By Andrew Hecht
MartinKronicle: Commodity Report
Report for the Opening of markets on December 21, 2015
Last week we saw two major events that affected markets. The U.S. Federal Reserve Open Market Committee raised interest rates for the first time in nine years and energy markets continued to plummet. The price of crude oil fell to lows of $34.29 per barrel on the soon to expire January contract. Crude oil is now approaching key support at the December 2008 lows of $32.48 per barrel. Meanwhile, natural gas traded to the lowest level in fifteen years.
Higher interest rates in the U.S. have been supportive for the dollar and a negative for equity and commodity prices on a historical level. While the Fed only raised the Fed Funds rate by 25 basis points in a move that was widely expected, the central bank said that they would be sensitive to data in 2016 but if all goes to plan we can expect 3-4 more hikes in the coming year.
Precious Metals- Gold and silver diverged on a week-on-week basis. Silver traded to the lowest level since August 2009 at $13.62 per ounce early in the week but recovered to close at the $14.08 level, 19 cents higher than the previous week’s close. February COMEX gold finished down $8.10 on the week at the $1065.60 level. Meanwhile, platinum group metals also moved lower on the week. Platinum closed the week at $859.50 per ounce up $18.70 on the week. Palladium was up $16.55 last week, closing at $558.95 per ounce.
Divergences continue in precious metals. However, the silver-gold ratio moved lower and is now at the 75.3:1. The platinum-gold spread closed at $205– platinum under gold. The changes in the spread reflect the relative strength on a week-on-week basis in industrial metals over gold.
Precious metals have been in a bear market since 2011. As we now are in the holiday season, it is likely that liquidity will decrease in these markets as the end of the year approaches.
Energy – Crude oil closed the week at $36.06 per barrel, new multiyear lows on the active month NYMEX February futures contract. Processing spreads continued to diverge with weakness in heating oil and strength in gasoline. Term structure in crude oil remained wide with contango on the February 2016 versus February 2017 spreads in WTI and Brent above the 20% level. The Brent premium over NYMEX crude moved lower to under $1 premium for Brent over WTI. 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 decade and a half lows on January futures when they traded down to lows of $1.684 last Friday. Support now stands at the 1998/1999 lows of just over $1.60 per mmbtu. Natural gas closed on December 18 at $1.765 with the market reeling from negative price action last week. Inventories reported by the EIA fell by 34 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 fell by around 28,000 contracts, which is likely a sign that shorts took profits during the deluge in prices. The contango remains high with February futures trading at a 9.6 cent premium to January futures, 3.6 cents higher than last week 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, aluminum, nickel and tin moved higher. Copper, lead and zinc posted losses. The moves in all metals were marginal. On COMEX, the price of active month March copper futures marginally lower closing at the $2.1080 per pound level last Friday.
Grains – Grains continue to be volatile. January soybean prices fell rose from the $8.70 per bushel level to around $8.92 while March corn was little changes at $3.745 per bushel. Wheat moved a touch lower on the week to settle just under $4.87 per 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 dipped by around 6 cents to the $1.44 per pound level. Sugar moved higher over the week and closed at 15.10 cents per pound, resistance is at 15.85 cents. The March-May 2016 sugar spread, closed at a 39-point backwardation up two ticks from the prior week. Cocoa futures moved lower in end of year profit taking and position squaring closing the week at $3252 per ton down $101 on the week. Coffee moved lower closing at $1.1900 per pound on Friday December 18. Cotton did not change much on the week closing at 63.69 cents per pound on the active month March futures contract.
Animal Proteins – Meat markets diverged as cattle were steady and hogs moved lower on the 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 2.22:1 level — the spread moved 0.12 higher from last week’s level.
The Fed has spoke and interest rates have moved higher. This is likely to be supportive for the dollar. The inverse relationship between the dollar and commodity prices is likely to keep pressure on the raw material asset class as we move into 2016. Meanwhile, energy prices continue to plunge and the divergence between crude oil, natural gas and the XLE is worth watching. 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.