TOP COMMODITY TRADING TRENDS TO WATCH

Gold and silver

The precious metals are in the process of breaking out to multi-year highs. Gold prices in July closed at six-year highs and are poised to test higher levels. Silver prices are beginning to percolate and are also poised to test recent highs. The demand for alternative currencies is beginning to change sentiment throughout the capital markets.

The sentiment shift started in the second half of 2019, as Federal Reserve Chairman Jerome Powell told investors and congress that a rate cut in July was likely. This led to a reduction in US yields and made the dollar a less attractive asset to hold. Unfortunately for currency investors, most global economies are contracting which makes other currencies also unattractive.

What has become attractive is alternative currencies such as gold and silver. Both gold and silver are quoted in US dollars and, as the dollar shifted lower, both precious metals have become more attractive. Gold prices have rallied higher than silver and are more attune to currency fluctuations. Silver has more industrial facets but will follow the changes in gold prices.

Sentiment in natural gas remains poor

Natural gas prices have had a difficult time getting off the mat and have pushed down to multi-year lows in 2019. The first named hurricane briefly pushed prices higher, but record production continues to weigh on prices. During the next three months, prices will likely remain volatile as the official hurricane season is from July through to October.

Hurricanes affect production. When a hurricane makes its way through the Gulf of Mexico, drilling operations need to stop, as companies evacuate their employees from offshore drilling rigs. For example, as Hurricane Barry made its way through the Gulf, 70% of production was halted.

Sentiment remains negative. In fact, the US Department of Energy forecasts that natural gas spot prices for June, July, and August this year will average $2.37 per million British thermal units. If realized, this price would be the lowest summer average of natural gas price since 1998. So while the trend is negative, there are situations that could occur where prices surge higher if supply is disrupted. The trend that will likely continue is rising volatility.

Grains are volatile

Corn and soybean prices are whipsawing after rising sharply during June. The weather has played an important role in future supply, as most of the eastern Midwest was flooded with heavy rainfall. While it remains unclear how much corn and soybeans will be harvested in the fall, what is more of a concern is the actual yield experienced per acre. Due to the flooding, farmers were not able to get crops in the ground and many filed for Prevented Planting which is insurance that a farmer can purchase that helps out when you cannot plant your crop due to a natural issue like flooding.

Corn prices in July hit a multi-year high after tumbling earlier in the sprint due to declining demand. Soybean demand has fallen off a cliff. In 2018, China stopped purchasing US soybeans as retaliatory tariffs made US prices too high. US farmers have not been able to find other customers and are expected to receive approximately 28-billion dollars in aid. Nearly 22 billion dollars have been offset by tariffs the US has collected on Chinese products. While President Trump continues to ask China to purchase US agricultural production, until they start this process, demand will remain weak.

The risk is to the upside as supply disruptions for the new harvest could come just as China begins to purchase US grains. This could generate a surge in prices that could drive the trend into a new gear.

Crude oil prices are facing both headwinds and tailwinds.

Crude oil prices continue to whipsaw as supply concerns have been offset by perceived weakening demand. OPEC has stepped up and announced that it will continue to produce at the current reduced levels for another six months. While production from OPEC nations is down, US production has been on the rise. During 2019, US production rose above 12 million barrels per day to 12.3, taking a portion of OPEC’s market share. The US still consumes more than 20 million barrels of crude oil a day, making the country a net importer.

On the demand front, US demand remains stable, but there are concerns about global growth. The Chinese economy only grew by 6.2% year over year, and Europe’s GDP remains subdued. Japan and Australian growth are also slipping which makes it less likely that crude oil demand will rise.

Summary

Several trends are emerging: Gold and silver prices are attempting to break out as investors are looking for alternative currencies. Gold recently hit a fresh six-year high, as safe-haven flows have buoyed the yellow metal.

Grain prices have also been on a bear and have recently consolidated. While the demand picture remains bleak, the lack of US domestic supply due to rains and floods could generate robust volatility.

Energy prices have been mixed. Natural gas prices have experienced a downward trend due to rising production. The Q3 is the heart of the hurricane season which is likely to bring on higher levels of volatility.

Crude oil prices have also been mixed. US supplies have been robust, which has been offset by declining OPEC production. Demand has also started to slip as global GDP begins to contract.