Commodities Recap For The Week Of Dec. 7, 2018

About: ProShares Ultra Bloomberg Crude Oil ETF (UCO), Includes: BCI, BCM, CMDT, COM, COMB, COMG, COMT, DBC, DDP, DEE, DJCI, DJP, DPU, DYY, FAAR, FTGC, GCC, GSC, GSG, GSP, PDBC, RJI, SCO, UCI, USCI
by: Andrew Hecht

A bullish week for commodities.

The dollar edges lower.

Gold over $1250 with silver moving towards the top end of its trading range.

Crude oil and oil products rally as OPEC cuts production by 1.2 million barrels per day.

The stock market falls and digital currency values continue to evaporate.

The Story of This Week: The Triad Replaces OPEC

It was a busy week in the oil patch. The week started with news that Qatar is leaving OPEC to concentrate on their natural gas business. However, the ongoing blockade of the tiny and wealthy nation likely contributed to their decision. After all, discussing energy policy with the Saudis who initiated the blockade has been more than distasteful for the Qataris. UCO and SCO are the double-leveraged crude oil trading products that replicate twice the daily trading performance of WTI futures that trade on the NYMEX division of the CME. In the current environment of high volatility in the crude oil market, these products provide market participants with turbocharged performance on a short-term basis.

On Thursday, December 6 the oil ministers of OPEC could not come to any consensus over output cuts. The market had expected a 1.4 million barrel per day decline in output, but KSA lobbied for only one million barrels. The oil ministers decided to turn to the Russians for guidance and support. The Russian oil minister Alexander Novack worked with Vladimir Putin to come up with a solution. Meanwhile, U.S. President Donald Trump continued to pressure the Saudis and other allies in the cartel to leave production unchanged.

OPEC's influence in the oil market has declined appreciably over recent years. If it were not for the Russians and Vladimir Putin, they would have had lots of trouble digging their way out of the situation when the price of the energy commodity fell to a low at $26.05 per barrel in early 2016. This week, the ministers turned to the Russians once again. The three leading producers of oil in the world are the United States, the Russians, and Saudi Arabia. The triad now controls the global oil market, and other OPEC members have become little more than a sideshow. Qatar's exit from the cartel was a realization that the power base in the oil market has shifted as policy is now made in Washington DC, Moscow, and Riyadh.

On Friday, December 7, the members of OPEC decided to cut production by 1.2 million barrels per day which was a compromise between the 1.4 million cut and the one million barrel level favored by the Saudis and likely supported by U.S. President Donald Trump who would have preferred no cut at all. Meanwhile, Vladimir Putin via his oil chief Alexander Novak blessed the move and emerged once again as the mediator and most powerful force when it comes to the production policy for the cartel. OPEC decided to issue an exemption to Iran who will not be required to cut their production from the current level. The 15 members of the cartel, except for Iran, agreed to reduce its petroleum output by 800,000 barrels per day while Russia and other allied producers will contribute another 400,000 barrels to the cut. The cartel also issues exemptions to Venezuela and Libya. The price of crude oil moved higher in the wake of the announcement.

Source: CQG

As the daily chart of NYMEX January crude oil futures highlights, the price of the energy commodity rallied on Friday to a high of $54.22 and settled at the $52.61 level posting its second consecutive week of gains after seven straight weeks of losses. While the price of the energy commodity recovered in the aftermath of the OPEC meeting, it remains close to recent lows and is not out of the woods given U.S. production at 11.7 million barrels each day. However, the production cut went a long way to stabilize the market and cause the falling knife to float.

If volatility in the oil market declines, one way to pump up trading and investment performance to enhance profits could be via the ProShares Ultra Bloomberg Crude Oil product (UCO) and its bearish counterpart (SCO). The fund summary for UCO states:

The investment seeks to provide daily investment results (before fees and expenses) that correspond to twice the daily performance of the Bloomberg WTI Crude Oil Subindex. The 'Ultra' funds seek results for a single day that match (before fees and expenses) two times (2x) the daily performance of a benchmark. It does not seek to achieve their stated objective over a period greater than a single day. The Bloomberg WTI Crude Oil Subindex is designed to track crude oil futures prices.

The fund summary for the inverse SCO product is similar as both products gain double leverage in the WTI crude oil market via positions in futures and swaps on the long and short sides of the oil market. The price for the leverage is decay, so UCO and SCO are only appropriate for short-term forays into the oil market. The price of crude oil moved from a low of $50.08 on December 6 to a high of $54.22 on December 7 as OPEC went from no decision to a production cut. The price of the energy commodities moved by 8.3% from low to high from Thursday to Friday.

Source: Barchart

Over the same period, UCO rallied from a low of $16.32 to a high at $19.09 or 16.97% almost a perfect double return compared to the nearby NYMEX futures contract.

The latest OPEC meeting and compromise over the production in the wake of falling crude oil prices since October is another sign that the triad of Russia, the United States, and Saudi Arabia is the force behind the price path of crude oil. OPEC has become a relic of the past that is nothing more than the triad's puppet.

Highlights in Commodities:

  • Gold posts a 2.17% gain on the week and closes above $1250 on the February futures contract
  • Silver moves 3.37% higher since last week
  • Platinum posts a 1.18% loss for the week, remains the dog of the sector, and was trading at a $462.20 per ounce discount to gold, a new record low
  • Palladium up just 0.19% on the week and reaches a new record peak at $1213.90 per ounce
  • Copper down 1.00% on the week as LME stocks continue to drop
  • January iron ore futures recover 3.48% since November 30 on the back of optimism over a trade deal between the U.S. and China
  • The BDI moves 4.53% higher since the last report
  • Rotterdam coal just 0.06% higher on the week
  • Lumber rebounds by 2.47% on the week
  • January NYMEX crude oil moves 3.30% higher since November 30 and moved higher after the OPEC production cut
  • February Brent crude oil gains 4.47% compared to last week
  • The premium for Brent over WTI in February closes the week at the $8.90 up $0.57 on the week
  • Gasoline recovers by 5.98%, while heating oil was 3.10% higher since last week on the January futures contracts
  • The gasoline crack spread in January moves 17.92% higher while the January heating oil crack gains 3.44% on the week
  • Natural gas slips 2.69% on the January futures contract on the week as the EIA reported a withdrawal of 63 bcf out of storage on Friday for the week ending on November 30.
  • Ethanol down 1.59% since last week
  • January soybeans gained 2.46% on the week on optimism over trade with the December WASDE coming next week
  • March corn gains 2.05% on the week
  • CBOT March wheat posts a 3.01% gain on the week. March KCBT wheat trading at a 19.25 cents discount under CBOT wheat down 3.75 cents from last week in a negative sign for wheat
  • March sugar gains just 0.23% on the week
  • March coffee down 3.21% since last week's report
  • March cocoa moves 1.00% higher on the week
  • March cotton moves 1.67% higher on the week
  • January FCOJ futures slipped 0.59% lower since last week
  • Live cattle gain 1.14% since last week on February futures
  • January feeder cattle edged 0.59% lower since the previous report
  • February lean hog futures 0.48% higher on the week
  • The December dollar index futures contract moves 0.74% lower since last Friday
  • March Long-Bond futures trading at around 143-09 up 3-00 for the week
  • The Dow Jones Industrial Average closes at 24,389 on Friday, November 30 down 1,149 points on the week as volatility continues. The DJIA erases all of last week's gains. The VIX moves 5.16 higher and was trading at 23.23 on Friday as selling accelerates in the stock market.
  • Bitcoin closes at $3,340.95 Friday down $632.95 or 15.93% since last week as the crypto falls towards the $3000 level
  • Ethereum moved lower to $91.31 down 19.12% since the last report

Price Changes for the Week:

GSG closes the week at $15.47 per share, up 36 cents since last week's report.

Source: Barchart

GSG is the iShares S&P GSCI Commodity-Indexed Trust which represents a diversified basket of commodities futures contracts, has net assets of $1.25 billion and trades an average daily volume of 768,496 shares. The fund summary for GSG states that it holds a "diversified group of commodities futures." Volume increased as the price rose in the GSG product over the past week.

Disclaimer: Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.