Bitcoin futures market as the price of the digital currency was around $100 lower at the $7090 per token level. A Chinese crackdown on cryptocurrencies has weighed on the digital currency asset class. The overall market cap dropped below the $200 billion level.

On Wednesday, the Fed’s Beige Book had few surprises as the central bank’s districts continue to focus on the risks associated with the trade war. Stocks powered to new record highs on the session before the Thanksgiving holiday. The dollar index edged higher, while the long bond futures moved lower to just over the 160 level. Grains posted small losses across the board, as all energy commodities fell slightly on Wednesday. Inventory builds in crude oil and products weighed on the prices of the petroleum commodities. January natural gas fell below the $2.50 per MMBtu level after the EIA released its weekly data report one day early. Gold, silver, and platinum fell, but palladium rose to a hew high at $1815 per ounce and closed at over the $1800 per ounce level for the first time. Lean hog futures edged lower, but live and feeder cattle prices moved to the upside. Cocoa declined, while cotton, FCOJ, coffee, sugar, and lumber all posted gains. Bitcoin recovered as the digital currency moved $530 per token higher to $7,655 after probing below the $7000 level.

 

Weekly Spreadsheet:

Copy of Spreadsheets for The Hecht Commodity Report November 27, 2019

Stocks and Bonds

Stocks moved to record highs over the past week even though both the US and China seem to be stalling when it comes to any preliminary trade deal. Chinese President Xi said he is anxious to do a deal that reflects equality, while President Trump repeated that any agreement could never be equal given the current imbalance that favors the Chinese on trade. All of the leading indices move to record levels since November 20.

 

The S&P 500 rose by 1.45% since the previous report, while the NASDAQ moved 2.09% higher. The DJIA posted a 1.23% gain since the last report. The risk of a selloff will continue to rise with the level of the indices. However, it is hard to disregard the optimism that continues to lead to buying in the stock market in an environment where interest rates are at very low levels.

Chinese large-cap stocks kept pace with US stocks since last week.

Source: Barchart

As the chart illustrates, the China Large-Cap ETF product (FXI) was trading at the $42.07 level on Wednesday, which was 1.50% higher than the closing level on November 20. 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 could depend on if the US and China sign a “phase one” trade deal, which does not seem likely by the end of 2019.

US 30-Year bonds edged lower over the past week. On Wednesday, November 27, the long bond was at the 160-03 level as it moved 0.19% 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.

Open interest in the E-Mini S&P 500 futures contracts rose by 3.23% since November 19, as investors continue to flock to the stock market. Open interest in the long bond rose by 1.76% over the past week. The VIX fell as the indices rose to new highs over the past week. The volatility index was at the 11.71 level on November 27, 8.37% lower over the period.

I continue to favor the long side when it comes to the VIX and VIX-related instruments, even though it has been a losing trade. The current level of volatility is 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 12 limits the downside potential for the instrument. I have been cautious with long volatility positions as the market has been moving higher in a straight line. At under the 12 level, I will dip a toe back in the water of the long side of volatility next week. Nothing has changed since last week, but when volatility eventually returns, it tends to do so with a vengeance.

 

The dollar and digital currencies

The dollar index was back above the 98 level on the nearby December futures contract on November 27. The contract posted a 0.49% gain over the period. The index has been trading around the 98 level since November 13 and settled at 98.288 on November 27. 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.

The euro currency was 0.63% 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, which could change US policies starting in early 2021.

 

Over the past week, Bitcoin fell sharply and probed below the $7000 level. Bitcoin was trading at the $7,573.60 level as of November 27, as it lost 5.85% compared to the value on November 20. It could be that a crackdown by the Chinese on digital currencies has sent the price of Bitcoin and other cryptocurrencies to the very bottom of the trading range.  Ethereum fell by 12.17% and was at $154.26 per token on Wednesday. The market cap of the entire asset class moved 6.92% lower as it underperformed the price action in Bitcoin. The number of tokens increased by 24 to 4867 tokens since November 20. 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 just over $205 billion. Open interest in the CME Bitcoin futures rose by 12.58% since last week, which could be a sign of bargain hunting. 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 way above the market at $10,050.

The Canadian dollar moved 0.22% higher since last week. Open interest in C$ futures fell by 3.13% 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, but it remained close to the bottom end of its trading range.  The support level for the Canadian currency is at just below $0.75 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 0.28% since last week’s report.

The British pound posted a 0.07% loss 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 Brazilian real edged lower since November 20 and remained below the $0.24 level as it fell by 0.89%. 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 moved higher since the previous report.

 

Precious metals moved lower over the past week in mostly quiet trading. Gold and silver prices fell but continue to consolidate after the rallies that took both of the metals that have a long history as currencies to highs in early September.

 

Precious Metals

Precious metals prices drifted lower since November 2, with the only gain in the sector in the palladium futures market. Palladium soared to a new record peak on November 27. All of the other precious metals moved to the downside led by platinum, the metal that has consistently underperformed the other members of the sector for years.

Gold fell by 1.41% since last week, while silver was 1.19% lower. The price of December gold was just below the $1454 per ounce level on Wednesday, while silver was at $16.912 per ounce. 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 fell by 2.67% since last week and was again below $900 per ounce. The level of technical resistance is at the September 5 high at $1000.80. January platinum bounced from its recent bout of selling. 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 lower since the previous report. The midpoint price of the metal was at $5650 per ounce on November 27. Palladium bucked the trend and was 4.00% higher on the week. The price traded to a new peak at $1815 on November 27 and closed at the $1811.40 per ounce level on Wednesday.

Open interest in the gold futures market moved 6.94% lower over the past week after reaching a new record peak at over 719,200 contracts on November 19. The metric moved 2.38% higher in platinum while it was 0.60% higher in the palladium futures market. Silver open interest fell by 5.46% over the period.

Aside from palladium, precious metals prices continued to trade within their respective trading ranges.

The silver-gold ratio edged marginally higher since the last report.

Source: CQG

The daily chart of the price of December gold divided by December silver futures shows that the ratio was at 86.06 on Wednesday, up 0.10 from the level on November 20. 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 a touch 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 moved lower since the last report. While gold moved down by 1.41%, the GDX was 2.52% lower since November 20, and GDXJ fell 1.27% 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 mostly consistent with that pattern. I continue to rate both ETFs as a hold. We are also long SLV, the silver ETF product, which posted a 1.25% loss since November 20, slightly underperforming the price action in the silver futures market. I continue to believe that both gold and silver will find short-term lows at higher levels during the current correction and consolidation period.

Platinum and palladium prices moved in opposite directions since November 20. December Palladium was trading at a premium over January platinum with the differential at the $916 per ounce level on Wednesday, which widened from the previous week and was at a new record level. January platinum was trading at a $558.00 discount to December gold at the settlement prices on October 29, which widened slightly since the previous report.

The price of rhodium, which does not trade on the futures market, moved $125 lower over the past week and was at $5,650 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 since October 29, as it continues to exhibit strength.

We are long the PPLT platinum ETF product, which moved 2.63% lower since November 20. 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 $10.25 on November 27, down 40 cents per share since last week. SILJ outperformed EXK shares over the past week as the latter dropped by over 10%. We exchanged our long positions in EXK or SILJ two weeks ago.

Last week I wrote, “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.

 

Energy Commodities

Most of the members of the energy sector posted gains over the past week. Crude oil traded in a choppy range, but the price moved to the upside along with products. Natural gas fell to a new low below the $2.50 per MMBtu level on the peak-season January futures contract. Ethanol also moved lower since the previous report.

December NYMEX crude oil futures rolled to January and rose by 1.93% over the past week. January Brent futures moved 2.74% higher since November 20. January gasoline was 1.57% higher, and the processing spread in January posted a 0.08% gain since last week as gasoline slightly outperformed the price of crude oil over the period. December heating oil futures moved 2.90% higher since the previous report, and the heating oil crack spread was 5.59% higher since last week.

Technical resistance in the December NYMEX crude oil futures contract is at $61.48 per barrel level, the high from September 16, with support at the $54.85 level. Crude oil open interest rose by 2.99% over the period. Trade and Iran are the primary factors facing the oil market, but the upcoming OPEC meeting next week is the next significant event for the oil market. The potential for changes in production policy by the cartel could add volatility to the WTI and Brent crude oil futures markets. The odds favor an extension of the current 1.2 million barrel per day output cut by OPEC members.

As I wrote last week, “We could see volatility in the oil and gas markets increase in 2020 as the US Presidential election will be a referendum on the future of energy policy. The progressive wing of the opposition party, which seems to be gaining support, could reduce or eliminate fracking. President Trump’s administration continues to support energy independence, which has made the US the world’s leading producer of oil and gas. A change in administrations following the November 2020 election could have a significant impact on both US production and world energy prices.” 2020 could be a wild year for crude oil and natural gas, as the US is currently the world’s leading producer of both energy commodities.

The spread between Brent and WTI crude oil futures in
January moved higher to the $5.96 per barrel level for Brent, which was $0.61 above the November 20 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. 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. While it was a choppy week in the oil market, little changed from the previous week.

US daily production stood at 12.9 million barrels per day as of November 22, according to the Energy Information Administration, which moved to a new record peak for daily output. As of November 15, the API reported an increase of 5.954 million barrels of crude oil stockpiles, while the EIA said they rose by 1.40 million barrels for the same week. The API reported a rise of 3.354 million barrels of gasoline stocks and said distillate inventories fell by 2.19 million barrels as of November 15. The EIA reported an increase in gasoline stocks of 1.80 million barrels and a decrease in distillates of 1.00 million barrels. Rig counts, as reported by Baker Hughes, continued to decline and fell by three last week to 671 rigs in operations as of November 22, which is 214 below the level operating last year at this time. The steady decline in the number of rigs with daily output at 12.8 million barrels per day level is a sign of the efficiency of the oil business in the US, which is a significant factor for the oil market. The decline in the rig count could weigh on future production and provide support for the price of oil. The OPEC meeting on December 5 and 6 is now the factor that will drive prices over the coming week.

OIH and VLO shares moved in opposite directions since last week. OIH rose by 4.38%, while VLO moved 0.08% lower since November 20. 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 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 1.93% higher since last week’s report. Buying dips in crude oil continues to be the optimal strategy. I am using tight stops on long positions in the ERX product and will re-enter if the market triggers stops. I am willing to take small losses in the quest for a significant profit as I would ride a bullish wave with trailing stops in ERX if it continues to move to the upside. Disappointment over trade between the US and China could be a negative factor for the price of crude oil. However, it could cause OPEC to increase production cuts in early December. The state of the trade war between the US and China has deteriorated since the last OPEC meeting in early July.

January natural gas futures were at $2.501 on November 27, which was 4.21% lower than on November 20. The futures contract traded to a high of $2.98 on November 5. The price fell to a low at around $2.50 per MMBtu since the previous report. Last week, the EIA reported a higher than expected withdrawal of 94 bcf from storage, bringing the total amount of gas in storage to 3.638 tcf as of November 15, which was the first withdrawal of the 2019/2020 season. The high for the 2019 injection season was at 3.732 tcf. Last year stocks rose to a high at 3.247 before the start of the withdrawal season in November. Stocks are starting the 2019/2020 peak season at 485 bcf above last year’s level.

Source: EIA

As the chart shows, stockpiles of natural gas are 16.2% above last year’s level and 1.60% below the five-year average as of November 15. This week, I expected the EIA to report a withdrawal of around 50 bcf as the winter season gets underway. The EIA report came out on Wednesday this week because of the Thanksgiving holiday on Thursday.

Source: EIA

The EIA reported a lower than expected withdrawal of only 28 bcf bringing the total inventories to 3.61 tcf. The bearish data caused the price of January futures to fall below the $2.50 level during Wednesday’s trading session.

Open interest rose by 4.46% over the past week. Technical resistance is at $2.98 per MMBtu level on the December futures contract with support at $2.475 and $2.388. The $2.187 and $2.135 per MMBtu levels stand as technical support on the continuous futures contract with resistance at $2.905 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. I would also put a time stop on any long positions through mid to late January 2020. 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 has been disappointing, but a correction on the upside is overdue.

I continue to believe that the uncertainty of the average temperatures across the US will cause at least one rally on the peak season January futures contract.

I had suggested buying call options with strike prices at the $2.80 to $3.00 per MMBtu for expiration in January and February 2020 in the natural gas futures options market on price weakness. The January $2.80 call at 5.70 cents was 5.50 cents lower since last week. This option offers a limited risk way to position for a seasonal rally based on the closing price on November 27. The option expires on December 26.

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 $6.37 level on Wednesday, up $0.30 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 and re-entering at lower levels.

December ethanol prices moved 0.87% lower over the past week. Open interest in the thinly traded ethanol futures market rose by 21.06% over the past week. However, with only 661 contracts of long and short positions, the biofuel market is untradeable. The KOL ETF product moved 3.13% higher compared to its price on November 20, and the price of January coal futures in Rotterdam rose by 1.69% over the past week.

The API reported that crude oil inventories rose by 3.639 million barrels for the week ending on November 22, compared to a consensus estimate of a decline of 418,000 barrels. While the consensus estimate was for an 1.222-million-barrel rise in gasoline inventories, the API said they increased by 4.378 million. Distillate stocks fell by 665,000 barrels for the week ending on November 22, according to the API. The EIA said crude oil inventories rose by 1.60 million barrels as of the end of last week. When it comes to gasoline and distillate stocks, the EIA reported an increase of 5.10 million and a rise of 700,000 barrels, respectively. The EIA and API data were bearish for the price of crude oil and products, but prices remained near recent highs.

The risk of a price spike in oil remains greater on the up than on the downside, given the continuing tensions with Iran. All eyes will be on Vienna, Austria, where OPEC meets on December 5 and 6.

In natural gas, the price will move higher and lower with the weather forecasts throughout December. The pace of stockpile withdrawals could also add to volatility in the nearby futures contracts. Natural gas has been trading in spring rather than winter mode over the past week.

Source: NYMEX/RMB

As the forward curve over the coming months shows, the peak price for this coming winter was at $2.501 in January, which was 11.0 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 could recover in December. My positions were out of funds as of November 27.

I have been tracking the price action in BG shares. Since November 6, the price of BG shares moved 3.35% lower to $53.45 per share on November 27. 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. 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. The oil market has been choppy, creating trading opportunities.

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 0.47% lower over the past week at $14.80 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.

While I continue to favor the upside in the crude oil market, the energy commodity tends to take the stairs higher and the elevator to the downside. Therefore, trading with stops on long positions can limit risks. The natural gas market is trading at a price level that assumes that the weather conditions will not be colder than average and that there is plenty of stocks available to meet requirements. A prolonged period of cold temperatures across the US could support the price of the volatile natural gas futures market. I believe that the time of the year limits the downside prospects from Wednesday’s close for the price of nearby gas futures at this time of the year.  A correction is overdue in the natural gas futures market.

 

Grains                                                             

The prices of soybeans, corn slipped, while wheat posted a gain over the past week as the winter season in the US has arrived, and crops in 2019 were at higher levels required to satisfy the level of demand. The next WASDE report will come out on December 10. 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 the end of 2019.

 

January soybean futures moved 2.54% lower over the past week and was at $8.82 per bushel on Wednesday. Open interest in the soybean futures market rose by 5.52% since last week. Price momentum and relative strength indicators on the daily chart remained in oversold conditions on November 27.

The March synthetic soybean crush spread edged higher over the past week and was at the $1.0225 per bushel level on November 27, up 2.25 cents since November 20. 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 mildly supportive of the price of the oilseed futures even though they were trading back well below the $9 per bushel level.

March corn was trading at $3.7325 per bushel on November 27, which was 1.06% lower on the week.

Open interest in the corn futures market fell by 8.26% since November 19. Technical metrics were in oversold territory in the corn futures market as of Wednesday. The price of ethanol fell by 0.87% since the previous report on the back of weakness in the corn futures market. January ethanol futures were at $1.3690 per gallon on Wednesday. The spread between January gasoline and ethanol futures widened to 30.75 cents per gallon on November 27, up 3.79 cents since last week.

 

March CBOT wheat futures were 1.54 higher since last week. The March futures were trading $5.2675 level on November 27. Open interest fell by 7.97% over the past week in CBOT wheat futures, which is not a bullish sign for the wheat futures market.

 

As of Wednesday, the KCBT-CBOT spread in March was trading at an 89.25 cents per bushel discount with KCBT lower than CBOT wheat futures in the March contracts. The spread widened by 3.50 cents since November 20. 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 2.3868:1 level on November 27, down 0.00820 since last week. The ratio has been trending higher since before the summer of 2019. 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. On November 27, the spread was virtually at the long-term average.

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.

 

Copper, Metals, and Minerals

The base metals that trade on the London Metals Exchange turned in a mixed performance over the past week, but the other industrial commodities moved higher. Iron ore, lumber, and uranium all posted gains for the second consecutive week. The Baltic Dry Index bounced higher over the past week.

Copper moved 0.94% higher on COMEX, while the red metal posted a 0.50% gain on the LME since the last report. Open interest in the COMEX futures market moved 7.16% lower over the past week. Copper was trading at $2.6745 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 had 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 progress on trade to test above the $2.70 per pound level. The copper market was sleepy over 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.

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 fell on the LME, but stockpiles continued to rise on the COMEX. 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 action in copper was minimal since last week’s report.

The LME lead price moved lower by 2.88% since November 19. 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 0.45% 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 rose by 2.70% 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 0.52% higher on the week. The price of zinc fell 2.91% since November 19, as stocks rose over the past week. 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 looks headed for a test of 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 $416.10 level, 3.33% higher 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 December was 0.39% higher at $25.90 per pound. The volatile Baltic Dry Index rose by 9.36% since last week after weeks of steady declines. December iron ore futures posted a 0.21% gain compared to the price on November 20. Open interest in the thinly traded lumber futures market rose by 8.90% over the past week.

LME copper inventories dropped by 2.40% to 214,200 metric tons since last week. COMEX copper stocks increased by 0.27% from last week to 40,097 tons. Lead stockpiles on the LME rose by 0.52%, while aluminum stocks were 6.08% higher after last week’s increase of over 23%. Aluminum stocks rose to the 1,229,475-ton level. Zinc stocks moved 4.84% higher from the last report. Tin inventories moved 2.26% lower since last week to 6,495 tons. Nickel inventories were 2.49% higher compared to the level on November 19. Stockpiles of nickel had been declining as the Indonesian export ban is set to take effect on January 1.

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. 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 $1.00 per share on Wednesday, down 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 $2.63 on November 27, up 43 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 $13.93 per share and moved 9.0% higher on the week.

We own two units of FCX shares at an average of $10.56. The stock was trading at $11.61 on November 27, $0.58 higher since the previous report. I will maintain a small long position in FCX shares.

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

I do not expect much price action from this sector for the rest of this year unless there is a deal on trade.

 

Animal Proteins

Live cattle and lean hog prices rolled to February futures. Since last week, live and feeder cattle prices moved in opposite directions, while lean hogs posted a marginal gain. Trade remains a significant factor when it comes to the path of least resistance of meats. However, the weakness in the Brazilian real and Argentine peso has been a bearish factor for the animal proteins. The low levels of the South American currencies decrease production costs in Brazil and Argentina. We are in the heart of the offseason for animal protein demand during the winter months.

February live cattle futures were at $1.26700 per pound level up 0.98% from last week. Technical resistance is at $1.2700 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 are sitting in overbought territory. Open interest in the live cattle futures market moved 3.91% higher since the last report. The total number of open long and short positions in the live cattle futures market continued to climb over the past week.

January feeder cattle futures underperformed live cattle as they fell by 0.52% since last week. January feeder cattle futures were trading at the $1.43325 per pound level with support at $1.38275 and resistance at $1.47775 per pound. Open interest in feeder cattle futures rose by 1.05% 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 edged a touch higher over the past week. The price ran into selling in mid-October. The active month February lean hogs were at 67.15 cents on November 27, which was 0.56% higher on the week. The open interest metric rose by 1.45% from last week’s level. Price momentum and the relative strength index remained in oversold territory over the past week. Support is at 66.525 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.

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

Source: CQG

Based on settlement prices, the spread was at 1.88680:1 compared to 1.87910:1 in the previous report. The spread increased by 0.77 cents as live cattle became a bit more expensive compared to lean hogs on a historical basis. The spread moved away from the historical norm.

Trade continues to be the significant factor facing the animal protein sector as we are now in the winter months, which is the height of the offseason for demand in the US. Production in Argentina and Brazil and any moves in the currency markets for the peso or the real could impact the prices of beef and pork. A rise in the Brazilian real and Argentine peso could provide support for meat prices, while lower values for the South American currencies would likely weigh on futures prices as they cause production costs to decline. The next event for the meat markets will be the release of the December 10 WASDE report by the USDA. The monthly WASDE will tell the markets more about the state of supply and demand for the meats.

 

Soft Commodities

Three of the five members of the soft commodities sector posted gains over the past week, with coffee gaining almost 5.75% and cotton and cocoa moving under 1% higher. Sugar and FCOJ futures posted less than 0.50% losses since last week.

March sugar futures drifted 0.47% lower since November 20, as the price of the sweet commodity was around the 12.79 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 fell last week and was at the $0.23505 level against the US dollar, down 0.89% since last week. 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 rose by 2.72% 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 as they rose by 5.72% since last week’s report and were trading at the $1.1730 per pound level. Short-term support is at the November 19 low at $1.0580 on the March futures contract. Resistance is at $1.1905. 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 $38.87 on Wednesday. Open interest in the coffee futures market rose by 1.60% since last week. I had taken some profits but am keeping 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 edged higher over the past week. On Wednesday, March cocoa futures were at the $2646 per ton level, 0.69% higher than last week. Open interest rose by 1.41%. Relative strength and price momentum have crossed lower and are moving towards 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 $30.15 on Wednesday, November 27. 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.

March cotton futures moved 0.98% higher over the past week. On August 26, the price of nearby futures fell to a low at 56.59 cents, less than one cent above the critical 2016 low at 55.66 cents per pound. March cotton was trading at 64.91 cents on November 27 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 9.68% since November 19. The total number of open long and short positions declined by over 15% over the past two weeks as December futures rolled to March. Price momentum and relative strength metrics were just above 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 edged lower over the past week. On Wednesday, the price of January futures was trading around 99.80 cents per pound. FCOJ nearby futures moved 0.30% lower over the past week. Support is at the 96.10 cents level. Technical resistance is at around $1.0705 per pound. Open interest rose by 1.21% since November 19. 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. This year, the price of orange juice has been weak and trading around 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.

The risk of a long position in the coffee market is rising with the price of the soft commodity. Selling on a scale-up basis or using trailing stops is the optimal approach to the coffee futures market and the JO ETN product in the current environment. Coffee can be one of the most volatile commodities that trade on futures exchanges. A supply problem in Brazil could cause an explosive move, so I continue to suggest holding a small core long position. I continue to favor buying sugar, cocoa, and cotton on price weakness over the coming week.

 

A final note

I want to wish everyone a happy, healthy, and safe Thanksgiving holiday. The last Thursday of November represents the end of the harvest season in the US. While the 2019 harvest is another year where supplies are sufficient to meet the global demand, there are no guarantees that the same will hold in 2020. Growing population around the world means that more people, with more money, compete for food each year. Any weather or crop-related issues could cause significant price appreciation in grains and other agricultural products next year.

Next week, the market will focus on the OPEC meeting, which could increase price volatility in the crude oil futures market. I believe the cartel will extend production cuts into 2020, and there is a small chance they could increase the current level, given the ongoing uncertainties of the trade war.

 

 

 

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.