Commodity Corner: Morning Comments

Good morning,


DXM9  97.785  -0.139                    GCM9  1284.9  +5.2                         ESM9  2928.50  +2.25                     CLM9  64.01  -1.20


The mystery this morning appears to be what is driving down oil prices today.  There was a story out in the afternoon yesterday that Iraq and Kurdistan were discussing as much as a 50% increase to oil production, which put some pressure on the market in the late trade.  The main talk in the market remains the stoppage of Russian oil deliveries in Europe, due to contamination, yet oil prices are undergoing a pretty significant correction today.  In the overnight trade, WTI crude found support against last week’s settle.  With the lack of any story on the tapes, the assumption is that today’s price action is long liquidation profit taking, after the big run up oil has had of late.


**the story just hit the tape that the CEO of Russia’s largest oil producer said that Iran oil sanctions won’t cause a supply shortage, as other producers will step up production to offset.  The major portion of this break in oil prices took place early in the European session, so possibly when these comments were first made.  In addition, the Russian central bank  announced it was keeping monetary policy steady, but a cut to rates could come in Q2 or Q3 this year.  This may have put some pressure on the ruble vs the euro, which could soften oil prices** 


Grains recovered yesterday, led higher by soybeans and soymeal.  It was reported that China imported 1.5m tons of US beans in March which provided some support for the oilseed, and a good export sales number for soymeal added to the enthusiasm.  There was some talk in the market late yesterday of a large purchase of US soybeans, but it has yet to be confirmed.  Other news in grains yesterday included total grain movement by rail was down 6.3% last week.  Planalytics raised its winter wheat yield estimate to 50.10 b/a from 49.0 b/a.  Next week, the wheat quality tour will take place, and the market will be trolling the twitter feeds for confirmation of the good conditions of the winter wheat crops that have been reported in the weekly crop conditions survey. 


Goldman put out its top trade recommendations for the rest of this year.  The ideas included buy gold and sell silver;  buy copper and sell zinc;  buy the GSCI agriculture and livestock index.  Part of the reasoning for the long agriculture call is the expected US/China trade deal, and the imbalanced positioning in the market, with a very large short position currently in existence.


Both the lean hogs and live cattle markets traded at limit down yesterday, with hogs settling there and cattle just above.  Hogs came under pressure as China canceled a US pork purchase.  Cattle remained under pressure, in a liquidating trade (down 4 consecutive days), as this market continues to work through the bearish report from last Friday.  It was reported that red meat production was down 1.9% y/y in the month of March.


Coffee, cotton and cocoa were all up yesterday.  Coffee bouncing as a strengthening real in Brazil was slowing producer sales.  There was also talk that a bottom  could be formed on the charts, as weather related risks could  be developing from a potential El Nino formation.  Decent cotton export sales helped support that market, where expected demand remains strong.  These markets are a touch softer in the early trade this morning.  Lumber was limit up yesterday, recovering from being hit last week on soft housing data.


Gold prices traded to the week’s high yesterday, as the corrections lower, both in the dollar and in equities, provided some support.  Gold also aided by ongoing stress in Argentina, where assets remain under pressure as the odds of a potential default rise above 60%.  On the other hand, copper traded at a 4 week low yesterday, as concerns about global economic growth continuing in 2Q and beyond remain.  Numerous central banks, have shifted monetary policy to a neutral to dovish (lower rates) bias recently, raising these economic growth issues. 


On the US economic data front, the first flash of Q1 GDP, coming in well ahead of estimates at +3.2%, vs an expected +2.3%.  Closer analysis of the report showed a large portion of the gain came from an inventory build.  The report also had a lower reading for the inflation index component.  The dollar traded lower following this release, which is supportive for commodity prices, denominated in dollars.   


Have a good day,



Michael Clifford


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