Weekly Update (Week of 2/13/23)
Weekly Update: February 13, 2023
Hello, welcome to the second post. You will now begin seeing daily candlestick charts as opposed to last week's longer-term view. Weekly charts will be posted approx. once a month, and Monthly charts once a quarter. I also plan to release a purely technical overview of these 9 commodities.
Find some more information on the way some commodities are quoted, as well as a deeper dive into the two most popular types of coffee.
I'd also like to take a moment to preview a fresh paper trading portfolio of $1mm (will reevaluate this if needed for things like margin requirements when holding positions in multiple commodities). There have not been any trades yet in this account.
Additionally, I am setting up a trading team focusing on commodities through the Math-Finance Group. We will have 3 teams of analysts becoming experts in their sector and providing weekly trade ideas and market updates that will also be summarized here. The trading portfolio for that group will also be linked here.
General Major News/Economic Developments
CPI numbers will be posted tomorrow (2/14)
Sources predict that China's recovery's effects will be felt at home, but the abroad effects will be softer than investors are expecting.
Metals
Developments/News
Gold
Barrick's Gold Mining (Tanzania) has increased its reserves from 69 million to 78 million ounces.
So why are gold prices coming down? There are two primary drivers for gold prices: real interest rates and the US Dollar. The increase in nominal rates, combined with a decrease in inflation and declining expectations, is causing real rates to rise. This could lead to a further 2% increase in real interest rates if they surpass inflation, which is a bearish force in the gold market. This force is already present to a significant extent, and investors can no longer ignore it given gold's inability to surpass its 2011 high.
Silver
We can assume this is due to the expectation of the fed hiking rates for longer than expected. There are a number of effects the Fed can have on silver. For example, if the Fed raises interest rates, it can increase the opportunity cost of holding silver, as investors may prefer to hold assets with a higher yield. On the other hand, if the Fed lowers interest rates, it can stimulate economic activity and demand for silver, as the metal is used in a variety of industrial applications. The Fed's actions can also affect the value of the U.S. dollar, which is the currency silver is priced in. If the dollar strengthens, it can make silver more expensive for foreign buyers and decrease demand, while a weaker dollar can increase demand and support higher silver prices
Copper
Copper prices are quoted in futures using the standard unit of measurement, which is the pound. When trading copper futures, traders typically buy or sell contracts that represent a specific amount of copper to be delivered at a future date. The price of copper futures is quoted as the price per pound and is usually expressed in cents per pound.
As an extremely popular metal in industrial operations and developments, analysts expect a long-term generational shift in copper prices. Short-term supply issues could squeeze the price in the short term, but as operations expand, the market as a whole will adopt fair market prices at a likely higher price per pound. The overall story remains the same as of right now.
It is also interesting to note that copper is a major player and focus of investments with the hope of achieving the "Green Revolution". Copper production can provide major political capital for any candidate with plans to expand production.
Agriculture
Developments/News
- The grain and oilseed markets are being impacted by the ongoing conflict in Ukraine, with Russian missile attacks causing a decrease in grain exports. The Ukrainian agricultural ministry reported that the country has shipped 5.5 million tons of grains and oilseeds, a decrease of 1.3 million tons from December 2022, which it attributes to the "artificial blocking of the grain corridor by Russian inspectors." The continuous flow of grains is crucial in keeping global prices low, according to the U.K's Agriculture and Horticulture Development Board. On Tuesday, the U.S. Consumer Price Index data will also be important, with weaker inflation data potentially pushing commodity markets higher.
- In the soft commodities market, sugar prices are expected to rise due to falling crop estimates and logistical problems in Brazil. Lower exports from India, as well as lower crop estimates from Mexico, Egypt, and Australia, are contributing to this. Coffee futures in New York are up 0.7% to $1.76 a pound, while raw sugar is down 1.4% at $0.20 a pound and cocoa is up 1.8% at $2,653 a metric ton.
Coffee
The chart shows a pause period since last week's post. Based on fundamentals and teetering supplies, we can expect this to be an area where institutions are building positions hence the sideways movement. The breakout from this small and tight range will be indicative of prices. My prediction is we head higher.
Robusta and Arabica coffee prices have closed up in recent sessions. Heavy rains in Brazil continue to keep farmers out of the field driving down expected yields. The story remains the same, and as January tallies have been released, my bullish stance on coffee has strengthened.
It's important to note that there are two main types of coffee traded on the commodities market: Arabica and Robusta. Arabica is considered to be of higher quality, with a milder and more flavorful taste, while Robusta is known for its stronger, more bitter flavor and higher caffeine content. The prices of these two types of coffee can fluctuate independently of each other and are influenced by different factors. For example, Arabica is more sensitive to changes in weather conditions, while Robusta is more heavily influenced by changes in demand from instant coffee manufacturers.
Here is a short overview of how coffee is priced, quoted, and measured:
Coffee is typically quoted in U.S. dollars per pound and is traded on international commodity exchanges, such as the Intercontinental Exchange (ICE) in the United States and the London International Financial Futures and Options Exchange (LIFFE).
When it comes to measuring coffee, the standard unit of measurement is the pound. Coffee beans are typically sold in bags, with each bag weighing between 60 and 70 pounds. In some cases, coffee is also traded in other units of measurement, such as the metric ton (2,204 pounds) or the kilogram (2.2 pounds).
Brazil exports for January 2023 have been reported down -18.5% as compared to Jan 2022
Vietnam exports for January 23 have been reported down -27.7% as compared to Jan 2022
Columbia exports for Jan 2023 have been reported down -19.0% as compared to Jan 2022
Cocoa
Cocoa is trading at about $2,660/tonne, continuing its uptrend towards the upper bound of the range.
Based on the fundamental story and price action, my stance on cocoa remains increasingly bullish until production and growth conditions perk back up to ideal.
When it comes to measuring cocoa, the standard unit of measurement is the metric ton. In some cases, cocoa is also traded in other units of measurement, such as the tonne (1,000 kilograms or 2,204 pounds) or the kilogram.
Cocoa prices have been positively impacted by concerns over the quality of some crops in West Africa due to the lack of fertilizer and pesticides resulting from the war in Ukraine limiting Russian exports. However, the abundance of supplies from the Ivory Coast has had a negative impact on cocoa prices. Data showed that Ivory Coast farmers have sent a total of 1.66 million metric tons of cocoa to Ivory Coast ports for the 2022/23 marketing year, which is a 3.8% increase from the previous year.
The recent rain in West Africa, which improved the outlook for the cocoa crops, has also had a negative effect on prices. On the other hand, declining cocoa inventories are supporting the prices. Cocoa stockpiles held in US ports monitored by ICE are moderately above their 9-1/2 month low, while those held in EU ports have reached a 10-month low.
The smaller exports from Nigeria, which is the world's fifth-largest cocoa bean producer, have also provided a positive impact on prices.
However, global cocoa demand is weak, which is having a negative effect on prices. The National Confectioners Association, European Cocoa Association, and the Cocoa Association of Asia have all reported decreases in cocoa grindings in the fourth quarter of the year. The quarterly report from the ICCO in December was bullish for cocoa prices, as it showed that global cocoa production fell 8.0% due to unfavorable weather and disease, leading to a deficit of 306,000 metric tons, compared to a surplus of 209,000 metric tons in the previous year.
Wheat
US Wheat exports look to be down 20% week over week.
Over the last 15 years, the average daily price change for wheat has been 10 cents per day with the largest daily increase being 96 cents and the largest decrease being 91 cents. The average price for Oklahoma and Texas Panhandle wheat has been $5.89 with the highest price being $13.13 and the lowest $2.55.
World wheat production has been setting new record highs every year for the last 5 years, but the increase in use has been greater than the increase in production, causing world wheat stocks to decline and prices to increase. The USDA projects the 2022/23 marketing year average wheat price to be a record $9.20 due to the Russian/Ukraine war.
There is likely to be another continued squeeze on wheat prices if tensions remain/escalate in Ukraine and Russia. Using tailwind from constantly growing world hunger and the necessity for grain products in a variety of cuisines as well as the long-term view on world population growth.
The USDA projects wheat prices to average $8 in 2023/24, $7 in 2024/25, $6 in 2025/26, and level off at $5.70 in 2026/27.
FAPRI-MU projects wheat prices to average $7.11 in 2023/24, $6.44 in 2024/25, $6.02 in 2025/26, and level off at $5.84 in 2026/27.
Both the USDA and FAPRI-MU predict that wheat prices will level off in the $5.75 range, but actual prices may be several dollars higher or lower than the average.
Energy
Developments/News
Ford invests $3.5 billion in a Michigan battery plant in conjunction with China’s Contemporary Amperex Technology Company (the world's largest EV battery maker).
- This speaks to Ford's longevity in the auto vehicle market. Companies like Tesla, Rivian Lucid etc. may be the leaders in the space, but a long-time dominator of the automobile industry like Ford will not have a hard time capturing the trust and maintaining the quality expected by its customer base.
Crude Oil (Brent)
There are two clear supply zones overhead for Brent Crude Oil. This is where I would expect prices to reverse, and fundamentals confirming, enter a short position in Brent contracts.
Crude prices gained this week on a weak dollar and strong equities.
Crude Oil (WTI)
WTI Crude has trekked higher alongside Brent Oil. There are two similar supply zones overhead along with a demand zone created on the way up. Prices can be expected to reverse at these levels.
Russia announced a cut of 500,000 barrels per day from its March oil production, contributing to a rally in oil prices last week. The move was influenced by the G7's $60-per-barrel price cap on Russian crude, aimed at limiting funding for the Kremlin's actions in Ukraine, as well as multiple Western sanctions imposed against Russia. The recent measures include a European Union ban on all forms of Russian energy and a G7 cap on Russel fuel with a $100 limit on diesel and a $45 ceiling on fuel oil and naphtha.
Liquified Natural Gas
No significant developments in natural gas prices or news this week. The small-scale intraday price movements continue to be driven by warmth pressures and fluctuating temperatures.
Footnotes
Went a little deeper into how each product is traded. In retrospect, I want to begin to understand the supply chains for each of these products. For now, enjoy these Thinkorswim and TradingView charts as well as my takeaways and summarized research found on Barchart, Reuters, WSJ, The Financial Times, and other great sources.
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