Commodity Corner: Morning Comments

Good morning,


DXM0  100.130  -0.244                GCM0  1729.5  +41.7                            ESM0  2776.00  +44.00                  CLM0  14.00  +2.43


The story for the markets remains oil.  Recognizing the June futures contract, and possibly even July could be subject to a similar fate that the May contract went through, the front part of the WTI futures curve came under attack yesterday.  June futures traded from over $22, down to a $6 handle.  There has been a lot of talk that the selling pressure in the WTI contracts was exacerbated by Oil ETF’s bailing.  USO reported yesterday it currently has 40% in CLM0, 55% in CLN0 and 5% in CLQ0.  While the WTI contract has appeared to take a breather for the moment, at very low prices, it appears to be Brent crude’s turn today.   Brent prices have dropped to 21 year lows, following the plight of WTI.  Yesterday’s emergency OPEC+ call, where the state of the oil market was discussed, and the agreed upon production cuts were left in place (beginning May 1), but no discussion about additional cuts took place.  Another negative for oil was the API projecting crude inventories rose by 13.2m barrels last week. 


With the hard move to negative prices the May oil futures contract observed on Monday, it has ben determined that all futures contracts are eligible to trade at negative prices.  This is a bit different from prior, where only the 1st contract listed could trade negative, the rest were thought to have $0.01 as the lower price boundary.  No longer the case.  In addition, the CME has now listed negative strike prices for the crude oil options market. 


Here is a look at the explanation of how the price limit circuit breakers work for the WTI futures contracts:


Prior to  today, the June WTI contract (CLM0) and later months traded with a $.01 low limit price.


Beginning today, all contracts in WTI will be allowed to trade negative going forward (or until the exchange decides otherwise on the fly).


There is a dynamic limit of 15% based off of the previous days close which is in effect for an hour (on a rolling basis), but, only serves to pause the market for 2 minutes.  


As an example, for today, the band is $1.74 in CLM0, over a rolling hour.  Once it is hit, the market will pause for the 2 minutes.  Then the exchange tacks on another $1.74 it can move lower over the course of a rolling hour before the next circuit breaker is reached.


In cases where a contract month may settle below $10.00, there is a minimum band of $1.50 to trigger the circuit breaker pause.


The following link should take you to the page on the CME website which gives what the 15% dynamic level is (based off prior day settle):


The equity markets are bouncing today, as the Senate approving the $450B additional small business stimulus package, and the apparent moment of some sanity in the oil market, allows for some assets moving towards equities. 


Gold prices are bouncing back up sharply, trading $40 higher from settle.  To me, this confirms the sharp break yesterday was driven by gold being sold to raise cash to meet margin requirements, following Monday’s bloodbath in oil.  There is some tension being reported in the Middle East today between the US and an Iranian gunboat, so geopolitical risks are helping push prices up as well. 


Corn and soybean prices are also attempting to bounce today, as prices yesterday got caught in the oil downdraft.  May corn traded down to $3.01, and May soybeans traded to $8.08.  Big acres are expected for both corn and soybeans.  As has been noted here numerous times, ethanol is dragging down corn as well, while Brazil’s soybeans are winning a majority of the business with China.  Wheat prices are a touch lower today.  The recent rally in US wheat has made it less competitive with Russia and France.  While there could be export restrictions and weather related production issues for these other countries, which could help the US down the line, it has yet to happen. 


The other commodities also were caught in the oil whirlwinds yesterday.  Sugar, cocoa, coffee, cotton and copper all had significant moves lower, as the demand destruction which was weighing on oil was being realized across all commodity sectors.  Today, as oil tries to calm, and equities bounce, these commodities are also in a recovery phase.             


Technical Moving Averages:

Product               50 day                100 day               200 day

SN0                      880.50                   912.00                   927.75

CN0                      360.25                   377.75                   394.75

WN0                    538.75                   546.50                   529.50

KWN0                  475.25                   479.00                   466.75

MWN0                536.00                   545.75                   552.25

SMN0                  305.1                     306.5                     311.3

BON0                   28.19                     30.77                     30.74

CLM0                   35.71                     46.27                     50.16

GCM0                  1633.1                   1584.5                   1544.8

LHM0                  67.805                   76.865                   82.935

LCM0                   95.650                   106.350                 108.940

KCN0                   114.95                   119.15                   114.40

CCN0                   2499                       2566                       2499

CTN0                   59.28                     64.63                     64.67

SBN0                    12.16                     12.99                     12.90

JON0                    106.05                   105.40                   108.70

HGN0                  240.15                   257.55                   261.60

HOM0                 125.27                   155.81                   170.15

XBM0                  108.21                   144.24                   158.96

NGM0                 1.886                     2.033                     2.192






Michael Clifford


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