Meetings of the G20, IMF and World Bank gave a lift to equities overnight, but quickly eroded. Most physical commodities are weak and we would expect that to continue until some positive and convincing news on how to handle the EU and US situations surfaces.
Tag Archives: Commodities
Video: Early Update – 2011.03.15
Concerns about the Japan’s potential nuclear disaster dominates market psychology today. Majority of physical commodity markets are down and will likely ignore any fundamental news.
Video! Morning Update – 2010.12.22
Good Morning. We are starting to experiment with some new video updates.
Commodity Outlook – 2010.09.27
Below is an excerpt from our most recent Newsletter. To receive access to this story, with trade strategies, and our daily coverage of 16 markets, visit futures-research.com for your free 2 week trial!
According to the US Fed and the Bank of England (BOE), the outlook for the economy remains highly suspect. However, it also seems as if the BOE, the US Fed and a long list of commodity markets are starting to catch a whiff of inflation. For some, the combination of ongoing slowing and rising prices fosters fears of stagflation. The central bankers who are tending toward the use of extra quantitative easing probably want to play up the prospect of deflation, as that seems to give them more room and justification for their actions. While some might suggest that historical rallies in cotton, sugar, coffee, corn, soybeans, beef, gold, silver, platinum and copper could be the result of internal fundamental supply and demand conflicts, there haven’t been many times in history that such a broad-based and historically significant rally ended up being a fluke. Certainly the run-up in gold is somewhat suspect because of the speculative component that is assumed to be in place in that market, but with so many unrelated and usually uncorrelated markets rising at one time, one could come to the conclusion that commodity supplies really are tight enough to push prices up, even in the face of a suspect global economy. We have banged the drum for some time on our belief that many commodity prices are too cheap or too close to their costs of production. It is now becoming even more apparent that global demand can draw down supplies very quickly.
In markets like grains and exotic foods (the soft commodities) it is also becoming clear that even minor supply-side setbacks have become significant events. Washington and the regulators would like to suggest that prices are being inflated by speculation, but that still doesn’t take into account that the cost of production for almost all commodities has risen. The speculators see that, and that is what is pulling money toward commodities. If commodity prices aren’t lifted by speculation, commodity production and supply won’t rise fast enough to meet surging global demand. As recently as June of this year corn prices for 2011 delivery were trading close to their cost of production. With the world supply set to contract even in the face of a record 2010 crop, it was clear that corn needed to rally aggressively or it would risk losing production area to cotton, soybeans or perhaps even wheat.
In the gold market one noted analyst recently suggested that the cost of production at some South African gold mines might be more $900 per ounce. That in by itself suggests that $1,270 gold prices are not as expensive as many would like to think.
An example of a storm brewing in the future can be seen in the milk market, where the price paid to farmers was so cheap throughout 2008 and 2009 that the US dairy industry saw a massive contraction. Since the demand for milk continues to increase globally, the contraction in the US dairy herd will probably means that prices in the coming year will have to explode. Since the dreaded speculators don’t usually frequent the milk market, that potential crisis will continue to fester until the required response in the market serves to reduce demand and rebuild production.
In the meantime, we think that strength in industrial and food-based commodities are justified but that a combination of a sharply weaker Dollar and promises of more easing are destined to bring about a temporary bubble in prices. However, the trend in prices over the long turn probably has to stay up to secure needed supplies. Therefore traders should adopt a long futures mentality, with the addition of periodic options protection in the face of classically overbought technical signals.
Commodity Outlook – 2010.04.26
Below is an excerpt from our most recent Newsletter. To receive access to this story, with trade strategies, and our daily coverage of 16 markets, visit futures-research.com for your free 2 week trial!
The global economy continues to resemble the “Energizer Bunny” as it has managed to keep on ticking despite a series of anxiety issues. However, the evidence of forward motion is quite compelling with various economic readings flashing positives, corporate earnings showing an improvement in revenues and profits and ongoing evidence that China continues to be a strong engine of growth.
In addition to favorable retail sales readings and the initial positive US Non-farm payroll reading, other developments have caught our eye. Perhaps one of the more subtle ones is news that the Colonial Pipeline has recently seen a string of days where a number of requests for shipment of gasoline and distillate products were rejected because of capacity constraints. Another rather telling sign is that Chinese oil demand rose more than 12% in March, and according to PetroChina that resulted in a seventh straight month of double-digit energy demand growth. When one also notes that in March Chinese copper concentrate imports were 17% above year ago levels and up 27% from the prior month, it is clear that the Chinese economy is not hitting the skids, contrary to predicted by many Wall Street analysts last month.
Within the US we would like to point out the stellar performance at UPS, which recently managed impressive earnings and revenues. With many pundits suggesting that consumers were still wounded and that high energy costs were going to make it hard for companies to perform, the UPS results seem to suggest that the consumer is O.K. and that many companies can deal with the high oil prices. In fact, many transportation companies have implemented fuel service charges. From our own experiences we have seen fuel charges on trash pickup, lawn services, etc. have generally remained in place since the $140 crude oil days. In other words, the economy is recovering and there appears to be a bit of pricing capacity returning.
As for the valuation of equity prices, the pundits have been calling for a “correction” for a large portion of the last four months. Into the April high reversal, those calls were given added credence by the resurgence of EU debt fears and the Goldman lawsuit. However, as we have said a number of times since the beginning of 2009, the equity market gains off the 2009 lows were largely the return of a tide of investment that was forced out of the market in the darkest hours of the sub-prime crisis. Again, the bears are suggesting that the stellar gains in stocks (using the 2009 lows as a starting point) are signaling more growth than can be justified by conditions. Our view is that panic and expectations for a “depression” were factored into the S&P from September 22, 2008 through March 6, 2009 and that the most of the stock market gains have come from scared money flowing back into place.
We also see the Lehman gap area from October 3rd through October 6th, 2008 as merely the top of the total disaster zone, and until the nearby S&P rises back above the late September 2008 range of 1237 to 1250, we don’t think that the market is pricing in anything more than modest growth. From an overbought-oversold perspective, the stock index futures are not overdone, as the COT S&P spec positioning as of April 13th registered a net long of only 1,810 contracts.
From a longer-term perspective, it should be noted that a US military report recently predicted that the world oil surplus could be gone by 2012 and that the world might also see a global energy shortage by 2015. That would seem to suggest that global energy demand is likely to continue to support oil and a long list of physical commodity prices. In our mind, seeing nearby crude oil prices manage a sustained rise above the $90.00 level will begin to rekindle energy-related buying interest in markets like sugar, natural gas, corn and soybean oil. Make no mistake about it; certain physical commodities are facing negative supply side issues, but demand and investment interest are showing signs of tempering the supply side threats.
