MartinKronicle: Commodity Report
November 23, 2015
Markets largely ignored the terrorist attack in Paris on Friday, November 13 last week. Equity prices moved higher and many commodities continued to move lower. Copper, gold, iron ore, nickel and the Baltic Freight index all posted new multiyear lows. In the case of the freight index, it traded to the lowest level since 1985.
The release of Fed minutes from the last meeting told us that the Fed is on course to raise the short-term Fed Funds at the December meeting. The dollar moved higher on a week-on-week basis and this contributed to weakness in commodity markets.
Precious Metals- Both gold and silver continue to display weakness. Gold traded to the lowest level since February 2010 as the December COMEX futures traded to lows of $1062. The yellow metal finished up on the week at $1076.70 and silver moved to $14.15 per ounce, just 25 cents above recent lows and key support. Meanwhile, platinum group metals a mixed bag. Platinum fell $5.40 on the week to $855.70, the lowest level since December 2008. Palladium was up around $20 on the week.
Divergences continue in precious metals. The silver-gold ratio is around 76:1, which is a bearish signal for the sector. The platinum-gold spread is now approaching another test of all-time lows established on October 2; it closed at a $220 spread, platinum under gold.
The action in precious metals markets continues to point to new lows however; a delayed reaction to the events in Europe could bring some fear based buying back into these markets, particularly if there are any new attacks. I would look at any price recovery as another selling opportunity for the time being as the trend and path of least resistance remains lower.
Energy- Crude oil was little changes on the week closing at $41.90 on the active month NYMEX January futures contract. Processing spreads weakened in heating oil but strengthened in gasoline. Term structure in crude oil widened with contango on the December 2015 versus December 2016 spread in WTI making a new high above the $8 level. Widening contango is yet another bearish signal for the energy commodity. Brent futures have rolled to January and the Brent premium over NYMEX crude moved marginally higher to $2.76 premium for Brent over WTI level. The move higher is likely due to fears surrounding Middle Eastern crude flows in the wake of the terrorist attack. However, the spread did move below $1.50 during the week. The trend in the spread seems to indicate that Brent will eventually return to a discount to WTI crude oil.
Natural gas made new contract lows on December futures closing at the $2.1410 level as the market prepares for winter. Inventories rose to new all-time highs at 4 trillion cubic feet. It is likely that increasing inventories have caused price weakness as we head into the winter season but inventories are at a level that is close to full capacity. Natural gas open interest continued to fall, which could be a sign that some shorts have closed positions. The contango remains high and widened by 0.3 cents over the past week with February futures trading at a 19.4 cent premium to December futures reflecting that demand will rise this winter.
Base Metals- Nonferrous metals on the LME moved lower, with the exception of lead and tin, this past week. On COMEX, the price of active month December copper futures made new multiyear lows as concerns about China and the prospects for an interest rate increase in the U.S. in December dominated trading. Copper is now just above $2 per pound, the low of the week was $2.0305 per pound. Nickel fell to twelve-year lows as demand for stainless steel in China continues to be weak.
Grains- Grains were quite this past week. Soybeans and corn moved marginally higher and CBOT wheat is testing support. Wheat closed just below the $4.90 level on the active month December futures contract.
Soft Commodities- Last week was a continuation of bullish action in the soft commodity sector. While the FCOJ futures market pulled back to the $1.50 per pound level, other soft commodities gained. Sugar moved higher on the week and closed at 15.30 cents per pound, only 23 points away from recent highs and key resistance. The March-May 2016 sugar spread, closed at a 39-point backwardation up two ticks from the prior week. This signifies the potential for a supply issue this March. Cocoa futures made new multiyear highs trading up to $3420 before closing the week at $3366 per ton. The forward curve in cocoa is moving into backwardation on supply concerns. Coffee showed some signs of life and rallied from $1.1530 to over $1.24 per pound in aftermarket trading on Friday November 20.
Animal Proteins- Meat markets were stronger as December futures are rolling to February. Cattle futures moved slightly higher on the week as did lean hog futures. 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. This spread, on December futures, closed at 2.24:1 last Friday, down on the week. The spreads in February is at the 2.26:1 level.
Recent terrorist event and the eventual response are likely to increase volatility across all asset classes. There are plenty of profitable opportunities in the weeks and months ahead in the commodity markets for those who understand these markets. The strong dollar and deviation between U.S. interest rates and others around the world will surely create volatility in all assets classes, particularly in commodities, which tend to be the most volatile of all. The majority of these opportunities will come from spread relationships. I remain bullish on the U.S. dollar and this means that I believe that commodity prices remain in a long-term bear market.
There will be no report next week. Have a happy Thanksgiving holiday.