Hurricane Laura Halts Crude Oil Production in the Gulf of Mexico

Hurricane Laura Halts Crude Oil Production in the Gulf of Mexico

August 31, 2020

Hurricane Laura has forced the evacuations of crews from offshore platforms in the Gulf of Mexico. It has been estimated that around 1.6 million barrels per day of offshore crude oil production has been halted. It entails a loss of about 84% of U.S. offshore crude oil production in the Gulf of Mexico. Additionally, producers have halted about 1.65 billion cubic feet per day of natural gas production from the Gulf of Mexico.  We will update the production chart below once the storms have end.

The chart below can be constructed in the Fundamental Analytics platform under Fundamentals > DOE > Crude Oil > Production > Domestic 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.

Dry Weather and Derecho Windstorm in Iowa Has Set Back the Corn Crop

Dry Weather and Derecho Windstorm in Iowa
Has Set Back the Corn Crop

August 24, 2020

Surveys of corn yield in the US Midwest last week estimated 2020 corn yields will likely total 177.5 bushels per acre (bpa). The USDA continues to survey the damage to the Iowa crop from the August 10 Derecho windstorm and with dry weather conditions persisting across the Midwest Corn Belt, today’s Crop Progress report shows a significant downgrade in corn quality. The report for August 9 showed 69% of the Iowa’s corn crop to be in good to excellent condition with the biggest quality decrease in Iowa, compared to today’s report for August 16, which shows 58%.

The chart below can be constructed in the Fundamental Analytics platform under Fundamentals > NASS > Corn > Condition > Excellent + Good > Iowa.


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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.

Drop in Commercial Air Travel Impacts Jet Fuel Demand

Drop in Commercial Air Travel Impacts Jet Fuel Demand

August 21, 2020

In mid-March a national emergency was declared.  Routine business air travel stopped and discretionary air travel halted.  The resulting demand for jet fuel dropped from around 1.9 million barrels a day to less than 600,000 barrels a day.  Demand had recovered to about 1.1 million barrels a day by the beginning of August but now it is decreasing again.  It now appears that the US business travel will not increase after this summer vacation period, so going forward, we do not expect a further recovery of jet fuel demand and there remains the downside possibility of demand again falling.

The chart below can be constructed in the Fundamental Analytics platform under Fundamentals > DOE > Implied Demand > Commercial Kerosene-type Jet Fuel > 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.

Gold, Silver, and Palladium Commentary August 19, 2020

Gold, Silver, and Palladium Commentary
August 19, 2020

The front month contracts of gold and silver are up from last week 3.46% and 7.73%, respectively.   This has resulted in the ratio of the 1-month Gold contract to the 1-month Silver contract (Figure 1) falling since last week, but essentially unchanged since Aug 6, 2020.   With the front month gold and silver contracts closing yesterday at $1999.4 and $28.05, respectively, the gold/silver ratio is now 71.28, or 9.2% higher than the 15-year average.   December Gold (Figure 2) closed yesterday at $2013.1, up 3.43% from the close on Aug 11, but essentially unchanged since Aug 4, 2020.  December silver (Figure 3) closed at $28.24, up 7.6% since last week, but almost unchanged from its close on Aug 7, 2020.

From an open interest perspective, gold’s open interest continues to fall, as it is down 1% for the last week and down 10.7% since recent open interest high on July 27.   Silver total open interest is down 5% for the last week and down a similar amount from the peak in open interest on Aug 6, 2020.  Both gold and silver saw a decrease in the CFTC COT net funds positions between the 8/4 and 8/11 reports, which continues the trend in net positions since the July 21, 2020.   It should be noted that gold non-commercial net fund positions are well above their 5-year average where silver is below.

Now for Palladium.  Palladium remains range bound between $2130 and $2365 and will likely remain there unless we see definite proof that automotive production in countries other than China are increasing or rhodium is in short supply (see below).

The final thoughts I leave with you today are regarding the price of palladium.  Russia’s Nornickel, the world’s largest high-grade nickel and palladium producer released their latest earnings and business outlook on Aug 11.  For those who are interested you can find the report here.  Nornickel has a neutral outlook on palladium as they expect to see a balance year with respect to supply and demand.  This is a shift in expectations as until recently demand was expected to exceed supply.   However, the price of rhodium has increased 34% since August 5, 2020.  As rhodium often is a good indicator of future trends in palladium, this increase should be monitored (Figure 6).    If there is a shortage of rhodium, auto makers are forced to increase their palladium loadings substantially, per the Nornickel report and this could drive up the price of palladium as happened in 2019 and 2020.


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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.

WASDE Reports Record High Corn Yield

WASDE Reports Record High Corn Yield
August 18, 2020
The latest WASDE report, issued last Wednesday, has corn yield estimates greater than what the market was expecting.  The trade was expecting a report of about  180.5 bushels per acre as a national average yield, but the WASDE report was 1.3 bushels more at 181.8. If that becomes reality, then that would be a 14.4-bushel increase year-over-year, or nearly 10% higher than last year. This would be a  new national record corn yield by US farmers and implies a total corn harvest of about 15.3 billion bushels, another a new record.
The chart below can be constructed in the Fundamental Analytics platform under Fundamentals > PSD > Corn > Yield > North America > United States.

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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.

Oversupply of Distillates Stocks

Oversupply of Distillate Stocks

August 14, 2020

Total Distillates Stocks remain high and counter seasonal.  The counter seasonal growth in Distillate Stocks starting in mid-March and now reaching record highs is another example of the economic impact of COVID-19.  With the collapse in the demand for jet fuel and the large reduction in manufacturing, the demand for distillates has been dramatically reduced.  Thus, the oversupply of unneeded distillates is illustrated by the growth and record levels of distillates stocks.

The chart below can be constructed in the Fundamental Analytics platform under Fundamentals > Distillates Fuel > Stocks > 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.

Gold, Silver, and Palladium Commentary August 12, 2020

Gold, Silver, and Palladium Commentary
August 12, 2020
Both gold and silver fell yesterday due to rising optimism related to a vaccine as well as due to rising yields. Comparing prices to the close last Tuesday, gold is down 4.7% and silver is essentially unchanged. The ratio of the 1-month Gold contract to the 1-month Silver contract (Figure 1), while up yesterday, continued its downward move since last week.  With the front month silver and gold contracts closing yesterday at $26.04 and $1932.6, respectively, the gold/silver ratio is now 74.23, or 14.7% higher than the 15-year average. A descending gold/silver ratio is historically positive for gold but keep in mind it is nearing its 15-year average. December Gold (Figure 2) closed yesterday at $1946.3, down 3.7% from the close on Aug 4. September silver (Figure 3), while falling a massive 15% yesterday, closed at $26.09, almost unchanged from its close on Aug 4.
From an open interest perspective, gold’s open interest is down nearly 10% from its short-term peak on 7/23 and is down 1% for the last week, possibly signaling continued closing of long positions.  Silver total open interest peaked on Aug 6, corresponding to silver’s recent high, and is down 1%. But even with the large move yesterday, total silver open interest is little changed for the week.  What is significant is that total silver open interest has finally climbed back to levels seen prior to the COVID pandemic. Both gold and silver saw increases in the CFTC COT net funds positions between the 7/28 and 8/4 reports. But the small moves in net positions of funds are not correlated to the large moves in silver and gold, when compared to history. In our commentary last week, we questioned why gold was continuing to move up aggressively while total open interest was falling.  At the time we were concerned that gold was moving up too aggressively and the previous two days seem to confirm our concerns.
Now for Palladium. Palladium saw continued up and down movement over the last week appearing to settle into a channel between $2050 and $2450. While these moves are significant with respect to the price of palladium, they are similar to how palladium has acted for much of 2020.  It is important to note these moves are coming in an environment where palladium’s total open interest is only 30% of pre-COVID totals and volumes have recovered to about 40% of pre-COVID volumes.  The last time palladium traded at this low open interest was back in 2004, so it appears to have lost favor. As a reminder, we track both palladium and silver and compare the movements as both metals are used heavily in industry.  As the supply of palladium remains constrained with respect to expected future demand, we would expect to see palladium price gains exceed or keep pace with silver price gains as industrial demand increases.  While the price of palladium has increased, it has not done so at nearly the rate of silver during the last several weeks, indicating silver gains are driven by more than just industrial use.
The final thoughts I leave with you today are regarding the price of gold in today’s environment.  Many recent articles have pointed to the large inflow of funds into gold ETF’s, a simple way to add gold exposure to portfolios.  (I am not for or against and I am not making any recommendations for or against). The increased buying along with the rapidly rising price of gold, then the quick drop yesterday has left many wondering what a reasonable price for gold is.  For those who are seeking to add gold as a hedge, how do they know what is a good price at which to buy?   As we have previously discussed, gold has been negatively correlated to the real yield (once inflation is deducted) of the 10-year Treasury.
As real rates (rate of interest minus inflation) went down, gold went up.  We have also discussed the article by Charlie Morris on how he values gold as if it were a bond. If you have not read the article, I would recommend and you can find it here.   As we have said for the last few weeks, we believe the continued market risks and geopolitical tensions combined with COVID are positive for 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.

Hedge Funds Still Very Bearish on Corn

Hedge Funds Still Very Bearish on Corn
August 10, 2020

Despite the concerns in the US and China for this year’s corn crop because of high temperatures and dampness that stunt the growth of corn plants, the Hedge Funds are still bearish on corn prices. In mid-May the Funds were net short about 250,00 contract and now are less so, net short about 100,000.  However, they are at a record net short compared to their positions during this week of the year versus previous years. We would not be surprised to see the Funds increase their net short positions as prices weaken, and then the increase in the net short positions would further pressure prices.

The chart below can be constructed in the Fundamental Analytics platform under Fundamentals > CFTC > Agriculture > Corn CBOT > Non-Commercial.

CBOT Corn – Net Short Positions


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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.

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 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 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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If you have any questions, please contact our Technology Manager, Mike Secen at mike.secen@fundamentalanalytics.com

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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.