WCU: Energy Crisis Fuels Commodity Rally Despite Growth Concerns

The month-long run-up in commodity prices shows no sign of easing with the main engine continuing to be the global energy crisis and its direct impact on other sectors, not least the energy-intensive industrial metal sector. Shortages of fuel leading to record-high prices has forced reductions in metal production from China to Europe, thereby exacerbating price gains for several key metals, many of which are important components in the global push to decarbonize economies.

The continued rally has however by now also started to raise concerns about its impact on consumers and whether high prices eventually will dampen the prospect for demand, thereby supporting more balanced markets. Global growth is already seeing regular downgrades with rising energy prices acting as a direct tax on consumers. Adding to this are higher inflation and a slow resolution of supply bottlenecks around the world as well as the need for an even greater medical effort to combat a not yet under control virus.

In addition to the price-induced demand destruction and the impact of energy/power cost inflation on disposable incomes, a slowdown in the Chinese property market and cuts to Chinese industrial production could be forces that in our opinion may slow but not curb further commodity gains during the coming months.

Inflation remains a hot topic and following months of range-bound trading the difference between inflation protected and normal bonds has started to move higher. The so-called breakeven yield, which reflects the markets expectations for U.S. inflation over the next five years, reached 3 percent, thereby exceeding the previous high from 2005. A rise in the ten-year breakeven yield to 2.70 percent helped keep real yields suppressed around –1 percent, thereby supporting a gold market which increasingly has been competing with cryptos, not least after this week’s launch of a Bitcoin futures-linked ETF.

Industrial metals have seen the strongest gains so far this month as the global energy crunch and China’s fight against pollution has curbed production at a time where demand has yet to show signs of weakness. After hitting a record high last week, the LME Metals Index, which tracks six metals, retreated this week with Chinese efforts to curb coal prices having a negative price impact on energy-intensive metals such as aluminum and zinc. However, the main story this past week has been the copper market where a rapid reduction in available stocks at LME-monitored warehouses helped drive an unprecedented surge in the cost of metals available for immediate delivery.

While the benchmark three-month forward copper contract on Monday hit a five-month high at $10,450/ton, the spot price at one point jumped to trade at a $1,100/ton premium over. In recent weeks big orders to withdraw stocks have seen the availability of copper sink to just 14,150 tons, the lowest since 1974. At the same time, inventories monitored by the Shanghai Futures Exchange has dropped to 40,000 tons, the lowest since 2009.

Worries about Chinese growth in generally, and specifically the health of the Chinese property market, has kept copper in a relatively tight range for several months, but the recent breakout amid tightening exchange-controlled supply could see it consolidate before eventually breaking the record highs from May. In High Grade copper we see support already emerging between $4.45 and $4.52 per pound.

Precious metals

The combination of rising industrial metal prices, a softer dollar and rising inflation expectations helped lift silver to a five-week high while at the same time supporting a drop in the gold-silver ratio back below 74 from above 80 at the beginning of the month. From this we can see that gold has been dragged higher instead of leading from the front. Despite Fed officials signaling no rush for rate hikes, gold has yet to find a bid strong enough to push it through key resistance at $1835.

The dollar, which provided a great deal of headwind during September, has stopped rising and following weeks of speculative buying which lifted the dollar long against a G7 basket of IMM currency futures to a two-year high, the greenback is showing signs of reversing. If realized, the rise in breakeven yields and deeply-negative real yields should provide enough ammunition to trigger a break and with that renewed buying from technically-orientated funds.

Real money managers meanwhile continue to show limited appetite with the recent drop in stock market volatility once again reducing the short-term focus on and need for diversification. The reduced sentiment towards gold can be best measured by watching the miners versus the spot price of gold. When investors are more bullish gold, they tend to buy the miners (GDX ETF as an example) for leverage. When the opposite is true, they prefer to own physical gold or ETF’s tracking spot gold prices. The ratio is currently just 13% above the all-time bearish lows from 2015, and 87% below the all-time peak exuberance high from 2006.

Stagflation, which is defining a period of inflation combined with slowing growth, tends to support the price of gold. It is worth noting that during each of two previous periods of stagflation, gold prices went higher while the Fed Funds Rate was also rising. With monetary policy on track to be tightened, the market may eventually have to rethink the negative impact on gold that many are currently pricing in.

EU gas and power prices traded mostly sideways following the early October spike, but at five times the seasonal average gas prices are still well above levels that will cause economic hardship across the region while at the same time hurting growth as heavy energy-consuming industries scale back their production. As temperatures continue to cool across the northern hemisphere, the market remains exposed to price spikes in the event of a colder winter. A 25% tumble in coal prices following intervention from several branches of the Chinese government helped, at least temporary, to alleviate some of the fears of runaway prices.

With the power crunch in China showing signs of easing as coal powered plants are incentivized to produce more power, the prospect for more LNG shipments reaching Europe has also received some attention. Overall, however, Europe is still facing a grim winter unless high prices kill demand, the winter turns out to be mild and windy, and most importantly Russia decides to ship more gas. Unfortunately, such a decision increasingly looks like it’s being linked to a swift approval by Germany of the controversial Nord Stream 2 pipeline. With this in mind, global energy prices look set to remain elevated with gas-to-oil substitution adding an additional layer of support for several fuel products from heating oil and diesel to propane.

Crude oil’s six-week rally showed signs of running out of steam in response to lower US gas prices and the slump in coal prices. From a technical perspective, the combination of Brent and WTI crude oil both reaching overbought territory and hedge funds turning net sellers into the rally helped trigger some long overdue profit taking. According to the latest Commitments of Traders report covering the week to October 12, hedge funds cut their exposure in Brent crude oil, the global benchmark, by 10% to 300 million barrels, less than half the record 632 million barrels recorded back in 2018, the last time the price traded above $80/b.

WTI crude oil meanwhile rallied to the highest level since 2014 with stocks at Cushing, the important delivery hub for WTI crude oil futures, rapidly draining to a 2018 low and well below average levels. As a result, the futures curve has moved deeper into backwardation, a formation where market tightness drives the spot price higher than the deferred prices. An example being the $10.4/b spread between the two nearest December futures contracts, a level that was last seen in 2013.

In our Q4-2021 outlook published on October 5, we raised our target range for Brent crude oil by 10 dollars to a $75 to $85 range. Having reached the upper end of this range already, and well before winter developments and a lack of additional OPEC+ action potentially tightens the market further, the risk to our forecast remains clearly skewed to the upside. Continued selling by hedge funds, however, needs to be watched as it removes a key source of demand in the “paper” market.

Arabica coffee has settled into a range around $2/lb which is 75% above the average price seen during the previous five years. Rising global demand, a smaller Brazil harvest due to adverse weather and not least dislocated supply chains have all supported a strong recovery in recent months. Brazil’s coffee exports recorded their weakest month in September in four years as the intense battle for containers and ship capacity helped keep prices elevated while at the same time driving down stocks monitored by the ICE exchanges, especially at European warehouses as the lack of shipments forced roasters to turn elsewhere for supplies.

With global port and container congestion expected to last well into 2022, the short-term prospect for prices will once again turn to weather developments in South America. Warnings about another La Nina event like the one that hit the continent last year may provide enough support to sustain and perhaps even build on current elevated prices.

Iron Ore, which halved in value between July and September, has since managed to stabilize around $120 per tons. The short-term outlook given Chinese efforts to reduce pollution through curbing steel production and worries about the health of the property sector are likely to keep prices suppressed during the coming months. With the demand outlook challenged, the short-term outlook depends on supply discipline from the three largest producers Vale, BHP and Rio Tinto who combined control around a 60% seaborne market share. So far, they have all responded by trimming their shipment guidance, a step that should help avoid a collapse to cost price, currently somewhere in the region just below $50 per tons.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Brent and Grains Sold; Industrial-linked Metals in Demand

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

This summary highlights futures positions and changes made by hedge funds across commodities, forex and financials up until last Tuesday, October 12. A week where stocks, despite concerns about inflation and supply disruptions, traded close to unchanged ahead of the start of the US earnings season. Bond yields and the dollar both rose ahead of Wednesday’s FOMC and CPI releases, while commodities generally traded softer due to losses in natural gas and grains.

Commodities

Speculators navigating an increasingly volatile commodity sector turned net sellers for the first time in three weeks after the Bloomberg Commodity Index suffered a temporary setback after hitting a fresh multi-year high. During the week strong gains in crude oil, fuel products and industrial-linked metals were offset by heavy selling across several agriculture commodities led by grains.

Overall, the hedge funds exposure across the 24 major commodity futures markets tracked in this was reduced by 4% to 2 million lots, with the bulk of the reduction being led by the grains sector, and perhaps somewhat surprising Brent crude which saw a 10% reduction despite hitting a three-year high.

Buyers returned to under-owned copper after the price finally shrugged off China’s concerns to break higher in response to tightening market conditions. The net long jumped by one-third, but at 35.5k lots it remains well below the 91.6k lots peak reached one year ago.

In grains, renewed selling of the three major crops reduced the net long to a 13-month low while softs were mixed, with profit taking reducing a very elevated cotton long, while a 11% price surge helped drive the coffee long to a five-year high.

Forex

The aggregate dollar long against ten IMM currency futures and the Dollar Index remained unchanged at $25.5 billion, the highest since June 2019, with most of action seen in JPY where a 1.9% price drop in USDJPY helped drive a 20% increase in the net short to 76.6k lots or $8.4 billion equivalent. Despite trading weaker on the week some short-covering emerged in EUR (3.9k), CHF (2.7k), GBP (8k).

Some focus on the AUD where a small amount of short covering still left the net short near a record high at 87.6k lots or $6.4 billion equivalent. Surging commodity prices and the re-opening of the economy following lockdowns saw price end the week at the highest level in six weeks.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

  • Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other
  • Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other
  • Forex: A broad breakdown between commercial and non-commercial (speculators)

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged
  • This makes them most reactive to changes in fundamental or technical price developments
  • It provides views about major trends but also helps to decipher when a reversal is looming

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

World Food Prices Climb for Second Month in September -FAO

The Rome-based Food and Agriculture Organization (FAO) also raised slightly its projection of global cereal production in 2021, to 2.800 billion tonnes from 2.788 billion tonnes estimated a month ago.

FAO’s food price index, which tracks international prices of the most globally traded food commodities, averaged 130.0 points last month compared with a revised 128.5 for August.

The August figure was previously given as 127.4.

On a year-on-year basis, prices were up 32.8% in September.

Agricultural commodity prices have risen steeply in the past year, fuelled by harvest setbacks and Chinese-fuelled demand.

For cereal production, FAO said its 2021 projection represented a record crop but was nonetheless below expected global demand, leading to a fall in forecast cereal stocks.

For a look at all of today’s economic events, check out our economic calendar.

(Reporting by Gus Trompiz;Editing by Elaine Hardcastle)

World Food Prices Jump in Aug, Cereal Harvest Outlook Cut – FAO

The Rome-based Food and Agriculture Organization (FAO) also said in a statement that worldwide cereal harvests would come in at nearly 2.788 billion tonnes in 2021, down on its previous estimate of 2.817 billion tonnes but still up on 2020 levels.

FAO’s food price index, which tracks international prices of the most globally traded food commodities, averaged 127.4 points last month compared with 123.5 in July.

The July figure was previously given as 123.0.

On a year-on-year basis, prices were up 32.9% in August.

FAO’s cereal price index was 3.4% higher in August from the previous month, with lower harvest expectations in several major exporting countries shunting up world wheat prices by 8.8% month-on-month, while barely surged 9.0%.

By contrast, maize and international rice prices declined.

FAO’s sugar index rose 9.6% percent from July, pushed up by concerns over frost damage to crops in Brazil, the world’s largest sugar exporter. Good production prospects in India and the European Union helped mitigate these concerns to a degree. Vegetable oil prices rose 6.7%, with palm oil prices hitting historic highs due to continued concerns over production levels and resulting inventory drawdowns in Malaysia. Quotations for rapeseed oil and sunflower oil also rose.

Meat prices edged up slightly in August, as strong purchases from China supported ovine and bovine meat prices and solid import demand from East Asia and the Middle East lifted poultry prices, FAO said.

The dairy price index edged slightly lower on the month.

FAO said the fall in its estimate for world cereal production this year was triggered by persistent drought conditions in several major producing countries.

Among the major cereals, the forecast for wheat production saw the biggest downward revision — down 15.2 million tonnes since July to 769.5 million tonnes — due mainly to adverse weather conditions in the United States, Canada, Kazakhstan and Russia.

The forecast for world cereal utilization in 2021/22 was cut by 1.7 million tonnes from July to 2.809 billion tonnes, still 1.4% higher than in 2020/21.

The estimate for world cereal stocks by the close of seasons in 2021/22 was lowered by 27.0 million tonnes since July to 809 million tonnes, pointing to a decline of 0.9% on stock levels registered at the start of the period, FAO said.

For a look at all of today’s economic events, check out our economic calendar.

(Editing by Crispian Balmer)

Coffee Futures Surge Due to Brazil Frosts

The pandemic’s impact on the availability of soft commodities like coffee and sugar has been real, with both soft commodities trading at multi-year highs. However, growing seasons marred by adverse conditions are worsening global supply, leading to further surges in prices.

Coffee Prices at 7-Year Highs

On the week of July 19, coffee futures soared by 20% as unseasonally cold weather in Brazil threatened the coffee crops of the world’s largest producer. By market open on Monday, July 26th, they had risen by a further 10%. This has taken coffee prices up to their highest levels since October 2014.

It started with a shortage of shipping containers earlier in the year, which gave commodities across the board a boost due to difficulties in ramping up global transportation following the lockdowns. Then, seriously dry conditions in May followed by frosty conditions in the crop’s flowering period in July, have severely stressed the country’s coffee crop. The extent of the damage has yet to be fully determined. The country’s food supply agency has estimated that around 11% of Brazil’s coffee crops have been affected by frost.

On and Off Years

Coffee plants follow a biennial crop cycle, characterised by “on” and “off” years. 2022 was due to be an “on-year” for coffee producers, an opportunity to build waning stockpiles with a bumper crop. The combination of drought and crop stress makes it highly unlikely that Brazilian producers will now have the opportunity of an on-year to rebuild stocks. This almost guarantees higher coffee prices for consumers and is also likely to affect smaller coffee businesses that don’t have the same purchasing power as the large coffee chains.

Price Action

Looking at coffee futures plotted on a monthly chart reveals the true extent of the move. Coffee futures have broken through a price level at $1.75 per pound that offered resistance back in both 2008 and 2016.

In the past decade, coffee prices have only peaked higher on two occasions. An extremely wet December at the close of 2013 was followed by Brazil’s worst drought in decades, which damaged coffee plants and led to a 5.4% downturn in production. The even more significant peak in 2011 has been attributed to a combination of factors. Poor harvests, investors trying to get ahead of price inflation following central bank responses to the 2008 financial crisis (recall that gold’s former all-time high was also in 2011), and surging global appetites for gourmet coffee have all been used to explain the surge.

At HYCM, we recently focused on coffee and sugar prices as evidence of the inflationary pressures mounting following the global response to COVID-19. Even before this recent move, the charts were suggesting a bull market that had no intentions of ending any time soon. This most recent rally has effectively set the first monthly higher-high we’ve seen in the agricultural commodity in 5 years.

Going Back Further

If you look back even further into the historical price action of coffee, you’ll notice that it’s an extremely volatile commodity that’s highly sensitive to growing conditions and consumer demand. The chart below tracks monthly coffee prices going all the way back to the 1970s. As you can see, while coffee has experienced supply/demand shocks in the mid-80s and mid-to-late-90s, the 2011 monthly close is only bested by the all-time high the commodity reached in 1977.

Back then, a severe frost in July 1975 destroyed two-thirds of the Brazilian crop. With replanted crops taking up to three years to return to full yield, you can understand why the global coffee market was so severely affected. A civil war in Angola, the fourth largest coffee producer at the time, also had the effect of removing a significant amount of the commodity from global markets.

However, when you look at the macro conditions back then, low growth and rising inflation (or stagflation as the combination was termed), you can see why a supply shock in a commodity known for being highly sensitive to weather conditions can get so out of hand.

The reason to look as far back as the 1970s is that many analysts and market commentators weighing in on the current inflation vs deflation debate see a return to 1970s style stagflation as a possibility. The expectation is that as growth slows when the effect of stimulus on economic activity wanes, we’ll be left with the result of all the monetary expansion, which is higher prices as more money competes for scarce assets.

Final Thoughts

Obviously, we could see a rapid mean reversion in coffee prices as we saw earlier this year with lumber. Also, keep in mind that as appetites for the commodity have grown globally, so has the efficiency of production and distribution. But when you compare the current coffee price peak with the ones that came before, it seems as though we’re comparing prior crises that are now in the history books (stagflation and the GFC) with one that has yet to fully play out. As to how far this rally still has to go, it depends on whether current inflationary pressures are enough to make this recent hit to the global supply the perfect storm.

by Giles Coghlan, Chief Currency Analyst, HYCM

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World Food Prices Fall in June for First Time in a Year – FAO

The Rome-based FAO also said in a statement that worldwide cereal harvests would come in at nearly 2.817 billion tonnes in 2021, slightly down on its previous estimate, but still on course to hit an annual record.

The Food and Agriculture Organization’s food price index, which measures monthly changes for a basket of cereals, oilseeds, dairy products, meat and sugar, averaged 124.6 points last month versus a revised 127.8 in May.

The May figure was previously given as 127.1.

On a year-on-year basis, prices were up 33.9% in June.

FAO’s vegetable oil price index plunged 9.8% in June, partly on the back of a fall in palm oil prices, which were hit by expectations of output gains in leading producers and a lack of fresh import demand. Soy and sunflower oil quotations also dropped.

The cereal price index dropped 2.6% in June month-on-month, but was still up 33.8% year-on-year. Maize prices fell 5.0%, partly because of higher-than-expected yields in Argentina and improved crop conditions in the United States.

International rice prices also fell in June, touching 15-month lows, as high freight costs and container shortages continued to limit export sales, FAO said.

Dairy prices dipped 1.0% on a monthly basis, with all components of the index easing. Butter recorded the largest drop, hit by a rapid decline in global import demand and a slight increase in inventories, especially in Europe.

The sugar index posted a 0.9% month-on-month gain, reaching its highest level since March 2017. FAO said uncertainties over the impact of unfavourable weather conditions on crop yields in Brazil, the world’s largest sugar exporter, pushed prices up.

The meat index rose 2.1% from May, with quotations for all meat types rising as increases in imports by some East Asian countries compensated for a slowdown in China’s meat purchases.

FAO said the slight fall in its estimate for world cereal production this year was principally triggered by a sharp cut to the Brazilian maize production forecast as prolonged periods of dry weather weighed on yield expectations.

Global wheat production prospects also retreated this month, as dry weather in the Near East hurt yield prospects there. By contrast, the forecast for global rice output in 2021 edged up.

The forecast for world cereal utilization in 2021/22 was cut by 15 million tonnes from the previous month to 2.810 billion tonnes, still 1.5% higher than in 2020/21.

World cereal stocks by the close of seasons in 2021/22 are now expected to rise above their opening levels for the first time since 2017/18. “Higher maize stocks foreseen in China account for the bulk of this month’s upward revision to world cereal inventories,” FAO said.

For a look at all of today’s economic events, check out our economic calendar.

(Editing by Crispian Balmer)

 

Speculators Keep Piling Into Agriculture Commodities

Saxo Bank publishes weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The below summary highlights futures positions and changes made by hedge funds across commodities, forex, bonds and stock indices up until last Tuesday, April 27. A week where U.S. index futures resumed their ascent, the dollar continued lower while US Treasury yields ticked higher, while staying within their established ranges. Commodities surged higher led by very strong gains in grains and soft commodities.

Commodities

Money managers increased bullish commodities bets with the total net long across 24 major commodity futures rising by 4% to 2.5 million lots, representing a nominal value of $137 billion. This in response to a 3.6% rise in the Bloomberg Commodity index to a fresh ten year high. The bulk of the increase was concentrated in grains and soft commodities which rallied by 8.6% and 7.3% respectively. The biggest individual position increases was seen in sugar, coffee, wheat, gas, oil and copper.

Energy

The combined net long in crude oil reached a six-week high at 677k, with the increase being led by WTI while speculators kept an almost unchanged position in Brent, primarily due to an increased amount of naked short selling. The biggest change was seen in gas oil where the net long came close to a one-year high.

Latest: Crude oil futures trade lower for a second day with the uneven demand recovery creating a somewhat challenging outlook. In India, April gasoline demand fell to the lowest level since August and increased curbs on mobility may trigger further declines into May. This at a time when higher fuel consumption is being recorded in the U.S., China and the U.K. and OPEC+ during the next three months begins to add barrels back into the market. The outlook is further being clouded by uncertainty about U.S. production growth and Iran nuclear negotiations where a deal could trigger rising production. For now, Brent crude oil trades within an ascending channel, currently between $64 and $69.

Metals

A relatively quiet week in precious metals with gold’s failure to build on the recent break above $1765 attracting fresh short selling resulting in the bulk of the 6k reduction in the net long being driven by new short positions. Silver length increased by 8% and platinum by 25% on tailwinds from surging industrial metals. The 6.3% rally in HG copper helped attract new longs with the net rising by 23% to 55.5k lots, still well below the December peak at 91.5k lots and the 2017 record at 125k lots.

Latest: Gold (XAUUSD) and silver (XAGUSD) continue to frustrate bulls and bears alike given their inability to break current ranges. Both trading higher today after surviving another downside attempt on Friday when the dollar suddenly jumped. US Treasury yields continue to trade range bound with rising breakeven (inflation expectations) being offset by lower real yields. Speculators cut length in COMEX futures last week while ETF holdings remain stuck near a one-year low. Current range in gold being $1755 to $1800.

Agriculture

Most of the speculative buying last week was concentrated in the agriculture sector (ex. livestock) with most grains and softs contracts seeing strong gains. Most noticeable being the strong gains in corn, wheat, sugar and coffee with dry weather in South America and the U.S. plains hurting the production prospects. The combined long in corn, soybeans and wheat reached a fresh record and with the latter well below previous peak positions, further length could be added over the coming weeks. In softs, the coffee long almost doubled while the sugar long jumped by 15% to 258k lots, the third highest exposure on record.

Latest: The Bloomberg Grains Spot index, already at an 8 year high continues higher today led by corn (CORNJUL21) and (WHEATJUL21). In corn, the spread between the July (old crop) and December (new crop) contracts has widened to 115 cents per bushel, and it highlights the current stress in the spot market as a powerful La Nina disrupts harvests in Brazil with dry weather cutting the production outlook by 8% to 104m tons. Adding to the current unease has been record Chinese imports while US planting progress and weather developments will be watched for clues as to the direction of the new crop contracts, such as December. Weekly U.S. planting progress data due later at 20:00 GMT

Forex

Broad speculative dollar selling lifted the net short against ten IMM currency futures and the Dollar Index by 30% to $10.3 billion, a six week high. The dollar was sold against all the major currencies with the bulk of the change being led by short-covering in Japanese yen where 11k lots ($1,3 bn equivalent) was bought.

What is the Commitments of Traders report?

The COT reports are issued by the U.S. Commodity Futures Trading Commission (CFTC) and the ICE Exchange Europe for Brent crude oil and gas oil. They are released every Friday after the U.S. close with data from the week ending the previous Tuesday. They break down the open interest in futures markets into different groups of users depending on the asset class.

Commodities: Producer/Merchant/Processor/User, Swap dealers, Managed Money and other.

Financials: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds and other.

Forex: A broad breakdown between commercial and non-commercial (speculators).

The reasons why we focus primarily on the behavior of the highlighted groups are:

  • They are likely to have tight stops and no underlying exposure that is being hedged.
  • This makes them most reactive to changes in fundamental or technical price developments.
  • It provides views about major trends but also helps to decipher when a reversal is looming.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

Start trading now

This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

WTI and Copper Bought, Gold sold as Risk on Reigns

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

The below summary highlights futures positions and changes made by hedge funds across 24 major commodity futures up until last Tuesday, June 2. A week where appetite for risk driven by stock market euphoria leading to hopes of a V-shaped recovery continued to be the dominant force.

The Bloomberg Commodity Index rose 0.7% with gains in energy, metals and grains being off-set by losses in softs and livestock. Speculators only made small changes to their positions with the net-long across 24 major commodity futures increasing by 2% to 545k lots. Buying of WTI crude oil, gas oil, copper and cotton being off-set by selling of gold, soybeans, corn and coffee.

Energy

Buying of WTI crude oil extended into a 9th week with funds adding 17k lots to bring the net-long to 380k lots or 380 million barrels, the highest since July 2018. Short sellers added small length for a second week thereby keeping the long/short ratio steady. The Brent crude oil net-long saw a small reduction as short-sellers added length for the first time since March. Despite dropping by almost 9% the natural gas long was kept close to unchanged with both long and short positions rising.

OPEC and its oil-producing allies agreed on Saturday to extend the group’s historic 9.7 million barrels/day production cut by one month to the end of July. As we highlighted in our latest update the risk of failure, despite concerns about non-compliance from a handful of producers, was limited given the need to support the price while lockdowns are eased and demand recover. A recovery that potentially risks being slower than the market expects due to the risk of second waves.

According to the latest weekly EIA report, demand for distillates in the US, which is mainly diesel, hit a 1999 low some 30% below the five-year average. Gasoline demand meanwhile has recovered but was 1.9 million barrels/day or 25% below the average for this time of year. With the deal having been all but priced in ahead of the meetings the risk to crude oil remains balanced. Speculative momentum may see both WTI and Brent take aim at closing the gaps to $41.05/b and $45.18/b respectively.

However much higher prices at this early stage in the recovery carries the risk of becoming self defeating as it invites back increased production from high cost producers, not least along the US shale patch. The market may soon also begin to focus on rising production after July from core OPEC members while Libya is showing signs of returning production.

Metals

The lack of short-term tactical opportunities together with the rising risk appetite seen across other asset classes, continued to cut interest in gold. Last week speculators cut bullish bets on COMEX gold futures by 8% to 137k lots, a one-year low. This during a time where demand for gold via bullion backed exchange-traded funds registered a new record with total holdings rising above 100 million ounces. Part of this development may be a product specific challenge that the futures contract currently faces.

The transatlantic disconnect that occurred between gold futures traded in New York and spot gold traded in London back in March left many market makers with heavy losses. This after the spot to futures spread, the so-called Exchange for physical or ETF, blew out thereby forcing cut backs and reduced risk appetite among market makers normally assuring a well functioning market place. These developments are likely to have led to some investors and traders instead focusing on bullion-backed ETFs.

The silver net-long held steady at 27k lots with the near 4% rally failing to attract fresh long positions. Potentially due to the fact that silver’s recent outperformance against gold reached its target as highlighted through the gold-silver ratio. Additional gains in silver may now require support from gold which struggled towards the end of week when a stronger than expected US job report sent real yields higher and gold lower.

HG Coppers continued recovery and flirtation with key resistance at $2.50/lb – that got broken on Thursday – finally saw the net switch to a long position for the first time since January. Dictated by the mentioned breakout funds are likely to add additional speculative length with the price now potentially taking aim at $2.60/lb.

Agriculture

The UN FAO’s Global Food Price Index reached the lowest monthly average since December 2018 last month. Covid19-related declines extended to a fourth month with all sub-indices with the exception of sugar seeing declines. A development which is also being replicated by the speculative exposure with hedge funds holding net-short positions in seven out of the ten grains and softs contracts tracked in this report.

Selling of corn continued with the net reaching a one-year high at 282k lots. This despite signs of a recovering price in response to increased ethanol-linked demand, The rising fuel cost theme also supported another week of short-covering in sugar. Hardest hit was Arabica coffee after the recent technical break below key support wiped out the remaining long with a net-short of 7k lots emerging.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Commodity Weekly: Crude Oil Frets Geopolitics, Sluggish Demand Bounce

The energy sector gave back some of their record monthly gains, industrial metals paused while precious metals rose on increased geopolitical concerns, a weaker dollar and lower bond yields.

Commodities trading was mixed during the final week of May. A month that turned out to be the come-back month for many markets following the Covid-19 related collapse seen during Q1. The continued easing of lockdowns around the world have, despite dismal economic data, raised hopes that a V-shaped recovery may occur over the coming months.

This is optimism we unfortunately do not share – with millions of workers unlikely to return to work, together with the risk of the virus re-emerging as some economies attempt to open-up too soon.

The Bloomberg Commodity Index traded lower, with the energy sector giving back some of their record gains seen after the April collapse. Industrial metals also traded softer on rising US-China tensions despite the National People’s Congress introducing new stimulus measures. A challenge to precious metals was quickly reversed with both gold and not least silver continuing to attract demand amid a weaker dollar, lower real yields and friction between the world’s two biggest economies.

Bloomberg ci sector

While silver continued to claw back some of its substantial March losses, gold’s resilience was tested once again this past week. The lack of follow-through momentum from the recent breakout to $1765 had left the market nervous and it culminated when the spot price briefly broke below $1700/oz this past week. However, just like the break to the upside failed to attract fresh buying, the break below support was not met by fresh selling.

Instead, support was quickly reestablished as the dollar and bond yields moved lower on increased US-China tensions. Investors continue to view the yellow metal, and recently also silver, as the go-to metals for protection.

While hedge funds, which often trade on the back of a short-term technical price developments, have been rather quiet in recent months, the demand for ETF’s backed by bullion has continued to go from strength to strength. Global holdings in gold-backed ETF’s have risen non-stop for the past six months with assets at a record level above 3,100 tons.

The same goes for silver which, despite its March slump, has seen total holdings rise strongly to reach fresh records on an almost daily basis during the past couple of months.

Having rallied by 50% since that March low at $11.65/oz, the metal has also managed to claw back some ground against gold. The gold-silver ratio, which expresses the value of one ounce of gold in ounces of silver, has recovered from the record 125 level reached in March to the current 98, still well above the five-year average close to 80.

We maintain our bullish outlook for both metals, not least gold now that its premium to silver has narrowed. The main reasons why we cannot rule out reaching a fresh record high over the coming years are:

Gold acts as a hedge against Central Bank monetization of the financial markets
Unprecedented government stimulus and political need for higher inflation to support debt levels.

The inevitable introduction of yield controls in the US forcing real yields lower
A rising global savings glut at a time of negative real interest rates and unsustainably high stock market valuation. Raised geo-political tensions as the Covid-19 blame game begins Rising inflation and a weaker US dollar.

The crude oil rally that emerged following the sub-zero collapse on April 20 is showing the first signs of pausing. This after the WTI futures contract hit $35 resistance and Brent failed to challenge $37.2/b, both levels being the 38.2% retracement of the January to April sell-off. The brief collapse into negative territory last month on the expiring May WTI contract probably was the single biggest contributor to support the strong rally that followed.

The event on April 20 sent a shockwave through the global oil market with producers realizing that something dramatic had to be done in order to rescue the market from even more pain. This probably led to the very strong and rapid compliance that major producers have been exhibiting during May.

In their latest monthly Oil Market Report the International Energy Agency saw global supply drop by 12 million barrels/day in May to reach a nine-year low at 88 million. Demand meanwhile was expected to recover from being down 22 million barrels/day year-on-year in May to down 13 million in June.

Supporting the process has been the rapid and in most cases involuntary reduction in US shale oil production, now estimated by the IEA to reach 2.8 million barrels/day year-on-year in 2020. Previous production cuts by OPEC+ always attracted some level of hesitancy as members of the group risked yielding further market share to producers in North America. That risk evaporated with the slump in WTI as it left many producers out of pocket, thereby forcing them to halt production.

Having potentially reached the consolidation phase, it is worth considering what could trigger renewed weakness. There are several risks with the most relevant being:

Easing lockdowns sparking a resurgence of Covid-19 outbreaks. Whether OPEC+ can maintain the current high level of compliance. Cash strapped US producers desperate to increase production with WTI back above $30/b.
Post-pandemic changes in global consumer habits (less flying and more working from home). A break above $35/b on the July WTI futures contract could signal a potential extension towards $40/b while support should emerge at $30/b. Only a break below $28/b would raise concerns of a deeper correction.

Apart from the risk of a new trade war between the US and China, as well as a weaker-than-expected demand recovery, the oil market focus in early June will once again turn to Vienna where OPEC and the OPEC+ group convene to discuss a path forward. Some concerns that Russia may struggle to commit to current cuts beyond July may once again create some nervousness prior to the June 8 to 10 meetings. This on the grounds that the recovery in crude oil prices so far has primarily been driven by supply cuts, that can easily be reversed, and not yet a solid recovery in demand.Crude Brent Oil

HG crude oil increasingly, just like crude oil, looks like it needs a period of consolidation. Having almost retraced most of its Covid-19 related sell-off in March, the metal is likely to struggle in its attempt to break back above $2.50/lb, a level which provided support but now resistance, since 2017. The National People’s Congress in China, which has just finished, offered fresh stimulus measures that will increase demand for raw materials in key sectors such as construction and transport.

Overall, however, it was not the fiscal bazooka the market has seen during previous downturns. While perhaps stabilizing the outlook it is unlikely to drive a recovery in growth back to the 6% level. For now, traders are holding onto the prospects for a global economic rebound outweighing increased tensions between the US and China.

Corn, a recent favorite short-sell among hedge funds, was heading for its biggest weekly gain since last October. The recent recovery in crude oil has led to increased demand from ethanol producers who normally consumer close to 40% of the US corn production.

Together with the potential short-term threat of hot and dry weather across the US Midwest, the price has moved higher and it now looks like a floor has been established at the key $3/bushel level. Speculators held a net-short of 245,000 lots (31 million tons) in the week to May 19 and continued short-covering could see the contract challenge an area of resistance above $3.40/bushel. Wheat is also finding a weather-related bid while soybeans remain troubled by US-China tensions hurting the prospect for Chinese demand.

crude oil Covid-19 related rollercoaster has gone full circle. After rallying by 25% during March on worries supply from South America would be disrupted the price has since collapse once again.

The prolonged shutdowns around the world have since reduced demand for quality beans from coffee shops and cafés. This week the price broke support and dropped back below $1/lb and well below the current cost of production for many farmers across South America. Something that may get addressed when the International Coffee Organization hold a virtual meeting of its International Coffee Council from June 1.

For a look at all of today’s economic events, check out our economic calendar.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

COT: Iran Tensions Lift Gold and Oil Longs

Saxo Bank publishes two weekly Commitment of Traders reports (COT) covering leveraged fund positions in commodities, bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

Read the COT Report

Strong and broad-based speculative buying ahead of yearend turned more selective during the first week of the year. The combined net-long across 24 major commodity futures was left unchanged close to an 18-month high. While buying of crude oil, gold, platinum and soybeans continued speculators sold most other contracts. Most noticeable natural gas which hit a record short as the price hit a record seasonal low. HG Copper was knocked back to neutral as the US-China deal rally ran out of steam.

Crude oil was left vulnerable to profit-taking following the US-Iran pump and subsequent dump when the focus turned to de-escalation. The combined net-long in Brent (+15k) and WTI (+5k) reached 714k lots, a 15-month high, following the US killing of a top Iranian general. The near 50% increase in net-longs following the December 6 OPEC+ decision to lower production left many recently established longs under water as the price dropped 11% from its Wednesday peak.

Hedge funds increasing bullish gold (+9k) bets to the highest since September got handsomely rewarded when the metal briefly spiked above $1600/oz last Wednesday. The subsequent $70 correction briefly challenged the bullish sentiment before the risk of another geopolitical flareup and a weaker than expected US job report ensured a weekly close above $1555/oz, the September high.

Platinum reached a fresh record long at 49k lots despite being rejected at $1000/oz, the September high, a failure which subsequent left it exposed to profit taking. Copper was knocked back to neutral as the US-China deal rally ran out of steam. The metal has traded in an uptrend since October with tight supply and lack of supply growth providing the underlying support.

In softs both sugar and coffee was sold with the latter retracing 50% of the October to December price surge as exchange-monitored warehouse supplies jumped.

What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behaviour of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

They are likely to have tight stops and no underlying exposure that is being hedged. This makes them most reactive to changes in fundamental or technical price developments. It provides views about major trends but also helps to decipher when a reversal is looming.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Commodity Weekly: Volatile Start to 2020

The first full week of trading turned out to be much more volatile than normal as geopolitical tensions ebbed and flowed. The year had barely begun before the US assassination of General Soleimani near Baghdad airport triggered fears of an imminent escalation of the conflict between the U.S. and Iran.

Crude oil and gold both spiked before crashing after both sides stepped back from further military action. Brent crude oil traded within a 10% range before finishing 5% lower to record its first weekly loss in six. WTI finished even lower following a bearish U.S. inventory report which saw stocks rise in both crude oil and products.

Gold, the safe-haven metal, spiked above $1600/oz for the first time since 2013 only to be slapped straight back to unchanged on the week. From a technical perspective, this development left a signal on the weekly chart which for some could be interpreted as a key reversal. While it is clear that gold needs more than geopolitical uncertainty to continue moving higher in 2020, we see the fundamental outlook providing enough support to offset any short-term technical weakness.

Source: Bloomberg, Saxo Bank

 

Global commodities could, as the first few weeks highlight, face a potentially volatile 2020 given the combination of ongoing geopolitical tensions, climate change and inflationary pressures. While global growth and resulting demand for key cyclical commodities remains stable, we see the supply side facing several challenges due to social unrest and climate change.Climate change will be the key focus in our Q1 Outlook due to be published on January 23. For commodities, we see these challenges manifest themselves through increased weather volatility leading to intense droughts, floods, heatwaves and wildfires leading to an increase in the rate of soil loss and land degradation.

Led by vegetable oils, meat and dairy global food prices have shown a steady rise during the past year. The UN FAO’s World Food Price Index which tracks 73 food commodities across five major groups, has risen 12.5% during the past year to reach a five-year high.

Source: UN FAO, Bloomberg and Saxo Bank

U.S. priced natural gas recovered after reaching $2.08/therm, a record low for this time of year and due to unusually mild weather hurting demand at a time of strong production. It nevertheless managed to stay supported despite the smallest weekly storage draw in 11 years.

It is not too late for a late winter scare to support the price, especially considering the combination of the mentioned low price level and speculators holding a record short position.

Arabica coffee also showed signs of finding support after retracing half of its dramatic 55% rally witnessed between October and December last year. The rally back then has led to a sudden,  surprise jump in exchange-certified stockpiles thereby removing the support which led to the strong rally.

The outlook for 2020 remains supportive with a global deficit expected to underpin the price. But for now, the market is once again under pressure from short-sellers who, due to the forward price curve structure, can pick up a 1-year carry on holding a short futures position of more than 10%.

Crude oil’s month long rally came to an abrupt end this week. The slump that followed US-Iran spike above $70/b on Brent crude oil, the global benchmark, was in our opinion driven by several factors. In the run up to the November U.S. election the appetite for another costly and most likely non-winnable Middle East war seems low. Not least considering the potential damage it would inflict on Trump voters through higher gasoline prices and falling stock markets.

Source: Saxo Bank

Saudi Arabia and its GCC friends have and will undoubtedly continue to apply a lot of pressure on the U.S. in order to avoid an escalation which would hurt economic growth and sentiment across the region. Not least the UAE, which is currently preparing to host Expo Dubai 2020 from October to April next year. It is expected to attract more than 25 million visitors from over 192 countries.

Crude oil is currently being held down by rising non-OPEC production led by the U.S and a potential disruption to supply could be mitigated by the release of strategic reserves held by the U.S., China, Saudi Arabia and IEA member countries.

Most of the Middle Eastern oil travels east not west with China being the biggest buyer. Iran, hit by sanctions, receives most of its oil revenue from China and any obstruction or risk to the safe passage from the Arabian Gulf would hurt them as well.

Finally, speculative buying of Brent and WTI crude oil since the OPEC+ meeting on December 6 reached 213 million barrels in the week to December 31. The sharp sell-off, once tensions eased, probably got exaggerated by the need from those holding loss making positions to reduce.

Having surrendered half the October-to-January gains, crude oil is likely to settle into a range with Brent crude oil, given the risk of another flareup, likely to find support between $64/b and $62/b. During Q4 we focused on a $60/b to $65/b range but following the agreement and adaption of further OPEC+ reductions, we raised that range by three dollars.

Providing the geopolitical stage stays quiet, the short-term market direction is likely to be determined by the weekly U.S. stock reports, economic leading indicators, U.S. – China trade news and monthly oil market reports from EIA, OPEC and IEA, with the next all due between January 14 and 16.

After racing higher this past week, and almost reaching our 2020 target at $1625/oz in three days, gold may now spend most of the first quarter consolidating. From a technical perspective preferably above $1510/oz and no lower than $1450/oz, before eventually moving higher later in the year. The short-term consolidation risks also takes into consideration the near record level of long hedge fund positions, which in the short-term could act as a drag on the price through long liquidation.

Geopolitical events such as the early January US-Iran standoff has supported gold but only for relatively short period of time. Apart from the underlying support from money managers using gold as a portfolio insurance the yellow metal need support from some of our 2020 expectations in order to climb further. They are: Federal Reserve cutting rates by more than expected, rising inflation concerns through higher input costs from energy and food, continued central bank buying (de-dollarization), a weaker dollar and not least multiple event risks culminating in the November US Presidential election.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

Stay Long Coffee

The trading session continuing its bullish momentum as this market looks to head higher in my opinion as the volatility should increase tremendously in the coming weeks ahead.

As I have talked about in previous blogs I am currently not involved, however I certainly believe that higher Coffee prices are ahead as the drought in the country of Brazil which is the largest producer in the world continues to accelerate as I think the next level is 150 which could happen in the next couple of days as the volatility looks to explode to the upside in my opinion.

If you are long a futures contract I would continue to place the stop loss under the 10-day low as an exit strategy which currently stands at 117.95 as the chart structure will start to improve on a daily basis, therefore, lowering the monetary risk.

The Brazilian Real hit a 1 month high against the U.S dollar as that is also a supportive fundamental factor, but weather conditions in the country of Brazil is the main factor to dictate short-term price action as this looks like the situation that occurred in 2014 when prices almost doubled in a matter of weeks could be happening again so stay long as I see no reason to be short.

TREND: HIGHER 

CHART STRUCTURE: IMPROVING

VOLATILITY: HIGH

This article was written by Michael Seery (CTA—COMMODITY TRADING ADVISOR)  www.seeryfutures.com

Coffee Prices Hit A 2 Year High

At the current time as I have talked about in many previous blogs I am not involved, but I do think higher prices are ahead as I am certainly not recommending any type of bearish position and if you are in a long futures contract I would continue to place the stop loss under the 10-day low.

Which now stands at 115.50 as an exit strategy as the chart structure will improve on a daily basis therefore the monetary risk will be reduced substantially in the coming days ahead.

As I have written about in previous blogs I want you to take a look at the 2014 chart as coffee prices exploded in the month of January due to a drought occurring in the country of Brazil and if that situation develops once again you will see higher prices develop quickly as the volatility certainly has expanded to the upside so stay long as there could be significant room to run.

TREND: HIGHER 

CHART STRUCTURE: IMPROVING

VOLATILITY: INCREASING

This article was written by Michael Seery (CTA—COMMODITY TRADING ADVISOR)  www.seeryfutures.com

Soybeans Higher 3rd Day In A Row, Coffee Prices Hit New Highs

Soybean Futures—Soybean futures in the January contract is trading higher for the 3rd consecutive session up another $0.04 at 8.82 a bushel bouncing off of major support rallying in my opinion on oversold conditions as prices have fallen out of bed over the last couple of weeks. Optimism about a possible Chinese trade agreement has sent prices up in the last several days, however I still remain bearish as prices are still trading under their 20 & 100 day moving average is the trend remains to the downside.

I have been recommending a bearish position from around the 9.23 level over the last several weeks and if you took that trade the stop loss has now been lowered to 9.09 & in tomorrow’s trade will be lowered once again to 9.04 as the chart structure will continue to improve on a daily basis therefor the monetary risk also be reduced.

This is my only grain recommendation as I’m keeping a close eye on a possible bullish position in corn so continue to place the proper stop loss as the grain market is sitting in limbo until some type of agreement with China comes about as we will have more clarity on that situation come December 15th.

TREND: LOWER 

CHART STRUCTURE: EXCELLENT

VOLATILITY: LOW

Coffee Futures—Coffee futures in the March contract continues its bullish momentum to the upside up another 325 points at 124.50 a pound hitting a 12-month high as this is the strongest soft commodity at the current time.

Presently I am not involved, however I’m certainly not recommending any type of bearish position as that would be counter-trend trading and if you are long a futures contract place the stop loss under the 10-day low which stands at 114.15 as an exit strategy, however the chart structure will start to improve on a daily basis therefor the monetary risk will be reduced.

Coffee prices are trading far above their 20 and 100 day moving average as this trend is strong to the upside as fundamentally speaking a supportive factor for arabica coffee Coex Coffee International on Wednesday said that Brazil’s coffee crop will be closer to 54-55 million bags well below the USDA’s forecast of 58 million bags.

There are major concerns in key coffee-growing regions in the country of Brazil which is the largest producer in the world about a lack of rain as I have witnessed this before and it will explode to the upside and if it continues as the volatility will increase substantially as all you have to do is look at the 2014 chart as that was the last drought that this commodity has experienced so stay long.

TREND: HIGHER 

CHART STRUCTURE: IMPROVING

VOLATILITY: INCREASING

This article was written by Michael Seery (CTA—COMMODITY TRADING ADVISOR)  www.seeryfutures.com

How High Are Coffee Prices Going?

I am currently not involved in this market as the chart structure did not meet my criteria to enter into a position, however I am certainly not recommending any type of short position as I remember what happened in 2014 when a drought hit the country of Brazil sending prices sharply higher in a matter of weeks and that situation could be developing once again.

Fundamentally speaking current arabica coffee supplies continue to decline which is also providing support to coffee prices after ICE-monitored arabica coffee inventories fell to a 1-1/4 year month low of 2.12 million bags on Friday. Weather concerns in Brazil are another supportive factor for coffee prices after Monday’s data from Somar Meteorologia showed that rainfall in Minas Gerais, Brazil’s largest arabica coffee growing region, was only 57.9 mm over the past week, or 78% of the historical average, which may curb Brazil’s coffee yields.

TREND: HIGHER 

CHART STRUCTURE: POOR

VOLATILITY: INCREASING

This article was written by Michael Seery (CTA—COMMODITY TRADING ADVISOR)  www.seeryfutures.com

Commodity Focus: Crude Oil, Gold and Coffee

The bill drew a rebuke from China and the standoff is likely to complicate discussions about a growth stabilizing trade deal. The markets reacted by sending bond yields and global stocks lower. Adding to the negative sentiment yesterday was the disappointing earnings report from Home Depot, a major U.S. retailer.

Crude oil already under pressure dropped further with Brent and WTI both breaking the uptrends from early October. Weakness was seen already before the Senate vote as the market was growing increasingly worried about the lack of concrete progress in U.S.-China trade negotiations. With demand growth once again being questioned the real damage was inflicted by a report from Reuters which said that Russia was unlikely to agree to further production cuts. Without deeper cuts from the OPEC+ group of producers the International Energy Agency forecast a 2020 production surplus of more than 1 million barrels/day. This in response to a continued rise in 2020 non-OPEC production from countries led by the U.S., Norway and Brazil.

Ahead of today’s “Weekly Petroleum Status Report” at 1530 GMT the American Petroleum Institute yesterday released their update. It showed a bigger than expected rise in both crude oil and gasoline stocks. We maintain the view that Brent crude is likely to remain rangebound around $60/b ahead of yearend. In the short-term, support, using Fibonacci retracements of the October to November rally, can be found at $59.90/b followed by $59.00/b.

Gold continues its slow recovery after recently finding support at the technical important level just below $1450/oz. A rejection at this level – if confirmed – sends a signal that the correction seen since the September peak has been a relatively weak one. The lack of firm buying response to the mentioned developments which have sent bond yields and stocks lower highlights a current wait-and-see approach ahead of yearend. Investors and traders who have booked profit, either in futures or exchange-traded funds are, given the time of year, unlikely to re-build major longs unless the yellow metal breaks back above $1516/oz. A break that could be triggered by renewed weakness in stocks or a repricing of the prospects for future U.S. rate cuts.

As we highlighted in our daily podcast on November 19 the short-term outlook for coffee has deteriorated once again. Improved fundamentals, being the outlook for a supply shortfall during the 2019-20 season, helped boost prices in recent weeks. This despite Brazil, a major producer of the high-quality bean, having seen its currency slide towards the weakest level since 2015. The weakness began on November 6 after Brazil’s largest-ever auction of oil deposits flopped and for a while it broke down the otherwise strong positive correlation between coffee and the Real.

Arabica coffee remains one of the favorite hedge funds short due to slope of the forward curve. The steep contango provides a carry for holding and rolling a short position. During a two-week period up until November 12 hedge funds cut their net short position in coffee by 80% and the short-term risk is that these could now be reinstated following yesterday’s technical break of support. Fundamentals are improving but until the mentioned contango is further reduced the outlook remains challenged. The one-year roll yield from holding a short position is currently close to 10% but down from 16% earlier in the year.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire.

Daily Commodity Focus: Natgas, Coffee and Palladium

Weather forecasts highlighting the risk of a colder-than-normal outlook. The market has been struggling for months with record production, especially from shale, not being met by strong enough demand from utilities and exporters.

Surging LNG exports and now the potential for robust winter related heating demand is what the market – currently at its lowest seasonal level since 2015 – has been looking for. A development that would ease pressure on storage facilities which has been filling faster this year than normal.

Arabica coffee (KCZ9: $1.01/lb +0.6%) trades back above $1/lb in response to renewed support from a stronger Brazilian Real which has risen by 5% against the dollar since October 16. Also adding support has been the prospect for a rising deficit during the 2019-20 season. Marex Spectron in a note to Bloomberg have raised the 2019-20 deficit to 4.7 million bags due to worsening production prospects in Brazil. This compares with an estimated 6.6 million bag surplus in 2018-19.

Also of note was yesterday’s opinion piece in the Financial Times from the head of international coffee business at Olam International. It highlighted the need for a mechanism to stabilize a market where low prices are threatening the sustainability of the industry and the farmers whose livelihoods depend on it.

Hedge funds have due to the forward curve structure been holding a profitable net-short in coffee since 2017. The short periods of recovery during this time has mainly been driven by short-covering and whether this time is any different remains to be seen. While the outlook for a rising supply deficit may support the price into 2020 the short-term outlook hinges on further BRL strength combined but the above mentioned short covering. On the chart below we have highlighted a few interesting levels.

The continued palladium rally has taken it to another milestone after reaching $1800/oz yesterday. It continues to breathe on the oxygen being provided by the strong combination of very tight fundamentals and strong bullish momentum. The market has been in an upward sloping channel since early August, currently between $1,725 to $1,820. 
 

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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Negative Week for Grain Prices Due to Weather and Optimism in Trade

Grains such as soybeans, corn, and wheat are trading with a negative note on Friday as investors are closing positions ahead of the weekend. Agricultural futures are ready to close the week with losses.

Soybean contracts down for the second day

ZS1 Soybean Futures 1-hour chart Sept 6
ZS1 Soybean Futures 1-hour chart Sept 6

Soybean is trading in consolidation mode after the deep decline performed on Thursday. Investors are trading in profit-taking mode ahead of the weekend.

On Thursday, soy was rejected by the 8.80 area, and it fell 1.60% to close at 8.61. On Friday, the grain attempted a recovery, but the dovish pressure was too intense, and it is now trading 0.12% down.

On the week, soybean is ready to close its third negative week in the last four, this time with a drop of 0.80% in the period. The unit has been trading in a range between 8.62 and 8.80 for a month.

Technical indicators are suggesting more room for the downside. However, the mentioned 8.62, and the 8.45 area are containing the unit.

Corn breaks below 3.56 and trades at near 4-month lows

ZC1 Corn Futures 1-hour chart Sept 6
ZC1 Corn Futures 1-hour chart Sept 6

Corn is trading negative on Friday after a brief period of consolidation on Thursday. However, the picture is really dovish and even more now that the pair broke below the 3.56 support and is trading at 3.55, its lowest level since May 13.

Currently, futures of corn are trading at 3.56, 0.63% negative on the day. Technical conditions remain bearish for the unit with the 3.50 and 3.40 areas as next support zones.

On the week, corn resumed its free-fall from 3.76 after the recovery performed the previous week. This time, corn contracts are falling 3.60% on the period. The technical picture is also very dovish.

Wheat stops two days of gains and falls on Friday

ZW1 Wheat 1-hour chart September 6
ZW1 Wheat 1-hour chart September 6

Wheat is trading down on Friday as investors are taking profits ahead of the weekend and after two days of gains. The grain is trading 0.75% down at 4.62, and it is heading to test the 4.60 area.

On the week, futures of wheat are fighting to close the period in positive, but the odds are against it as technical indicators are suggesting more declines before the end of the session. Wheat is trading 0.05% negative on the week.

Coffee on consolidation mode below 100.00

Futures of coffee has been trading in a small range between 95.00 and 98.00 during the whole week. Consequently, the unit is posting a weekly decline, but the drop is not that much. Coffee contracts have declined 1.50% in the week.

Grains to Close Week, Month With Losses, All About Trade War

Grains are trading mixed on Friday but with a negative note on August as investors are still waiting for trade war developments. As for now, conciliatory words between US and China are giving some hopes.

“The most important thing is to create the necessary conditions for continuing negotiations, said Gao Feng, a spokesman for China’s Commerce Ministry. However, he said that China has an arsenal of measures for retaliation. However, they don’t want to use it.

Despite the conciliatory tone, the market is reluctant to believe in everything China and the United States said, as it seems they want to have a prolonged trade war. Farmers, then, are suffering the consequences.

Soybean ready to close August with gains

ZS1 Futures of Soybean 1-hout chart August 30
ZS1 Futures of Soybean 1-hout chart August 30

Soybeans are trading positive for the third day in a row as investors welcomed conciliatory feeling between the two parts involved in the trade war. On Friday, futures of soybeans jumped to trade as high as 8.78 per bushel, but the level resisted and it sent the unit back to previous levels.

Profit-taking ahead of the end of the week and month is keeping the grain out of higher prices. Currently, soybean is trading 0.60% positive on the day at 8.73.

On the technical analysis front, odds are for a bullish extension in the short and middle terms as studies on both, the 1-hour and daily charts, are pointing to the upside.

On the week, soybean is closing the first positive period in the last three weeks. The oilseed is posting a 2.10% weekly gain, recovering almost all losses experienced in the previous two weeks.

In the monthly chart, soybean is closing August with a 0.63% gain as the unit was on time to reverse losses in the first half of the month, but the benefit is not that big. August would be the third month of gains in the last four. The monthly chart also suggests that the grain is moving in a long term range between 8.44 and 9.30.

Corn down amid profit-taking

ZC1 Futures of Corn 1-hour chart August 30
ZC1 Futures of Corn 1-hour chart August 30

Corn is trading down for the second day as investors are closing positions ahead of the end of the month. Early in the day, the contract attempted to break above the 3.74 level, but it wasn’t successful.

Currently, corn is trading 0.40% negative at 3.69. The unit is now testing the 3.69 area, which is the support that is containing the downside. Below there, the next frontier would be 3.66.

On the week, corn is giving signals of life as the unit is performing its first period of gains after the sell of experienced in the last three weeks. Thought the move is on a consolidation phase rather than a recovery.

The month is also an ugly picture for corn as it is closing its third negative period. The unit has now entered on full steam into the long term range traded between July 2014 and May 2019 between 3.40 and 4.00.

Wheat breaks below 4.62 and trades at lows since May

ZW1 Futures of Wheat 1-hour chart August 30
ZW1 Futures of Wheat 1-hour chart August 30

Futures of wheat are trading negative on Friday with the unit breaking below the 4.62 area and extending drops to 4.59, its lowest level since May 16.

Previously in the day, wheat traded around 4.66, but a break below the 4.64 triggered stop losses that fueled declines to 4.62, where another batch of stop losses was activated. Then, the unit found support just below the 4.60 area.

Currently, the unit is trading at 4.60, 2.50% negative on the day.

On the week, the unit is falling 3.50%, extending losses after the previous week small recovery.

On the month, wheat is falling for the second period, with August performing 5.28% down in the period. Overall, wheat is inside a downtrend with the 4.20 area as the most likely destiny.

Grains roundup for August 30

Coffee is down in the day, week, and month as futures of coffee weren’t able to break above the 98.00 area. The contract is now traded at 95.25, 2.15% down. On the week, coffee is 0.11% down after attempting a recovery that was capped at 98.50. In the bigger picture, coffee is closing August with a 3.25% decline, extending the already sell-off of 10.30% of value performed in July. Technical analysis suggests more declines in all frame times.

ZC1 Futures of Coffee 1-day chart August 30
ZC1 Futures of Coffee 1-day chart August 30

Sugar is having the same story of coffee with declines in the day, week, and month. The trend in the sugar futures is even more visible to the downside with prices at 11-month lows around 11.10. The unit is closing its fifth negative week in a row, and its second month with red numbers in a row. August is 8.20% negative for sugar.

SB1 Futures of Sugar 1-day chart August 30
SB1 Futures of Sugar 1-day chart August 30

Happy weekend and stay safe!

Soybeans, Corn, and Wheat Trades Down Amid Progress Report

Grains are trading down on Thursday as investors are digesting recent progress in crop reports.

Traders are now focused on the second survey of planted acres that the U.S. Department of Agriculture will release on August 12. They are expecting significant advances.

Soybeans extend decline for the fourth day

Soybeans daily chart July 18
Soybeans daily chart July 18

Soybean is trading down for the fourth straight day as investors are digesting reports on crop progress. Beans are now testing the 8.700 area.

Currently, Soybean is moving at 8.728, 0.50% down on Thursday. In the last four days, the oilseed has fallen around 4.4% from July 15 highs at 9.125 to today’s fresh bottom at 8.710.

Technical conditions suggest more room for the downside with the 8.660 area as the next support. Below, check the 50-day moving average at 8.615 and the 8.400 as buying zones.

To the upside, the unit needs a close above the 8.800 area to give bulls reasons to believe in a long run. The 20-day moving average will be the next resistance and above there, 9.150.

Corn breaks below 4.200

Corn daily price July 18
Price of Corn daily price July 18

Corn is falling hard on Thursday as investors are digesting better than expected reports on crop progress. It is the third negative day in the last four.

Prices of corn fell on Thursday from 4.300 to break below the 4.200 area and trade at lows since July 3 at 4.170. Currently, it is trading at 4.190, 2.35% negative on the day.

Technically, the pair looks bearish with the 50-day moving average at 4.110 and the July 1 and 2 lows at 4.060 as the next supports.

Wheat falls below 4.940

Price of wheat daily chart July 18
Price of wheat daily chart July 18

After falling for four consecutive days, wheat has finally broken below the July 10 low of 4.930, and it is now trading as low as 4.905, a fresh minimum since June 10.

The grain is now developing what it looks like a lower low on the daily chart — signaling a downtrend in the chart pattern.

With the pair trading 1.56% down on the day at 4.921, next support is at the 200-day moving average at 4.365. Below there, 4.760 and 4.730 are the levels to watch as buying zones.

Grains report for July 18, 2019

Sugar is falling hard for the sixth day in a row as investors are digesting improved weather in Brazil and India. Technical conditions suggest more losses in the short and middle term.

Coffee futures closed Wednesday with gains, but the unit remained below the 109.00 after finding support at the 105.50 area. The unit moved up and down with violence on Monday and Tuesday. However, on Wednesday, it returned to the range between 105.50 and 108.00.