About shipping dynamics driving softs higher, make or break time for crude and peakish inflation
Commodity Report #35
The benchmark, Bloomberg Commodity Index, ended the week 2% higher.
The energy sector was the best performing sector this week, followed by regained strength in the soft sector. On the losing side, we saw grains that were sold off following the release of the monthly WASDE report.
Crypto was solid in a consolidation phase at key technical levels. Gold and many metals were higher — even while the Realyield was this week higher too.
Here is my latest playbook:
Make or break time for crude oil
Higher high or not — that is here the question if you look at the technical chart of crude oil. I’m still not so sure about the 100$ crude prediction that is consensus right now on Twitter. I still see a lot of downside potential for crude in the next few months.
While several fundamental factors advocate even higher oil prices, as low inventories, low CAPEX into the oil sector and a trend from investors from growth to value stocks and investments, there are also fundamental reasons to believe in lower oil prices in the coming weeks, as a slowing PMI, restocking of inventories (see Cushing) and overall money manager sentiment.
Also, keep in mind — that crude currently seems to be another treasury yield proxy — so if oversold treasuries start to reverse again…you know.
Don’t take the Baltic Dry index as a single indicator for the shipping industry dynamics!
I currently see too many people on Twitter using the Baltic Dry index and referring to the falling cost of shipping goods. But the BDI only gives you a small fraction of the whole puzzle. That’s why I always lay several shipping indices which measure several costs of transportation, cargo and goods, over each other. There can you see that the shipping crisis is far from solved.
Nevertheless, there is also good news already on the horizon. It seems like the high cost of shipping containers leads to a higher CAPEX into new vessels and container ships in the future. When there is more supply of ships in the future and demand stays the same — rates will come back down again. Everything here is a question of time. This chart shows how many new ships were ordered over the past 3 years.
Softs are rising
While I still stand behind my call of falling soft commodity prices in 2022, I must admit that still rising shipping costs and low capacity are delaying this reversion to the mean trend till today. IMO higher prices in cotton, sugar and coffee are opportunities to add to existing short positions, as long as enough liquidity is available. A strong stomach is needed here!
WASDE report
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The latest WASDE report by the USDA gave grain traders some new insights.
Responding to the report several grains were selling off the following days sharply. But there are actually winners and losers right now — so it’s important to look at every grain separately.
I will discuss the implications of that in this week’s Member report — a closer look at corn, soybean as well as oil and meal, oat, wheat futures, and the fundamental as well as technical trends in the sector.
If you haven’t done it by now — consider subscribing to the weekly commodity report to get updated about the most important developments in the commodity sector every Monday morning (for free)
US Dollar Update — make or break time (again)
As I wrote for several weeks — I expected a correction in the Dollar Index. Now it seems like this correction is here. Let’s see how long the selloff will hold on.
Elsewhere In The Macro World
As I stated several times in my reports, I expect inflation to peak around February this year. Last week we saw more indices of that actually happening — the inflation trend seems to top out, when also on high levels.
I expect inflation to persist further (something like 3–4%) — but the rate of change will slow down from here on (I expect February) It’s hard to beat last year’s YoY comparisons IMO.
Much weaker than expected retail sales data confirmed that bias on Friday.
This week look out for:
- a quiet week on the news front
Coming up in tomorrows Member Report:
WASDE report review & where grains are headed next
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