Weekly Commodity Report

by Andrew Hecht

Report for the Opening of markets on December 7, 2015

Summary:

Last week we saw three major events that affected markets across all asset classes. On Wednesday, a tragic terrorist attack in San Bernardino, California is yet another reminder of the dangerous world in which we live. On Thursday, the ECB surprised markets by not delivering the level of stimulus expected and the U.S. dollar fell. The dollar index made a new high at 100.60 and then proceeded to fall over 2600 points on the session. The dollar put in a bearish key-reversal trading pattern on both the daily and weekly chart.

On Friday, the jobs report supplied another data point in support of an interest rate hike by the U.S. Federal Reserve later this month. OPEC met in Vienna last Friday and the result of the meeting could be a free for all of selling in oil from members. in a surprise move, OPEC adopted a “wait and see” policy in terms of the low level of oil prices while at the same time the cartel unofficially raised their production ceiling to 31.5 million barrels per day.

Highlights:

Precious Metals – Both gold and silver made new multiyear lows last week as they fell to $1045.40 and $13.805 respectively before the correction in the dollar caused a rally in both precious metals. February COMEX finished up on the week at $1085.80 level and silver moved up to $14.545 per ounce. Meanwhile, platinum group metals also moved higher on the week. Platinum fell new lows at $825 but closed the week at $880.40 per ounce. Palladium traded down to under $523 but closed the week at $566.60 per ounce.

Divergences continue in precious metals. The silver-gold ratio is around 74.4:1, which is continues to be a bearish signal for the sector. The platinum-gold spread closed at $203.50 — platinum under gold.

The action in precious metals markets will be interesting in the sessions ahead. It is possible that gold will follow through to the upside after the bullish technical action last week. Watch the inter-commodity spreads between precious metals.

If the silver-gold ration and platinum gold spread move lower, it could mean that we will see a sustained recovery rally. However, I would look at any price recovery as another selling opportunity as the fundamentals for the U.S. dollar remain bullish for the medium-term.

Energy – Crude oil closed the week below the $40 level on the active month NYMEX January futures contract at $39.97 per barrel. Processing spreads weakened slightly in heating oil but continued to strengthen in gasoline. Term structure in crude oil widened with contango on the January 2016 versus January 2017 spread in WTI making a new high at the $7.77 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 marginally higher to $3.03 premium for Brent over WTI level. The move higher is likely due to fears surrounding Middle Eastern crude flows in the wake of increasing terrorist attacks.

Crude oil fundamentals and technicals are bearish but the political premium on crude remains 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 at $2.131before recovering and closing last Friday at the $2.1840 level as the market prepares for winter. We saw the first inventory withdrawal of the season last week and stockpiles fell below 4 trillion cubic feet.

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. Natural gas open interest rose slightly which could be a sign that some shorts are returning to the market.

The contango remains high with February futures trading at a 6.1 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 two weeks, copper and zinc moved marginally lower with aluminum, nickel, lead, zinc and tin posting small gains. Most of the gains came late last week when the dollar moved lower. On COMEX, the price of active month March copper futures made new multiyear lows at $2.002 on November 23 as concerns about China and the prospects for an interest rate increase in the U.S. in December dominated trading. The dollar lifted copper to close last Friday at $2.0760 per pound. The rally in copper was tepid considering moves in precious metals and the dollar.

Grains – Grains saw volatility over the past two weeks. January soybean prices moved back above the $9 per bushel level while March corn rallied to over $3.80 per bushel. Wheat moved lower to a new low at $4.655 and then recovered to $4.845 by last Friday. Grain prices received some support from the potential for El Nino to flip to a La Nina during next year’s pollination season. La Nina has caused nasty droughts in the U.S. in the past.

Soft Commodities – Last week was a continuation of volatility and bullish action in the soft commodity sector. While the FCOJ futures market pulled back to just under the $1.40 per pound level, other soft commodities gained. Sugar moved higher over the past two weeks and closed at 15.44 cents per pound after making new highs at 15.85 on Friday. The March-May 2016 sugar spread, closed at a 44-point backwardation up five ticks from the prior week. This signifies the potential for a supply issue this March.

Cocoa futures continued to show strength closing the week at $3390 per ton. The forward curve in cocoa is moving into backwardation on supply concerns. Coffee continues to show signs of life closing at $1.2695 per pound on Friday December 4. Cotton also rallied on dollar weakness closing last week at 64.89 cents per pound, the highest level since late August.

Animal Proteins – Meat markets diverged as cattle fell and hogs moved marginally higher. 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 2.17:1 last Friday, down on the week. The spreads in February is at the 2.18:1 level — both months spreads moving lower from levels two weeks ago.

Final Comments:

Yet another terrorist event last week means it is likely that volatility across all asset classes will increase. While the correction in the dollar was bullish for commodities, the outcome of the OPEC meeting certainly yielded the opposite effect. The prospects for an interest rate hike in the U.S. continue to rise, which is historically bearish for raw material markets.

There is volatility ahead for all markets and that means there are plenty of profitable opportunities in the weeks and months ahead in the commodity markets for those who understand these markets. The volatile dollar and deviation between U.S. interest rates and others around the world will surely create a bumpy road 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, I believe the dip last week was a buying opportunity and this means that I believe that commodity prices remain in a long-term bear market.

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