Copper and Oil Show Strength While Precious Metals And Agricultural Commodities Go The Other Way

  • Oil making new highs
  • Dr. Copper is strong
  • Gold and silver lose luster
  • Agricultural commodity prices are ugly
  • The dollar, trade and lots of questions for the coming months

Commodity prices are often barometers of inflationary pressures. Rising input costs cause businesses to raise prices for finished goods. In some cases, increasing raw materials prices have a direct impact on consumers. When the price of gasoline increases, discretionary spending tends to decline.

These days, we see a bifurcation in the commodities asset class as some prices are rising while others are falling which creates confusion when analyzing the state of the US and global economies. The US dollar is the world’s reserve currency and the benchmark pricing mechanism for most commodities. The dollar is sitting near its breakout level causing price weakness in some raw material markets while others are ignoring the level of the US currency.

Commodities prices can become highly volatile at times. The weather or geopolitical events can cause prices to explode or implode. There is lots of uncertainty these days in markets across all asset classes, and the price action across the commodities asset class is not providing many clues about the overall state of economic conditions around the world. Markets are waiting for the next shoe to drop on international trade. Meanwhile, we are getting lots of conflicting signals from raw material prices.  

Oil making new highs

Crude oil took the elevator down during the final quarter of 2018 and has been taking the stairs higher so far in 2019, but recent events threaten that the stairs to the upside could turn into an escalator, an elevator or even a rocket ship over the coming days, weeks, and perhaps months.

Source: CQG

As the weekly chart of nearby NYMEX crude oil futures highlights, the price of the energy commodity has appreciated steadily from a low at $42.36 at the end of December to the most recent high at $66.60 on April 23 on the nearby June WTI futures contract.

Crude oil has rallied on the back of economic growth leading to stronger demand. Seasonality as the peak season for gasoline usage approaches has boosted the price. Production cuts of 1.2 million barrels per day by OPEC and lower production from Libya and Venezuela, the two OPEC members that are political basket cases have contributed to the recovery that now has put the energy commodity on a path for a challenge of the October 2018 high at $76.90 per barrel.

Over recent days and weeks, the oil market had begun to focus on the upcoming expiration of exemptions for eight countries that purchase crude oil from Iran. India had already petitioned the US government for an extension, while other high-profile buyers of the heavier-grade of Iranian crude oil likely quietly made similar requests. China, the world’s leading consumer of all raw materials was one of the nations granted an exemption by the US government. With a few weeks to go until May, the market began to opine on whether President Trump would allow another six months of exemptions to the eight countries. After all, the price of oil has been rallying steadily, and an extension would likely slow down the ascent and avoid any ugly confrontations with Iran that would lead to further gains. However, the writing may have been on the wall over recent days when it comes to the early decision that arrived on Monday, April 22.

Recently, the US declared the elite Iranian Revolutionary Guard a terrorist organization. Iran responded saying any US military personnel present in the Middle East terrorists.

It should have come as no surprise that on Monday, April 22 the Trump administration emphatically stated that there would be absolutely no extensions for exemptions and any country importing oil from Iran will be subject to US sanctions. President Trump sent the message home with a tweet:

Source: Twitter

Iran quickly responded telling the US that they are prepared to close to Strait of Hormuz, a narrow waterway that is a passageway from the Persian Gulf into the Gulf of Oman. Around 20% of the world’s traded crude oil travels through the passage each day.

It is likely that the rhetoric between Washington DC and the theocracy in Teheran will increase. Any hostilities that involved Iran with either the US, the Saudis, or other allies in the Middle East that impact production, refining or logistical routes could cause the price of petroleum to skyrocket.

The Brent-WTI spread tends to move higher during bull market periods in the crude oil market. 

Source: CQG

As the chart of June NYMEX WTI minus June Brent futures that trade on the Intercontinental Exchange shows, the Brent premium has expanded from $6.46 on April 10 to over $8.60 on April 22.

Crude oil is a leader in the commodities asset class. The price action so far in 2019 has been bullish, and the situation between the US and Iran could support further gains and perhaps an explosive move to the upside.

Dr. Copper is strong

Copper is an industrial metal that tends to reflect the global economic landscape. During periods of expansion, the price of the red metal often appreciates, and contraction tends to send the price lower. Copper started 2019 on a sour note as the price of the nonferrous metal that is a building block for infrastructure around the world fell to a new low at $2.5430 on January 3. 

Source: CQG

Copper was trading above the $3.30 per pound level in June 2018 and reached a high during that was just 0.65 cents below the December 2017 peak. After failing to make a higher high, the price failed and dropped like a stone on the back of the trade dispute between the US and China. China is the world’s leading copper consumer, and tariffs and retaliation between the countries with the world’s leading GDPs triggered an economic slowdown in the Asian nation. The price of copper fell with the Chinese economy.

After reaching a bottom at the very start of 2019, the price reversed as optimism rose that trade negotiators would agree to a new framework for trade which pushed copper to its latest peak at $2.9955 during the week of April 15. Copper has moved higher on positive news from the trade talks when it looks like a deal will end the protectionist policies. However, when there is no news, the price has drifted lower over recent sessions. On April 22, the price of copper drifted below the $2.90 level on the news that the US would not extend exemptions for those nations purchasing Iranian crude oil. The copper market likely interpreted the move as a potential roadblock in the trade discussions as China is one of the buyers the US granted an exemption back in November 2018. It is not likely that the leadership in Beijing will sit back idly and allow Washington DC to dictate which nation the Chinese are allowed to trade with which could lead to a speed bump or worse in the ongoing negotiations. At best, it could slow things down which is why copper has drifted back to the $2.90 per pound level on the nearby COMEX futures contract. However, the $2.90 level is a pivot point for the red metal, and at over 35 cents above the early January low, it represents a level that continues to reflect an optimism that a trade deal that will end protectionist policies is still on the horizon.

Gold and silver lose luster

The price action in crude oil and copper, two of the leading commodities in the asset class, indicate a bullish trend in raw materials as both have posted considerable gains in 2019. Meanwhile, the prices of gold and silver made attempts to rally earlier this year, but they failed, and both are now sitting at levels that are lower than at the end of 2018.

On Tuesday, April 23, the price of gold fell to another new low for 2019 at $1267.90 on the active month June futures contract. May silver also fell to a new low for the year at $14.70 per ounce. A stronger dollar and new highs in the stock market have led the prices of the precious metals lower. While the total number of open long and short positions in the silver futures market remains at an elevated level at 217,858 contracts as of April 22, in gold the metric dropped from over 540,000 contracts in mid-March to under 440,000 contracts this week. Declining price and falling open interest is not typically a validation of an emerging bearish trend in a futures market, and the gold futures market could run out of selling sooner rather than later. The drop in open interest is a sign that market participants are exiting risk positions given the correction. My experience in the gold and silver market is that the next time to consider a long position is when they look their worst, and both precious metals are looking a lot less precious these days.

Gold and silver have been moving lower, despite the strength in crude oil and copper over recent sessions.

Agricultural commodity prices are ugly

While precious metals are correcting lower, many of the agricultural futures markets are downright ugly these days. Even though we are at a time of the year where uncertainty about the 2019 crop should be peaking, grain prices are trading to near or at lows for this year.

Source: CQG

May wheat futures are near their recent low at under $4.40 per bushel which is not far above the low for this year at $4.27. 

Source: CQG

Despite the rise in the price of oil and gasoline, corn which is the primary ingredient in ethanol in the US has declined to a new low for 2019 at the $3.50 per bushel level.

Source: CQG

The soon to expire May soybean futures have traded optimism over a trade deal between the US and China for the reality of falling animal feed demand from China as the nation’s hog population suffers from African swine fever. May soybeans were trading at just over $8.60 per bushel on April 23, a new low for 2019. It is possible we could see relief rallies in the grains after the May-July roll period.  

The prices of other agricultural commodities have also been weak over the past weeks. Coffee futures fell to their lowest price since 2005 last week at 86.35 cents per pound. Orange Juice futures traded to a low at $1.002 per pound on April 23 which is the lowest price since 2012. While we are at a time of the year when uncertainty over the 2019 crop in grains and many other agricultural products should be providing support for the sector, more than a few are at or near the bottom end of their pricing cycles which is creating some bargains in the commodities that feed the world.

The dollar, trade and lots of questions for the coming months

The current divergence in the commodities asset class reflects the geopolitics of oil, the optimism over trade in copper, and the reality of high levels of inventories and a rising dollar for many of the other raw material futures markets.

One of the most significant factors in the asset class over the coming weeks will be the level of the dollar versus other world currencies. The dollar remains near the highs against the Brazilian real which weighs on the prices of commodities that come from the South American nation like sugar, coffee, and oranges. A strong dollar tends to weigh on all raw material prices, and the dollar index is making another run for the December 2018 high.

Source: CQG

As the chart shows, the dollar index is back above the 97 level at 97.255 on April 23. The critical level on the upside stands at the mid-December peak at 97.705. The index has failed on previous attempts to make a higher high and break to the upside, but interest rate differentials between the dollar and yen and euro as well as other world currencies could push the dollar to a new high which would likely weigh on commodities prices in the short run.

I am off on vacation and will return during the week of May 6. While I am gone, I will be watching the dollar, the ongoing saga of negotiations on trade, the weather when it comes to agricultural commodities, and the rising potential for explosive events in the Middle East. There is an old Chinese saying or curse depending on how you look at it that says, “May you live in interesting times.” We certainly live in fascinating times, and while I have my eyes on currencies, trade, the weather, and Iran these days, I have learned that being prepared for the unexpected event that moves markets is vital to remember. Peripheral vision is a necessary skill for all traders and investors to protect capital and profit from the price variance that sure to continue.