Weekly Update (Week of 2/20/23)
Weekly Update: February 21, 2023
Hello! Not too many significant developments this week to take note of, but the technical story for oil worked out very well and there has developed a nice setup for Gold futures. Taking technical trades backed with macro stories seems to be the money maker. Tight risk and overall where you can, risk off.
I will also be looking into and reading some books on some of the soft (cocoa, coffee) in order to develop a deeper understanding. I will begin to hone in on those commodities that I understand and can work with best. Hopefully, readers can expect some commodity-specific posts throughout this week and next apart from these weekly overviews.
As always, feel free to leave comments and suggestions.
General Major News/Economic Developments
- The Earthquake in Turkey is an added wrench on top of Turkey's already fragile economy. With a heavy reliance on funding from allies, whilst battling rapid inflation, the added millions that require urgent help do little to alleviate the situation.
- The US Government once again approaches its debt ceiling and faces another situation where they have to either simply raise or raise and cut spending. It will be interesting to see what they decide this time.
- Late automobile loan payments expose cracks in customer credit. Borrowers with low credit have shown face in numbers unseen since 2010. Consumer lawyers said that when cars were in short supply during that time, some dealers were able to sell vehicles that were in worse condition, increasing the risk that they would break down or require major repairs. A key reason borrowers stop paying is that the car stops working. It is an interesting indicator to keep an eye on.
Metals
Developments/News
While the general metal trade does not seem to provide any clear direction until economic data is released, investors can be advised to invest in metals that are precious to technology companies (lithium, copper, cobalt).
Gold
As mentioned last week, Gold seemed to be searching for that 8-day moving average and has thus far successfully found support on it. I think over the next day or two we should get a small pullback. Upon review of some basic supply and demand levels, I have placed an order on the paper portfolio for 1x long /GC contract at 1848 even with a stop loss below 1845. I am risking 3 points to potentially hit 1865 for a roughly 17-point gain.
As mentioned last week as well, gold prices are often driven by the US Dollar index. With the dollar generally higher over the past month, gold prices have slid. The reasoning for this is that gold is often seen as a safe haven investment when investors do not trust the currency. With the dollar strengthening, investors are likely outflowing from gold and inflowing to the USD at least whilst awaiting economic data this week.
In my personal macroeconomic view, the hiking of rates is far from over. And inflation is far from curbed. That results in a continued longer-term pullback in gold, but the trade order I have put out looks to take advantage of a short-term pullback. Once that trade comes to fruition or stops out, I will evaluate whether or not a short position in gold as aligned with the macro view makes sense on a risk-reward scale.
Silver
The theme of risk aversion based on overall geopolitical tensions has strengthened over the past weeks supporting silver prices lower. There haven't been any significant developments, but the price should be watched closely from a technical standpoint.
Copper
The technicals point bullish for copper as do global macroeconomic factors. The break of the inside daily candle was a great trigger for a long trade risking the low of that candle, but I missed the opportunity. Will wait for another setup there.
No significant fundamental updates on copper for this week, but the world view remains bullish on factors of utility and supply.
Agriculture
Developments/News
Coffee
On Friday, March arabica coffee closed up at a 3-3/4 month high, and robusta coffee closed up at a 2-week high due to heavy rains and forecasts for more rain next week in Minas Gerais, Brazil's largest arabica growing region, which will keep farmers out of fields and delay the application of fertilizers and pesticides. Tighter US coffee supplies also contributed to the rise in prices. On the bullish side, robusta coffee inventories are shrinking and global coffee exports are decreasing. Volcafe predicted a record deficit for the global 2023/24 robusta coffee market.
On the bearish side, the recovery in ICE arabica coffee inventories is a factor. The USDA cut its global 2022/23 coffee production estimate and global coffee ending stocks estimate. The drought led to a decrease in Brazil's coffee output, but Conab forecasted an increase in the 2022/23 Brazil arabica crop.
As I continue to read up on coffee, it has become clear that staying on top of weather forecasts for Minas Gerais, Brazil is key to understanding intraday price movements. I plan to source reading material on the nuances of the coffee trade.
Cocoa
Cocoa prices increased moderately on Friday, with New York cocoa reaching a one-year high and London cocoa a 2.25-month high, as some Ivory Coast cocoa exporters are close to defaulting on their contracts due to a lack of cocoa beans. Concerns about the quality of some West African cocoa crops due to a lack of fertilizer and pesticides also supported prices. However, reports of recent rain boosting soil moisture levels in Ivory Coast and Ghana, leading to larger yields of the cocoa mid-crop, and tepid global demand are negative factors for prices.
Global cocoa production for the 2021/22 year fell 8% YoY, and the global cocoa deficit was revised upward by the ICCO to -306,000 MT from a September forecast of -230,000 MT.
There are more moving parts to the cocoa trade than there are to coffee. I will be sourcing some deeper fundamental readings on this one this week as well.
Wheat
Wheat futures closed mixed, with KC wheat up while SRW and HRS contracts faded. The weekly loss was limited for March HRW to 2.5 cents.
Ukraine is expected to produce 64.8 MMT of grain in 23/24, including a 17.4 MMT wheat crop with a 14 MMT forecasted wheat export program.
USDA projected 23/24 wheat acreage of 47.5m producing 1.92 bbu.
IGC's Feb world wheat figures show a slightly higher trade and slightly looser carry out, with trade upped by 2.5 MMT mainly to Russia and stocks 1.1 MMT looser mainly in the EU, to 281.7 MMT.
Energy
Developments/News
Crude Oil (Brent)
Brent experienced a healthy pullback in tandem with WTI. The overall story hasn't changed and we expect oil prices to remain relatively flat over the next week.
The discussion surrounding China's decision to drop its COVID-zero policy is heating up, with speculation that Beijing is contemplating easing or rolling back its restrictions. Chinese stocks have soared amid these rumors, and a new report from Goldman's commodity team suggests that China has ramped up crude imports in preparation for an eventual reopening, which Goldman predicts will likely take place in 2Q 2023. The oil market is currently depleted of inventories and spare capacity, and the risk of supply disruptions in various countries is elevated. Current lockdowns in China are subtracting from oil demand, but Goldman believes that recent headlines simply mark the start of a multi-month preparation period for reopening.
Crude Oil (WTI)
The supply zone in oil I highlighted last week worked to perfection, moving down $4 per barrel for a massive return. The risk was very tight on the trade as well. However, it was only a short-term viewpoint and that trade has now concluded. Overall we are still caught in a general range between 72 and 82 per barrel.
The macro story remains the same as Brent's.
Liquified Natural Gas
No significant developments, but we continue to monitor weather tendencies. As it continues to get warmer I expect this trend to continue.
Comments
Post a Comment