05.07.21 - The Commodity Report

OPEC meeting impact on Crude Oil, USDA report impact on Grains and the difficulties in forecasting the Gold price development.



Financial Conditions

If we take a closer look at the change of financial conditions, we saw the USD was able to resume its upward trend. Inflation expectations were falling but the Realyield was also declining significantly because treasury yields of all maturities were dropping too.

As long as the dollar isn’t able to break the 93.3 mark and therefore isn’t able to make a higher high, I’m sticking to my transitory USD strength thesis.

It is also worth noting that the positioning of the dealers currently indicates an upcoming rise in the Euro and the Japanese Yen. Those two currencies make up over 70% of the Dollar index. Another indication to be careful on the USD long side.


My Current Watchlist

Long Side: Gold, Lumber, Copper, Cocoa, Platinum, Cotton, Soybean Oil, Natural Gas, Milk III
Short Side: Lean Hogs, Sugar, Orange Juice
Open Positions: Long Gold, Short Lean Hogs

My Thoughts & Current Setups

Crude Oil traders were solely focused on the OPEC + meeting in the past week. But to the surprise of many, there was no agreement on Thursday or Friday.

It is noteworthy that it is not the usual suspects like Russia and Saudi Arabia that have blocked an agreement, but only the United Arab Emirates. (UAE) Only they voted against an increase in output of 400 Mio. bpd. This is unusual in that the UAE has so far been a rather approving and calm member in the history of OPEC. However, this changed with last week's meeting. Negotiations on this should continue on Monday.

In addition, the weekly crude oil reserves were again lower than expected, which further supported the price. In addition, the blocking of production increases should of course also be viewed as bullish for the oil price.

My personal price target of $ 75 for Crude Oil has now been achieved. Due to the seasonality and positioning of the commodity traders, I will be taking my chips off the table. Only if we break the 77$ mark and retest the level I would be happy to put in another long order, despite bad seasonality. Might sound stupid, but this is how I do it.

Gold is still a tricky one. Is it going on more leg lower or is this already the bottom? Or is this now the turning point to longer term bear market for Gold?

From a charting perspective, the price of Gold could drop further to 1680 US dollars in the next few days. That is where the next significant support area currently is. In my opinion, this is the “make or break” mark to watch for. Should this price mark break, this would be extremely bearish.

If we look at the fundamental data, it should be noted that the Gold price has a strongly negative correlation to the Realyield. As long as the Realyield is low or even negative, as it has been up to now, this speaks for a good environment for the Gold price. If, however, the Realyield turns up again, against the expectations of the overall market, this would probably mean further headwinds for the Gold price.

The general market sentiment towards Gold is very bearish today and the precious metal is still oversold according to the RSI and other momentum indicators.

Last but not least, according to CoT data, the positioning of the commercials, which are so important for the commodity markets, is now tending towards a greater willingness to buy. Moreover Central Banks could step back in and buy more Gold, which would be a step to moving out of the dollar. Here you can read more about this theory.

Nevertheless I stay long Gold and looking for long entry setups at precious metals like Copper and Platinum.

Grains put in a top performance, triggered by the publication of the numbers on the progress of the sowing of the various grain varieties by the US Department of Agriculture. (USDA)

The numbers were below expectations, the expected harvest must now be excellent in order to avoid bottlenecks. This brings the weather back into focus. The further development of the current heat wave in the northwest of the American continent with temperatures of up to 50 degrees Celsius must also be closely monitored.

While China in the past few weeks has repeatedly suggested that it will only access US imports of grains again, the current China import data showed a completely different reality. Chinese corn imports in May alone were 395% up on the previous year. This shows once again that China has apparently lost the upper hand over prices in the current commodity cycle.

In my opinion, the most grains looking not so good from a chart perspective. The only setup I currently like on the long side of Soybean Oil. The weakness of Corn prices also justifies my latest short trade on Lean Hogs because those markets are currently extremely correlated. (Chinese Lean Hogs need lots of US imports of Corn)


Elsewhere In The Macro World

Chinese PMI numbers were within expectations but still showing signs of a peaking economy. Pending Home sales in the US were much stronger than expected and show us that the surging home price trajectory is far from over. PMI in the US also showed that we’re most likely at peak growth and its not getting any better than it already is.

The job market report was solid with more new jobs added than expected but. Nevertheless we also got a higher unemployment rate which surged from 5,6% to 5,9% mainly because more people voluntarily left their jobs and the number of job seekers rose .Coronavirus concerns, child-care responsibilities and expanded unemployment benefits are all likely contributing to the record number of unfilled positions. One can definitely say there are enough positions to fill but not enough workers, which want or can fill these positions.

Next week look out for the latest OPEC+ meeting developments on Monday. Tuesday the US publishes the latest Services PMI numbers. On Wednesday we could see some more insights about the FOMC’s thinking about tapering.

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Till next Monday, Lukas

If in the mean time you have any questions, please feel free to contact me via Twitter or Mail.

(The Commodity Report is not investment advice)