Good morning,
DXM9 96.50 -0.111 GCM9 1306.6 -1.7 ESM9 2885.00 +2.50 CLK9 64.31 +0.33
Oil resumes its march higher, following yesterday’s trade which saw prices take a breather and correct from the recent high prices for the move. OPEC had some headlines this morning, from its monthly report, calling for a tighter oil market, as production plunges. Output fell by 534k barrels a day in March. It stated demand for OPEC oil is 1m barrels a day below a year ago levels. There was a large options trade that took place in the WTI futures market yesterday, looking for a big backwardation move into April 18 (expiration). The trade is a 0.25 cent call option, bought on the May/June calendar spread. The size of the trade would equate to between 5 to 6 m barrels of oil, and the call was purchased for 5 cents. If the May contract outperforms the June, and the futures spread moves towards this 25 cent spread, there is a risk of seeing a bit of a squeeze in the May contract in WTI. Mid-session yesterday, the EIA released its 2019 price forecasts for Brent and WTI. The call for Brent is 65.15 and for WTI, 58.80.
In the grain markets, yesterday brought the latest installment of the WASDE report from the USDA. Inventories, both domestic and global, came in above expectations for corn and wheat, while coming in just under estimates for soybeans. For corn, the numbers were much larger than anticipated. However, corn managed to rally following the report, in a trade which looked like more short covering was taking place (large short covering has been taking place over the past week or so). Interestingly, with corn rallying on the bearish report, futures open interest actually rose by over 9k contracts. Soybean open interest also rose by over 11k in yesterday’s trade. Also surprising, as funds still carry a short in beans, and yesterday’s data showed modest declines to inventories. Soybean production in Brazil was raised slightly, but partially offset by a small reduction in the expected size of the bean harvest in Argentina. In the wheat markets, inventories also were increased. On the domestic side, part of the reason for the higher inventories was a lowering of expected exports (corn exports were also lowered). Wheat prices traded down towards weekly lows on the data, only to find some support and firm a touch into the close. A snow storm, today and tomorrow, moving across the Midwest and Great Plains, potentially bringing 2 feet of snow to some areas, may have been the source of support for wheat prices. With the WASDE report behind, the grain markets will return attention to the weather, such as this current storm, and be looking for any significant delays to planting of corn and spring wheat.
The lean hogs market had a limit down move yesterday, and change from the very strong rally observed over the past couple of weeks, which saw prices lock limit bid a couple of times. News out of China, with the Farm Minister stating the number of new swine fever cases is going down, may have been part of the rational behind the selling. Funds have been increasing the size of the spec long position on this rally, and yesterday could have been an attempt to book some profits. The cattle markets were lower yesterday, with seasonally lower demand ahead of the summer grilling season one reason given.
In the softs, orange juice was lower, trading at low prices not seen since October 2015, despite USDA cutting Florida production. Sugar was higher, as prospects for an increase in cane ethanol demand in Brazil lends support. Cocoa, with continuing concerns about dry conditions in the Ivory Coast, had its 13th straight higher session. This is the longest rally in cocoa since February 2015. Arabica coffee traded higher for a second day yesterday, attempting to bounce from low prices not seen since 2005.
Gold prices traded at a 2 week high yesterday, supported by the weaker dollar and a reduction to the global economic growth forecast from the IMF. Industrial metals finished slightly higher, as continued hope that there will be an economic recovery in China keeps a bid to prices.
Back to the US weather, following the massive storm bringing up to 2 feet of snow to parts of the Great Plains and upper Midwest, the weather pattern will shift, bringing rain to the Corn Belt, Delta and deep South. Planting delays are expected in these areas. A second rain storm to these same areas is expected a few days later. The prospect for dryer weather does occur towards the latter half of the month.
US economic data released this morning saw March CPI come in +1.9% y/y vs an expected +1.8%, and the core CPI +2.0% y/y vs +2.1% expected. This afternoon brings the minutes from the most recent Federal Reserve meeting. This meeting suggested a shift in tone from the Fed, to that of a more neutral to possible even dovish stance, so the market will be looking for any clarity in today’s minutes. Anything which changes how the market interpreted the Fed last month can have a direct effect on the dollar, which will impact many commodities.
Trade idea update: Buy KWN9 / WN9 spread at -31. Settled -29 yesterday. 1st upside objective is -17.25. A chart of the spread is attached.
Have a good day,
Mike
Mike Clifford
312 604 6404