By Andrew Hecht
Summary
Last week we saw two major events that affected markets across all asset classes. In the wake of the OPEC meeting on December 4 the price of crude oil fell below the August 24 lows at $37.75 per barrel. Crude oil is now approaching key support at the December 2008 lows of $32.48 per barrel.
Late last week, there were signs of troubles in the high yield bond market when a major fund froze withdrawals for reasons of liquidity. This could present markets with major worries. This week, the Federal Reserve Open Market Committee will meet for the last time in 2015 and most expect them to raise the Fed Funds rate by 25 basis points. This will be the first interest rate hike in the U.S. in nine years. While the move is widely expected, it will be the Fed’s statement after the meeting that is likely to move markets. The Fed has kept us guessing all year long about “liftoff” for U.S. rates, this week’s meeting is their last chance to make good on their promises.
Highlights
Precious Metals – Both gold and silver moved lower on a week-on-week basis. Silver traded to the lowest level since August 2009 at $13.75 last Friday making yet another new low. February COMEX gold finished down $12.10 on the week at $1073.70 level and silver moved down 65.5 cents on the week settling at the $13.89 per ounce level. Meanwhile, platinum group metals also moved lower on the week. Platinum closed the week at $840.80 per ounce down $39.60 on the week. Palladium was down $24.20 last week, closing at $542.40 per ounce.
Divergences continue in precious metals. The silver-gold ratio moved higher and is now at the 77.3:1, which continues to be a bearish signal for the sector. The platinum-gold spread closed at $2343 — platinum under gold, at all-time lows for this relationship.
The action in precious metals markets will be interesting in the sessions ahead. Gold did not follow through to the upside after the bullish technical action during the prior week and silver made a new low. Watch the inter-commodity spreads between precious metals. It is likely that an interest rate hike will weigh on the price of precious metals but they may be more sensitive to the statements rather than the action of the U.S. central bank. After Wednesday, it is likely that liquidity will decrease in these markets as the end of the year approaches.
Energy – Crude oil closed the week at $35.62 per barrel, new multiyear lows on the active month NYMEX January futures contract. Processing spreads diverged with continued weakness in heating oil and strength in gasoline. Term structure in crude oil widened dramatically with contango on the January 2016 versus January 2017 spread in WTI making a new high at over the $9 level. Brent spreads in the same months also widened. Widening contango is yet another bearish signal for the energy commodity. The Brent premium over NYMEX crude moved lower to $2.31 premium for Brent over WTI level. The move lower reflects a decrease in the political premium of Middle Eastern crude oil which could come back to bite the market in the future. Crude oil fundamentals and technicals are bearish but the political premium on crude remains very low considering that over half the world’s reserves are located in the Middle East.
Natural gas made new contract lows on January futures contract on four out of five days last week and traded at lows of $1.9590 per mmbtu before recovering slightly and closing last Friday at the $1.98 level as the market prepares for winter. Inventories reported by the EIA fell by 76 bcf last week but there are enough natural gas stockpiles at this point to deal with whatever Mother Nature throws at the United States this winter, which will likely continue to add bearish fuel to the natural gas futures market. Temperatures across the United States remain unseasonably warm for this time of the year, which is a bearish sign for demand for heating commodities, natural gas and heating oil. Natural gas open interest rose by over 30,000 contracts, which could be a sign that some shorts are returning to the market. The contango remains high with February futures trading at a 6 cent premium to January futures reflecting that demand will rise this winter and that there are ample stocks.
Base Metals – We saw mixed results in the performance of nonferrous metals on the LME. Over the past week, copper, lead and zinc moved higher. Lead was the best performer as it gained $92 per ton on the week. Aluminum, nickel and tin posted losses. On COMEX, the price of active month March copper futures moved higher in what was likely a delayed reaction to weakness in the dollar closing at the $2.1135 per pound level last Friday.
Grains – Grains continue to be volatile. January soybean prices fell from the $9 per bushel level to around $8.70 while March corn dipped to $3.75 per bushel. Wheat moved a touch higher on the week to settle just over $4.90per bushel last Friday. All eyes will be on the progress of the South American crop and whether El Nino has any effect on these agricultural markets.
Soft Commodities – Last week was a continuation of volatility and bullish action in the soft commodity sector. While the FCOJ futures market rallied by around 10 cents to the $1.50 per pound level, other soft commodities fell. Sugar moved lower over the week and closed at 14.58 cents per pound, support is at just below 14 cents. The March-May 2016 sugar spread, closed at a 37-point backwardation down seven ticks from the prior week. Cocoa futures were quiet closing the week at $3353 per ton. The forward curve in cocoa displays some tightness as a backwardation has emerged. Coffee moved lower closing at $1.2120 per pound on Friday December 11. Cotton also moved lower shedding a penny on the week closing last week at 63.71 cents per pound on the active month March futures contract.
Animal Proteins – Meat markets diverged as cattle fell and hogs moved higher on the now active month February futures contracts. The long-term average of the live cattle versus lean hog spread has been around 1.4 pound of pork value in each pound of beef value. The spread in February is at the 2.08:1 level — the spread moved 0.10 lower from last week’s level.
Final Comments
Commodity markets find themselves in a precarious position. Energy prices are falling dramatically. This means that production cost for many raw materials will fall. At the same time, the dollar has moved lower. Bullish and bearish factors are likely to confused markets raising the potential for volatility.
If the Fed raises interest rates on December 16, it is inherently bearish for raw material prices but the market is likely to focus on the statement and future intentions of the central bank rather than the action after the meeting. I remain cautiously bullish on the U.S. dollar, I believe the recent dip is a buying opportunity and this means that I believe that commodity prices remain in a long-term bear market with interest rates heading higher and the price of all energy commodities falling.
There will be plenty of opportunities for profits in 2016 in the commodity sector. Many of these opportunities will present themselves in the market structure or spreads within the commodities markets.