Can the Heating Oil Crack Spread Go Lower?

Can the Heating Oil Crack Spread Go Lower?

August 7, 2020

Heating oil prices (ULSD futures) are at some of the lowest values in ten years.  Below is plot of the December 2020 Heating Oil contract crack spread (black line), at $12.06 for the August 6, 2020 settle.   At this level the crack spread is not profitable for refiners.  This spread reflects manufacturing and commercial activities which has been greatly reduced because of the Covid-19 pandemic.   We do not believe this is an opportunity to go long the crack spread – low prices and low cracks do not necessarily signal a buying opportunity.  In energy, if futures prices are low, they will often go lower.

The chart below can be constructed in the Fundamental Analytics platform under Prices > Energy > WTI Crude Oil > Instruments & Spreads.

 


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The information provided here is for general informational purposes only and should not be considered individualized investment advice. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Gold, Silver, and Palladium Commentary August 5, 2020

Gold, Silver, and Palladium Commentary
August 5, 2020

Both gold and silver continue to make significant gains due to several underlying factors in the market (negative real interest rates, Covid-19, inflationary fears, overvalued markets, political risks, geopolitical tensions, hedging). The ratio of the 1-month Gold contract to the 1-month Silver contract (Figure 1) continued the downward trending, falling another 4% this last week as front month silver rallied 7.2% and front month gold 2.9%. With the front month silver and gold contracts closing yesterday at $26.01 and $2001.2, respectively, the gold/silver ratio is now 76.93, or 18.5% higher than the 15-year average. December Gold (Figure 2) closed yesterday at $2021 and September silver (Figure 3) moved up to $26.03 from $24.3 last week. Both gold and silver have risen 10.2% and 33%, respectively, since July 17.

From an open interest perspective, gold’s open interest is down 5% from 7/17, the beginning of the recent bull run, and down 8.3% from its recent peak on 7/23.  This is different than silver, where silver’s open interest continues to climb, up 11% from 7/17.  Both gold and silver saw drops in the COT net funds positions between the 7/21 and 7/28 reports.  While the number of gold short positions held by the bullion banks are at historic positions, they fell 7.7% from the previous week’s report. The difference between the December and August gold contracts at $19.8/oz, which is similar to last week. We continue to believe that for the longer-term, fear of inflation resulting in negative real interest rates will continue to pressure gold higher.  But does the rapid rise in gold, combined with falling total open interest falling as gold rises, possibly signal this recent rise may be partly an attempt to close shorts?

Now for Palladium. Palladium saw a large move down this last week and even with this move down, the palladium/silver ratio continued to fall, highlighting the significance in the silver move.  Total open interest as well as non-commercial net-position of funds continue to increase for palladium.  Even though total open interest fell last week, it is still climbing with respect to 7/17. The most recent COT report shows net non-commercial positions continue to increase in palladium as well. Continued demand for palladium as well as a continued rise in total open interest should continue to provide support for the metal.

The final thoughts I leave with you today center on the concepts outlined in the opinion article written by Tim Duy on Bloomberg on July 17, 2020. You can find the article here. The concepts outlined in this article could be very important as they outline proposed Fed policy changes on how the Fed may react to economic conditions and how this could affect inflation and real interest rates.  Some believe this signal from the Fed is what has led to the extraordinary increase in gold and silver prices since July 17.  In short, the Fed may place less emphasis on the Phillips Curve for forecasting inflation and instead run the economy hot to drive up inflation, in order to bring down unemployment while using yield controls. We have some reservations about this type of engineering. The Fed’s thinking seems to be that such actions may result in times were inflation runs higher than expected and combined with yield controls may result in negative real interest rates for some time to come (years).  The fact that gold and silver prices have jumped significantly since this time seem to indicate that investors are quickly looking for places to park their money in order to limit issues from negative real rates.

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The Fundamental Analytics Team

The information provided here is for general informational purposes only and should not be considered individualized investment advice. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Ethanol Production on the Rise Could Have Impact on Corn Prices

Ethanol Production on the Rise Could Have Impact on Corn Prices
August 3, 2020

Fuel Ethanol production is on track to return to more normal levels.  With that increased production there is a corresponding increased demand for corn, which in turn will increase corn prices.  The price increase will probably lag the ethanol production increases.   However, monitoring fuel ethanol production could act as a leading indicator for corn prices.

The chart below can be constructed in the Fundamental Analytics platform under Fundamentals > DOE > Fuel Ethanol > Production > Total US.

 


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The Fundamental Analytics Team

The information provided here is for general informational purposes only and should not be considered individualized investment advice. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Is Contango Coming Back in the Crude Market?

Is Contango Coming Back in the Crude Market?

July 31, 2020

The chart below plots the forward curves for WTI Crude futures contracts.  The black line plots the settles as of July 30, 2020, with the September contract settle at $39.92; the red line plots the settles of two weeks earlier, July 16, 2020, with the August contract settle at $40.75.  The contango structure of the curve has steepened as the front of the market has dropped from $40.75 to $39.92.  A falling market generally increases the contango and, in turn, pressures prices.  The contango should be monitored.

The chart below can be constructed in the Fundamental Analytics platform under Prices > Energy > WTI Crude Oil > Analysis.


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The Fundamental Analytics Team

The information provided here is for general informational purposes only and should not be considered individualized investment advice. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Gold, Silver, and Palladium Commentary July 29, 2020

Gold, Silver, and Palladium Commentary
July 29, 2020

The past few days have been for the financial history books. This might be true for the few weeks too. Both gold and silver made significant gains since our last commentary a week ago. The ratio of the 1-month Gold contract to the 1-month Silver contract (Figure 1) continued the downward trending falling another 6.5% this last week as silver rallied much more than gold.   With the front month silver and gold contracts closing yesterday at $24.27 and $1,944.70, respectively, the gold/silver ratio is now 80.14, or 24.9% higher than the 15-year average.  Astute readers will observe that we changed our comparison this week from the 5-year average to the 15-year average to provide a better longer-term view of the ratio.   December Gold (Figure 2) closed yesterday at $1963.90, up 5% since the 7/21 close, and September silver (Figure 3) moved up to $24.3 from $21.557 last week, reflecting an increase of 12.7% since the close on 7/21.

Total open interest for both metals continue to increase along with increasing prices which tends to indicate increased long positions versus short covering.  Open interest on gold is up 30% since recent low in June 2020 and volume increased dramatically this week, up about 200% over last week.  As with gold, silver volumes are close to historic highs and the most recent COT report shows continued increase in non-commercial net long positions.   The number of gold short positions currently held by the bullion banks remain elevated from historic levels with difference between spot and front month contract at about $3.80/oz.   In addition, the difference between the December and August gold contracts are down to $19.2/oz from this same time last week.  As we have been saying over the last weeks, we believe longer-term health of the global economy as well as expectations about higher inflation may tend to keep gold elevated and rising.

  

Now for Palladium.  Palladium saw a large move up this last week and even with this move up, the palladium/silver ratio continues to fall.   Total open interest as well as non-commercial net-position of funds continue to increase for palladium.  While down significantly from before February 2020, total open interest is now up nearly 60% from its recent low in March, and the most recent COT report shows net non-commercial positions continue to increase as well.   These factors bode well for continued support for palladium.

The final thoughts I leave with you today are from a paper and interview published this year.  Both have to do with inflationary pressures, the same root cause, but explained in different ways.  The first was written by Hans Fredrik Hansen, which was published in this years’ “In Gold we Trust” report, pages 160 – 176 titled “Monetary Endgame Head? When Absurdity Becomes the New Normal”.    Hans discusses that they only way to increase growth in this environment is to increase the velocity of money which will eventually result in higher inflation.  The interview was given by Scottish market strategist Russell Napier, who has for two decades seen deflation as the dominant theme.  He is now warning of rising inflation, driven the need to reduce the massive government debt by ensuring inflation remains above bond yields for years.    Both of these papers point to potential higher inflation and keeping government yields low, which will result in lower real rates which is good for the price of gold.


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The Fundamental Analytics Team

The information provided here is for general informational purposes only and should not be considered individualized investment advice. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

US Soybean Exports Lagging Behind Last Five Years

US Soybean Exports Lagging Behind Last Five Years
July 27, 2020

According the latest FAS export sales report, old crop soybean sales dropped 46% below the prior four-week average of 11.5 million bushels, but exports were helped by another 28.2 million bushels in new crop sales for a total of 39.7 million bushels. The 39.7 million bushels exports were on the low side of estimates ranging between 25.7 million and 68.0 million bushels.  China has come back as a major importer at 14.3 million bushels. However, cumulative totals for the 2019-2020 marketing year are still at the lows, slightly behind last year’s pace, with 1.452 billion bushels.

The chart below can be constructed in the Fundamental Analytics platform under Fundamentals > FAS > Oil Seeds > Soybeans > Accumulated Export.


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Best Regards,

The Fundamental Analytics Team

The information provided here is for general informational purposes only and should not be considered individualized investment advice. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Refiner’s Demand for Crude Oil

Refiner’s Demand for Crude Oil

July 24, 2020

Crude oil is the Oil Refiner’s raw material that is processed in gasoline, diesel fuel, jet fuel, etc.  As the need for the refined products declines the amount of crude oil needed correspondingly declines.   By mid-May gasoline and diesel fuel demand had bottomed out and demand was increasing, so crude runs increased.  Now, however, with the rising Covid-19 cases and hospitalizations, refined product demand is down.  Crude runs, at 14.3 million barrels per day, show the change from increasing runs to now decreasing runs.  Monitoring crude runs acts as an index of the state of the US economy.

The chart below can be constructed in the Fundamental Analytics platform under Fundamentals > DOE > Crude Oil > Refiner Inputs and Utilization > Crude Oil Inputs > Total US.

US Total Crude Runs (Year-over-Year)

Latest Data as of Friday, July 17, 2020   14.3 million barrels per day

US Total Crude Runs

Latest Data as of Friday, July 17, 2020   14.3 million barrels per day


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Best Regards,

The Fundamental Analytics Team

The information provided here is for general informational purposes only and should not be considered individualized investment advice. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Gold, Silver, and Palladium Commentary July 22, 2020

Gold, Silver, and Palladium Commentary
July 22, 2020

The ratio of the 1-month Gold contract to the 1-month Silver contract (Figure 1) continued the downward trending, falling a significant 8% this last week.  Even with gold’s strong upward move, the fall was driven by silver’s even more aggressive upward move.  With the front month silver and gold contracts closing yesterday at $21.497 and $1,842.40, respectively, the gold/silver ratio is now 85.71, or 12% higher than the 5-year average, having fallen from 20% last week.   August Gold (Figure 2) closed yesterday at $1,843.90, up 1.7% since last week and September silver (Figure 3) moved up to $ 21.557 from $19.53 last week, up 10.4% since last week.   Total open interest for both metals continue to increase along with increasing prices which tends to indicate increased long positions.  But it is interesting that gold volume remains subdued compared to 2019 average volumes and the most recent COT report showed a slight decrease in gold non-commercial net long positions.  Silver volumes are close to historic levels and the most recent COT report shows continued increase in non-commercial net long positions.   The most recent “In Gold We Trust” report stated that a falling gold/silver ratio significantly increases the probability of a bull market in gold.  This is the exact scenario we have seen for the last few months.

Two additional items we should continue to watch with gold are the large number of short positions currently held by the bullion banks as well as the large spread between the August and December gold contracts.  This December contract was $25.7/oz more expensive than the August contract at end of day yesterday, where the five-year average is about $8/oz.   Since 2003, the difference between the August and December contracts have not exceeded $12/oz for any length of time.  Finally, we believe the concerns regarding the longer-term health of the economy as well as expectations about higher inflation may tend to keep gold above 1800.   If this upward momentum continues it may also pressure the bullion banks to attempt to exit their short positions thus maintaining the upwards pressure.   But this would most likely only occur should the spread between the spot and futures price start to rise.

As we have noted over the last few weeks, the total open interest as well as non-commercial net-position of funds have both been increasing for palladium.     It should be noted that total open interest continues to build since the lows in late June and the COT report shows net non-commercial positions continue to increase as well.   As mentioned last week we will continue to watch this trend to see if there may be early signs of a directional move.   Without a clear signal of increasing open interest or news on increased production demand, we expect palladium to continue to trade in a similar pattern for the near future.

These final two charts compare the forward curves from July 21, 2020 and July 19, 2019 and then present the open interest of the June, August and December gold contracts.  The significant difference in the shape of the forward curves is what is driving the difference now seen between the August and December gold contract.  A similar effect also occurred this year at the end of May as the final roll from June into August was 85% complete.  This month, this effect is occurring much earlier and has occurred near the peak of the August open interest as the roll began.   Both peaks are identified by red arrows on the second chart.   This seems to indicate the pressures to roll to the next contract are rising, compared to previous times.


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Best Regards,

The Fundamental Analytics Team

The information provided here is for general informational purposes only and should not be considered individualized investment advice. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

US Corn Exports Lagging Behind Last Five Years

US Corn Exports Lagging Behind Last Five Years
July 20, 2020

The latest USDA FAS (Foreign Agriculture Service) release on Thursday, July 16, 2020, for data up through Thursday, July 9, showed that after several weeks of strong exports, U.S. corn volumes dropped below five-year average levels and are considered to remain that way as South American crops dominate the export markets.

In the FAS weekly export sales report, corn exports dipped for the week ending July 9 as Brazil’s corn crop begins to take over export channels. It was the second straight week of corn export declines as volumes dropped 2.8 million bushels from the previous week to 39.9 million bushels, as it appears that time has run out on seasonal export strength.  The chart below plots the accumulated exports of corn during this 2020/2021 market, 1.42 billion bushels, below the last six at this time.

The chart below can be constructed in the Fundamental Analytics platform under Fundamentals > FAS > Feed Grains > Corn > Accumulated Export.


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Best Regards,

The Fundamental Analytics Team

The information provided here is for general informational purposes only and should not be considered individualized investment advice. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.

Oversupply of Total Petroleum Products

Oversupply of Total Petroleum Products

July 17, 2020

Much discussion has centered around the oversupply of distillates because of refinery configurations producing unneeded supplies of distillates.  However, taken as whole, considering that  inventories of crude oil, gasoline, naphtha, kerosene, jet fuel, diesel fuel, etc. together now are at record levels for the last 35 years. While crude oil and refined product prices have recovered from historic lows during the last three months, these price levels may be only temporary given the serious bearish fundamentals.

The chart below can be constructed in the Fundamental Analytics platform under Fundamentals > DOE > Crude Oil > Stocks > Total Stocks (Excluding SPR)

Figure 1 – US Total Petroleum Stocks

Latest Data as of Friday, July 10, 2020   1,452 million barrels

Figure 2 – US Total Petroleum Stocks (Year-over-Year)

Latest Data as of Friday, July 10, 2020   1,452 million barrels


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Best Regards,

The Fundamental Analytics Team

The information provided here is for general informational purposes only and should not be considered individualized investment advice. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.