- 2001: Volume 10, No. 3 What's Hot and What's Not: Supply Problems Ignite Gas Markets

The ranks of "hot" markets thinned a bit over the past month. Unleaded gasoline, natural gas, Eurodollars and cotton registered big moves, but many agricultural markets, notably corn and soybeans, remained in the doldrums due to big supplies and favorable crop outlooks. However, coffee, gold, cocoa and the stock market showed some signs of life and all four may have bottomed and embarked on up phases.

What’s Hot

Unleaded Gasoline—Tight stocks and numerous refinery problems put unleaded gasoline into a steep supply rationing rally phase. API gasoline supplies are about equal to last year’s level which resulted in record high gas prices in many parts of the U.S.. The real problem is tight stocks of clean burning blends mandated by clean air laws which refiners don’t like to produce. The only mitigating factor is a big U.S. stockpile of crude oil which sets the stage for increased gasoline output. However, prices are likely to stay strong until concrete proof emerges that supplies are catching up to demand, which probably won’t happen until early summer.

Figure 1:

Natural Gas—This market did a big about face and fell sharply in reaction to rising storage supplies due to benign spring weather across the U.S. which resulted in slower than normal heating demand. On the other side of the coin, natural gas supplies are still "tight" by historical standards meaning a bout of above normal temperatures across most of the U.S. could quickly revive supply concerns (i.e., stronger demand for electricity generation for air conditioning) and trigger a strong rally. Since everyone is aware of that possibility, prices are likely to level off soon, probably at major support around 4000, waiting for a better fix on summer weather.

Eurodollars—Eurodollars stayed in a strong uptrend, although the action was pedestrian in view of what commodity markets are capable of. Since it appears the U.S. economy is still on the verge of recession (Fed officials prefer to say that economic risks are weighted to the downside) and the Fed is likely to keep cutting interest rates, at least two more times according to the pundits, Eurodollars are likely to keep grinding higher.

Cotton—Cotton stabilized a bit but stayed in a major downtrend due to ample supplies and the outlook for a big U.S. crop. Slower U.S. and global economies have hurt demand and Southern Hemisphere crops were big. On top of that, U.S. acreage is likely to rise sharply, setting the stage for a massive 19 to 20 million bale crop, weather permitting. And since planting conditions have been favorable across most of the U.S. prices are likely to stay on the defensive.

What Might Get Hot

Normally this is the time of year when traders start piling onto the long side of corn and soybeans in anticipation of weather rallies. However, because of ample supplies, particularly soybeans due to a massive South American crop, the upside is likely to be limited. Strong demand related support needed to sustain a big up move isn’t likely to develop since there aren’t any supply concerns; users have no reason to take on forward coverage. It would take significant crop problems in the U.S. to change that, and thus far the weather has been nearly ideal in most of the Midwest and Delta. And for what it’s worth, which isn’t much, the National Weather Service sees normal summer weather across the grain and soy belt.

Gold—The fundamental story for gold remains bearish since inflation is expected to stay under control, the U.S. dollar is strong, the global economy has slowed, and central banks (notably the Swiss and U.K.) are expected to keep selling down their stockpiles. However, London lease rates have firmed, indicating improved demand, and the chart pattern is turning bullish, showing a major double bottom at support around the 255 level. We don’t know what bullish excuse may come along to trigger an up move, but we’d go with the chart and look for higher prices.

Coffee—It’s the time of year for coffee to establish a weather premium going into the Brazilian frost season (June and July), and prices have rallied sharply over the past week. Historically the odds of a damaging freeze are low, about one in five, so it’s a good bet there won’t be any problems. Also, global stocks are huge, and Brazil is currently harvesting another large crop. However, the funds are in the process of turning around to the long side and there’s probably enough cool weather in the Brazilian coffee forecast to keep prices working higher.

Cocoa—Cocoa jumped sharply higher this week on speculative buying tied to the violation of technical resistance levels. However, due to a smaller Ivory Coast crop and better European and U.S. demand, there are some bona fide fundamental reasons for this market to try the upside again, and we wouldn’t be surprised to see a rally to the old high around 1200.

Wheat—The U.S. winter wheat crop continued to deteriorate and U.S. and European spring wheat planting was delayed by rain but wheat prices slumped on the outlook for demand to stay sluggish. In addition, big Southern Hemisphere crops have taken the edge off of a relatively tight global supply/demand balance. There appear to be enough crop problems to justify higher prices, but it would probably take problems with the U.S. corn and soybean crops to put wheat into a bull phase, and that’s not on the horizon right now.

Stock Market—Even though signs of a weak U.S. economy kept surfacing, notably a very weak May employment report, the stock market managed to move higher on the rationalization that aggressive Fed rate cuts over the near-term will result in a stronger economy over the long-term. Of course, there’s no sign that the economy is out of the woods, but it’s what investors think that counts, and they appear to be cautiously bullish, favoring further gains in equities.