by Andrew Hecht
MartinKronicle: Commodity Report
Report for the Opening of markets on November 2, 2015:
Summary:
Last week, the U.S. Fed announced, once again, that they would leave interest rates unchanged. This came as no surprise to the market. However, the comments from the Central Bank did provide surprise to the market as the Fed upped the stakes for a liftoff in rates in December. The Fed has been saying all year long that the Fed Funds rate will increase in 2015, now they have one meeting left to raise the short-term rate. Markets response created many divergences. Divergence among asset classes has been the hallmark of 2015.
Highlights:
Precious Metals– Both gold and silver put in bearish key-reversal trading patterns on weekly charts last week. Gold made a higher high at $1183.10 on Wednesday and closed below the previous week’s highs. Silver exhibited the same bearish trading pattern.
Inter-commodity spreads between silver and gold and platinum and gold both point to long-term divergence. This tells us that both platinum and silver are too cheap or gold is too expensive on a historical basis.
Energy- Oil recovered slightly this past week but processing spreads remain weak. Term structure in crude oil remains in contango but the level of the deferred premium has been tracking rather than leading underlying price movements. The Brent premium over NYMEX crude moved slightly lower indicating supply fears about increasing sales of Iranian crude.
Natural gas made a new low this week below the $2 level as the market prepares for winter. Inventories are now approaching the November 2012 all-time highs of 3.929 tcf. As of October 23, stockpiles of natural gas stood at 3.877 tcf according to the latest report from the EIA. It is likely that increasing inventories has caused price weakness as we head into the winter season.
Base Metals- Nonferrous metals on the LME all moved lower this past week. On COMEX, the price of active month December copper futures declined on concerns about China and the prospects for an interest rate increase in the U.S. in December. The strong dollar has caused weakness in this sector over recent sessions.
Grains- Lethargic trading in corn and soybeans continues as the harvest season is supplying the market with a third straight year of bumper crops. CBOT wheat is showing signs of strength as the market rose to the upper end of the trading range as concerns about El Nino could cause prices to move even higher in the weeks and months ahead.
Soft Commodities- El Nino related weather events in the coming months could cause increasing volatility in the sugar, coffee, cocoa, cotton and frozen concentrated orange juice markets. Perhaps the most interesting development in this sector is the change in term structure in sugar over recent months. The March 2016-May 2016 ICE sugar spread has moved from contango to backwardation over recent months. This signals tightness in the sugar market. Many soft commodities are trading a low levels compared to recent years. The action in sugar could be the first sign that this sector will become exciting in the months ahead.
Animal Proteins- Cattle futures have been strong while hog futures have shown weakness recently. 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 2.35:1 last Friday. In October, this spread moved higher before collapsing down to 1.8:1 as the contracts neared expiration.
Final Comments:
There are plenty of profitable opportunities in the weeks and months ahead in the commodity markets for those who understand these markets. The majority of these opportunities will come from spread relationships.
Andrew Hecht teaches a 12-session course on market structure and spreads in the commodity markets. You can learn more about commodity spreads, including how to research and locate these opportunities, including how to trade them and… More Info….