By: Gary Burton CFTe On: September 29, 2019 In: Expert Advice, Market Commentary, Most Popular Comments: 0

Several conflicting themes are emerging in 2019, the first is the persistent warnings of a global growth slowdown. At the same time, the world is focused on oil for potential short-term supply shortages and copper, again for supply deficits  both in strong demand as the shift takes place to renewable energy sources to power electric cars while mining and processing shortages loom.

China’s coal hub Linfen in central province Shanxi, one of the most polluted cities in the nation, plans to extend its winter restrictions on heavy industries to the end of the third quarter this year as it strives to meet air quality targets. Steel mills and coke plants in the city will be ordered to halt at least 30 percent of their operations or even shut down during the period.

Linfen was identified by the Government Environment Ministry as the worst performer in terms of air quality in the first quarter 2019 among the 168 cities that are monitored across the country.

Central banks continued to be the largest buyers of gold during 2018, buying 615 tonnes, a record, and have extended buying into 2019.

In soft commodities, Chicago wheat futures continue to slide, with prices under pressure from expectations of bumper production in Russia and the United States.

US winter wheat crops remain in largely good or better condition much as the market expected during late 2018. The USDA said 60 percent of the winter wheat crop is in good-to-excellent condition, compared with 31 percent a year ago.

The United States has won a World Trade Organization ruling against China’s use of tariff-rate quotas for rice, wheat and corn, which it successfully argued limited market access for US grain exports.

Western Australia generates about 50% of Australia’s total wheat production with more than 95% of this exported predominantly to Asia and the Middle East. This market has recently come under pressure from increased competition from low cost producers such as Russia. However, West Australian bred premium wheat varieties have risen by 1% per year during the past 30 years, a rate higher than the world average.

Oil
The Organization of the Petroleum Exporting Countries (OPEC) met in Vienna last December. The organisation was in danger of imploding as the cartel of big oil producers lurched from crisis to crisis—crashing prices, regime changes in member countries, cartel infighting, and frequent attacks by Mr. Trump.

Russia has stepped in and wielded its power as a major oil producer to help. That has given Mr. Putin considerable influence over the direction of the world’s $1.7 trillion crude-oil market, and more power in the Middle East. Russia is now OPEC’s therapist!       Source: WSJ

US crude oil output from seven major shale formations is expected to rise by about 80,000 barrels per day (bpd) in May to a record 8.46 million bpd, the US Energy Information Administration has advised.

The US rig count, an early indicator of future output, is higher than a year ago when 815 rigs were active.

Oil  West Texas Weekly chart

Price divergence from December 2018 continues to play out with price moving from the bullish flag pattern through several resistance levels, the most recent at $61.80. This breakout on a large range bar has been followed up with two consolidation short range weeks. This current $61.80 should become the support level on any price weakness.
The relative strength indicator has now rolled over above the 70 level indicating a loss of upward momentum.
To remain in a bullish primary up trend, a closing price over the $65 and $70 is required in the coming quarter.

Iron Ore Continuous Contract

During January – February 2019, China’s steel mills appeared reluctant to restock despite the supply outage from Brazil, and remain focused on the China US trade negotiations.

Major producers, including BHP and Fortescue, have indicated they are unable to raise exports significantly to cover the losses from Brazil.

But any restocking by Chinese steel mills is expected to be subdued in the short-term considering their pressured margins, tight credit conditions, and sintering cuts as pollution levels in China continue to worsen.

The weekly utilization rates at steel mills across China edged up to 65.75 percent recently as of the end of February 2019.

Rolled Steel prices extended gains in early 2019, with the most-active rebar contract on the Shanghai Futures Exchange up 1.6 percent to US $194.0 a tonne.

Mining company BHP Group anticipates China’s infrastructure to rebound in 2019, while its property market will be resilient and the automobile market will improve after a very weak 2018.

Concluding Comments:  With price moving below $62.00 (4), a potential trading range between $59.00 and $69.00 would currently be the most identifiable pattern.

With support coming into play above $71.00, the weekly chart shows strong weekly trading range move over the $80.0 rejection level established during February 2019.

With immediate rejection below this key level, $71.00 will become the next support level to monitor.

Short term support is indicated at the $71.0 level, however the large price gap back to $68.0 will be the lower target on any further weakness in price.
The Slow Stochastic indicator is moving to a 2nd ‘swing sell’ signal as this new $80.0 rejection plays out.
The underlying primary trend remains up.

Zinc Weekly

Zinc was again under pressure after another surge in inventories on the LME. This saw zinc futures falling over 3 percent and break below the strong upward channel it has been trading this year.
A railway that carries zinc from major producers such as Glencore and South 32 across Australia’s outback is expected to reopen this month after it was damaged by floods.

Pessimism continued to mount on the back of weak European PMI data and potential weak Chinese data and the strengthening US Dollar.

The Weekly chart for Zinc shows key resistance at 25,000 CNY and support at 20,600 CNY.

This trading range at best is set to continue as a reflection of inventory data.
A breakout to the high side would be best case scenario as a demand increase from global manufacturing.
In the short-term, the current 22,415 CNY level being tested is a positive move for a retest of the 25,000 level resistance highs. The Relative strength Indicator (14) is not showing any real positive price momentum as the value drifts around the 50 level.

Copper

Major producers BHP and RIO continue to invest heavily into c-opper projects across the world as Chile’s Cochilco state copper commission held its estimate for the price of copper at $3.05 per pound, rising to $3.08 for 2020 on improving prospects for growth in China. This will be the driver of copper for 2019 and beyond.

Electric Cars- While conventional cars contain about 9 to 22 kilograms of copper, a hybrid electric vehicle typically contains 35 kilograms of copper, while the plug-in hybrid electric vehicle uses about 59 kilograms of copper. And finally the battery electric vehicles typically contain more than 81 kilograms of copper.
Copper producers by production output, has Codelco on top followed by Freeport McMoRan with BHP coming in third. Research analysts focused on future transport requirements predicted that the increase in copper demand for electric cars and buses will move from 185,000 tonnes currently in 2018 -19 to 1.74 million tonnes in 2027.

This represents a 9-fold increase in copper requirements for electric vehicles.

Concluding comments:  The $2.85 resistance level may become the support level on any retest of lower prices.

The weekly chart of copper has now entered into a primary uptrend with the price breaking over the resistance level of $2.85 following the retest of the short-term trend line. A further break during February has set highs of $2.98 followed by the $2.85 resistance level becoming the support level on this current retest of lower prices.
The last trading bar shown has again rejected the $3.00 price level, copper remains in a tight 15 cent/lb range.
The Relative Strength Indicator (14) has moved over the key 50 level and highlights the improving price momentum but remains flat in line with the declining volatility in this consolidation phase.

Gold Continuous Weekly

A moderation of some of the major concerns about the global growth outlook has tempered the price of gold in this second quarter of 2019. Recent data over the quarter has eased concerns and safe-haven assets have been under significant pressure. Among a string of positive economic indications were data from both United States and China that tempered concerns about global growth and took the sheen off safe-haven bullion.
China’s economy grew at a steady pace in the first quarter, defying expectations of further weakness, while trade deficit in the US fell to an eight-month low in February, boosting the country’s economic growth in the previous quarter. The two counties have set a tentative timeline for the next round of trade talks and aim to conclude negotiations by early June, according to a Wall Street Journal report published in April.

The yellow metal is also under pressure from rising momentum on China’s surprising better-than-expected GDP, retails sales and industrial production data released in mid-April.

Concluding comments: The $1306 support line is now the key level to hold on any retracement.

Gold has lost the primary up trend as the ‘hammer’ lows are broken. The weekly chart for gold shows the recent ‘bearish flag’ playing out with an outside period playing into the breakdown below $1290.

The weekly candles have made a decisive move lower. Without a positive fundamental input, the loss of price momentum may see gold move lower to test $1243.32 support.Relative Strength Indicator (14) has now moved below the key ‘50’ level indicating a loss of positive price momentum.

Wheat

In soft commodities, Chicago wheat futures continue to slide, with prices under pressure from expectations of bumper production in Russia and the United States.

Australian wheat production and exports for the 2018-19 season have been scaled back by four million tonnes and 3.85 million tonnes, respectively. It comes as Australian growers watch the skies in the month of May to determine grain plantings for the upcoming 2019-20 season.

The World Agricultural Supply and Demand Estimates April report raised world wheat supplies by 2.1 million tonnes, putting global ending stocks at a total of 275.6 million tonnes. Australian wheat production for 2018-19 were reported at 17.3 million tonnes, down on the 2017-18 figure of 21.3 million tonnes.

Concluding Comments:  Support at US$464 looks set to be retested.

Following a strong move through 4464.0, the weekly chart of Wheat has found consolidation in price.
The low OPu ‘outside period up close’ has a very high statistic for showing major turning points in market price moves as is the case in wheat as it marks the low at $420.00.

The current consolidation pennant back at the $464.00 support level is considered a bullish continuation pattern and a break higher would be the expected outcome. Wheat remains within a trading range between $400 and $555.0.

Gary Burton  CFTe
Gary provides research analysis for Thomson Reuters and is an AR for Mplus Markets.
garyburton@mplusmarkets.com.au

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