Commodities in Unison

Macro Perspectives: Wed 26 Aug 2020

Yesterday we talked about the catalyst for a move in crude oil. Today, crude was up as much as 2.8%.

The storm brewing in the Gulf has now caused nearly 300 oil and gas drilling platform closures, which represents over 80% of the production from that area. The forecast on the storm has now been upgraded to a major hurricane (category 3) by landfall. Harvey was a category 4, two years ago.

Like Harvey, this storm will likely impact refinery operations that are near the shoreline as well - which should further disrupt production and the supply chain. Again, this is all developing into a catalyst to get oil prices moving (higher).

In addition, overnight it was reported that the U.S. and China had positive talks on carrying out phase one of the trade deal. Within that agreement, China has a commitment to buy, in addition to their normal annual imports from the U.S., $12.5 billion of agricultural commodities, and $18.5 billion of energy-related commodities.

As you can see in the charts above, at seven full months into the year, China is well behind on its commitment - to the tune of about $10 billion in ag spend, and about $12 billion in energy.

With that information, not surprisingly, commodities led the way on Tuesday. Coffee was up 3.4%. Nat gas was up 3.2%. Corn was up 2.6%. Lean hogs, up 2.6%. Lumber, up 2.3%. Soybeans, up 1.6%. Wheat, up 1.5%.

Now, a fair question: Do we really want China to fulfill this commitment right now?

It was just a month ago that Pompeo made the case for building an alliance of "free nations" to stand up against the Chinese government, calling for regime change, and calling the Chinese Communist Party a threat to the free world. The media gave little coverage to this speech, which sounded at best like a cold war declaration (at worst, like a 'hot' war declaration).

So, given that we are emerging from an economic crisis, that has already resulted in a supply shock, do we really want to be sending our food and energy to China?  And do we want to do so, in a fragile economy, knowing that it will put upward pressure on prices, where inflation is already brewing.