MartinKronicle: Commodity Report
Report for the Opening of markets on November 16, 2015
Last week, many key commodity prices continued to move lower. Precious metals, base metals, energy and many agricultural commodities moved to the downside. The only bullish action in the raw material markets was in sugar, cocoa and frozen concentrated orange juice futures. The dollar, which has been rallying since the middle of October, finished the week close to unchanged.
At the end of last week, the terrorist attack in Paris will leave traders with a new spin on markets as they return to their trading desks this week. The fear factor will certainly rise to a new level given the brutal nature of the attack that killed scores of innocent people and injured hundreds. Fear tends to breed volatility in markets and we are likely to see an increase in both in the weeks ahead as the civilized world digests and responds to the horrific events.
Precious Metals- Both gold and silver continue to display weakness. Gold made a new contract low by 70 cents as the December COMEX futures traded to lows of $1073. Continuous contract lows are at $1072.70 the July 24 lows. While gold marginally and closed the week at $1083.40, silver moved to $14.23 per ounce, just 30 cents above recent lows and key support. Meanwhile, platinum group metals moved aggressively lower last week. Platinum fell over $80 on the week to $861.40, the lowest level since December 2008. Palladium was also down over $80 on the week. It is fast approaching key support that is $20 below its current price.
Divergences continue in precious metals. The silver-gold ratio moved higher to over 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.
The action in precious metals markets continues to point to new lows however; the events in Europe last Friday could bring some fear based buying back into these markets. I would look at any price recovery as another selling opportunity for the time being.
Energy- Crude oil moved lower on the week and broke short-term support at the $42.58 level and closing at $40.74 on the active month NYMEX December futures contract. Processing spreads weakened in crude oil adding to bearish sentiment. Term structure in crude oil widened with contango moving higher in both WTI and Brent crude. 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 lower to $2.47 premium for Brent over WTI level. The move lower is the result of growing inventories. The IEA said last week that global inventories of crude oil are now around the 3 billion barrel mark.
Natural gas recovered marginally this week with December futures closing at the $2.383 level as the market prepares for winter. Inventories rose above the November 2012 all-time highs to 3.978 tcf. 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 fell a bit, which could be a sign that some shorts have closed positions. The contango remains high and widened by 0.8 cents over the past week with February futures trading at a 19.1 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 tin, this past week. On COMEX, the price of active month December copper futures made new lows concerns about China and the prospects for an interest rate increase in the U.S. in December. Copper now seems to be on a path towards $2 per pound.
Grains- The USDA issued its monthly WASDE report this week. The report confirmed a third straight year of bumper crops in grains. All major grain prices moved lower in the wake of the report.
Soft Commodities- The only bullish action in commodities was in the soft commodity sector last week. The biggest volatility last week once again came in the FCOJ futures market, which moved to highs of over $1.60 per pound on Friday before pulling back. Citrus greening in Florida is causing supply concerns and is fueling the explosive action in FCOJ futures. Sugar moved higher on the week and is only again above the 15 cent per pound level. The March-May 2016 sugar spread, which I highlighted in last week’s report, closed slightly higher at around a 37-point backwardation. This signifies the potential for a supply issue this March. Cocoa futures appreciated and they are now at the highest level since July. The forward curve in cocoa is flat nearby and in backwardation in deferred delivery months.
Animal Proteins- Meat markets continue to show signs of weakness. Cattle futures moved lower on the week and lean hog futures made another new low at 52.80 cents per pound before recovering. 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 2.385:1 last Friday, down marginally on the week.
In October, this spread moved higher before collapsing down to 1.8:1 as the contracts neared expiration.
Events in France at the end of last week will likely 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.