About the Natgas squeeze, crude oil and the Brazilian Real (aka commodity currency)
Commodity Report #37
The benchmark, Bloomberg Commodity Index, ended the week 1,65% higher.
The index was driven by strong energy price increases. Natgas rallied 16% w/w after a short squeeze in the expiring February contract on Thursday.
All metals except Palladium were lower — mostly driven by a very strong USD in the past week. Palladium’s strength is no surprise at all, I wrote about the net long position by commercials for several weeks. This finally played out now.
Grains were also strong over the past week, mostly driven by speculative money flows. Softs were mostly lower, in general, soft commodities are trading mostly sideways over the last 3 months.
Here is my latest playbook:
Natgas with a price explosion
NatGas showed some crazy price swings over the past week. Moreover, we saw a major short squeeze in the already expired February contract on Thursday.
The price strength in the current forward contract (March) is explained by a cold weather forecast for the next week throughout the US. Nevertheless, the price should continue to decline over the next 2 months or so.
Commodity Currency is outperforming
Over the last three months, there was actually only one currency, which was able to outperform the USD — and that was the Brazilian Real.
That’s because Brails economy is highly dependent on Commodity exports and prices in general. Therefore the currency was relatively stable over the past months, compared with other major currencies.
Oil setup has scary parallels to September 2018
If you look at the divergence its looking like 2018, if you look at
IMO the main driver of a higher oil price is the expectation of Russia invading Ukraine. As I explained in last week’s Member report, I still expect a correction in crude oil futures.
Shipping conditions update
Still crazy to see that. There are no signs of easing conditions on the shipping front for containers yet. Meanwhile, the cost of shipping grains and dry bulk is still easing — but the seasonality of the BDI is pointing towards a bottoming process in the next weeks!
w/w changes:
- Harpex +3,29%
- China Freight Index +0,28%
- Drewry -2,87%
- Baltic Dry -11,67%
- IGC Grains/Oilseeds -7,41%
Whale buying activity at bitcoin
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While the general macro environment is speaking against a need rally in bitcoin — it’s still interesting to see that the big buyers are currently buying. Something to keep an eye on — especially if bitcoin is able to break out to the upside again.
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US Dollar Update — rallying higher
The correction in the USD seems to be over. A higher-high was made last week. Moreover, it was the strongest weekly gain for the Dollar Index since June 2021. Therefore it’s still astonishing to mee how resilient most commodities are still performing.
Elsewhere In The Macro World
Maybe the market is expecting too much by now. Here are the latest expectations by investment banks about rate hikes (0,25 pt) in 2022:
- JP Morgan — 5 in 2022, 3 in 2023
- BofA — 7 in 2022, 4 in 2023
- Deutsche Bank — 5 in 2022, 3 in 2023
- Morgan Stanley — 4 in 2022
- Goldman — 5 in 2022
Meanwhile, Fed Fund futures are pricing in 5 rate hikes till the end of 2022!
I still find it hard to believe that increasing rates at least 5 times in 2022 will work well in an environment of a slowing economy. Expectations are too high IMO. I don’t think this is possible without crashing the whole economy.
This week look out for:
- Chicago PMI on Monday
- ISM Manufacturing PMI and JOLTS on Tuesday
- OPEC meeting on Wednesday
- ISM Service PMI on Thursday
- Job report on Friday
Coming up in tomorrows Member Report:
5 rate hikes in 2022? How to trade a too aggressive market sentiment.
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Till next Monday, Lukas
If you have any questions in the meantime, please feel free to contact me via Twitter or Mail.
(The Commodity Report is not investment advice)
