Commodity Corner: Morning Comments

Good morning,


DXM9  97.065  +0.110                   GCM9  1273.8  -3.8                          ESM9  2916.00  +3.50                     CLM9  65.60  +0.09


Europe returns from the Easter holiday to find oil continuing the grind higher, on President Trump’s call to end the waivers on sanction against countries buying Iranian oil.  WTI took out the psychological resistance level of $66 (high 66.19) and is currently sitting just below this level.  Brent crude is lagging a bit, only trading as high as  74.70 in the overnight trade.  It was discussed yesterday that 700 to 800k barrels of oil a day could be removed from an end to the sanctions waivers.  It was thought that Saudi Arabia, would pick up the slack for this reduced supply, but it’s not clear where the Saudis stand on this.  B of A’s commodity head just had a headline hit  the tape, calling for a price target in oil of $82 by year’s end.  Aside from the oil story, optimism for higher prices comes from a report put out by the Citi commodity team (all of the Citi price forecasts here were taken from stories on Bloomberg), calling for a US/China trade deal to be completed in June, with the results being good for commodities.  Some of the reasoning behind this call is improved economic prospects, more demand from China and a lower dollar. 


Similar optimism for higher prices is not being felt in the grain markets, where, in spite of a large spec short being carried in the grains, the markets  continue to slide down.  Funds appear to be adding to the record short position in corn, as futures open interest increased by over 15k in yesterday’s down trade.  The products made new lows for the year overnight, and are attempting to stage a bounce, but it’s rather anemic at the moment.  The overnight pressure to prices came from yesterday afternoon’s  crop  conditions and progress reports, showing a very healthy winter wheat crop and farmers are  finding  opportunities to get some corn in the ground.  The weather forecast does present pockets of opportunities for planting, and with modern technology, and big planting window isn’t really a necessity anymore.  Soybean prices also received some pressure from China reporting it imported 13.2% fewer soybeans in March than a year ago.  Back to the Citi report, the call for 2019 soybean prices is $9.20/bu (in part driven by declining soymeal prices due to less demand from China because of swine fever) and 2020 prices of $9.75/bu.  In addition to the good US condition of the winter wheat crop, an abundant harvest is expected from Russia, where export prices have dropped to a 7 month low.  Wheat reported the largest export inspections number since September of 2016, but still couldn’t generate a bid.  US prices are down 14% on the year, but as Russian prices sag, the US continues to face difficulties in the export arena.  The Citi report forecasts 2019 wheat prices at $4.86/bu and 2019 corn prices at $3.80/bu (both higher than the present spot, boosted by the trade deal). 


Lean hog prices were down sharply yesterday, touching limit down at 1 point, only to settle just above that level.  In spite of the continued concerns about the swine flu epidemic, seen in China reporting a 13% reduction in its hog herd, prices had a correction  yesterday.  Some  of  the pressure on hogs prices yesterday came from the futures market carrying a large premium to the cash market.  In addition, funds remain carrying a very large spec long position in futures, and there may have been some profit taking occurring.  Live cattle was also down yesterday, where funds also carry a large spec long position.  Citi’s research piece called for China importing between 500k to 1m tons of pork from the US this year. 


Sugar had another strong day yesterday, led higher by the prospects of increased demand from the cane ethanol community in Brazil.  This comes from the stronger oil markets.  Citi calls for sugar prices to average $0.131/lb for 2019.  Brazil’s CONAB just increased its projection for ethanol output to 33.6b liters.  Cocoa, which was lower yesterday, is projected to trade in a range of $2,300 to $2,400/ton in 2019.  A supply surplus should remain for this year, but there could be a switch to a deficit next year.  Arabica coffee prices were cut to $0.98/lb for 2019.  Cotton traded higher again yesterday, as continued strong demand prospects supports the market.  Cotton is lower today, as China announces it will sell 1m tons of cotton from its state reserves.  Lumber traded at a 4 month low yesterday, driven down by soft existing home sales data.


Gold bounced off last week’s lows yesterday, as the US/Iranian oil dispute created a bit of a safe haven bid.   It has come back off today, as the markets have an orderly demeanor, even with the volatility in the oil markets.  Copper prices were lower yesterday, as thoughts of slowing exports in Asia and the weak existing home sales data pressured prices.  Overall, optimism from the trade deal should keep underlying support in the copper market.               


Have a good day,



Michael Clifford


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