As we look at the mid-month market commentary, the COVID-19 pandemic is front and center. “Risk” commodities like copper, crude oil and corn long-term support levels on demand destruction as a result of the pandemic. Front month WTI Crude Oil futures are now hovering near major long-term support level of $30/bbl. By contrast, agricultural markets have experienced a “slow” grind lower with corn now trading around $3.55/bu and soybeans closing in on $8.35/bu. How much lower can risk commodities like crude oil go? A lot will depend on how much “demand” destruction unfolds as a result of the coronavirus pandemic. That stated, dropping below and sustaining trading below the $25/bbl. might prove unlikely as many upstream wells are unprofitable at these levels. In other words, we might be entering a phase where commodity prices hold at their long-term support levels while equities and other risk assets continue to trend lower.
Agricultural Outlook: CME Group Corn Futures
Let’s look at corn futures in greater detail. Although corn continues to follow risk assets lower, unlike most risk assets, so far this market has held important long-term support at $3.50/bu. basis the actively traded front month. Unlike other commodities, corn is entering its “weather event risk season” throughout the North American grain belt. If delayed plantings or a drought were to unfold in 2020, we could look back at the $3.55/bu. level as a buying opportunity. If planting and silking seasons pass without problems and demand destruction continues due to the pandemic, the next logical support level for corn is $3.50/bu. and at this point we feel corn might continue to hold $3.50/bu even if the stock market continues to move lower.
Energy Outlook: CME Group WTI Crude Oil Futures
In the first half of March 2020, WTI Crude Oil futures broke the $40/bbl. on news of the spread of the coronavirus and breakdown of production accord between the Saudis and Russia. That $40/bbl. level acted as support for decades and suggested a retest of the 2016 lows at $27/bbl. Unlike other risk assets which are nowhere near long-term support, due to tight oil plays in North America crude oil had already been under price pressure prior to the coronavirus scare and the breakdown of relations between the Saudis and Russians and this means we could see a divergence between oil and financial risk assets in the second half of March where assets like copper and stock index futures drop significantly lower and crude oil basically moves sideways to slightly lower. Historically the $27.00/bbl. to $30.00/bbl. level has proven to be a good value area in WTI for many decades now. Whether we violently bounce up from that level or simply build a long-term base remains to be seen, but for the bears caution is probably advisable at these levels.