Commodities Week Ahead: Oil, Cocoa, Metals In Focus On Trade War Angst

US disinclination to strike a trade deal with Canada and China will keep commodity market sentiment in check this week, although recent highs in prices of energy to palladium, cocoa, wheat and live cattle could encourage investors to seek gains in specific trades.

With just a month left to the third quarter, doubts were growing that Canada will soon become a part of a revamped North American Free Trade Agreement (NAFTA), after Friday’s deadline for both countries to reach an agreement passed. Subsequent reports that bilateral talks would resume on Wednesday eased some worries that Ottawa might be excluded completely from the US-Mexico trade deal announced last week.

Be that as it may, a US-China trade deal—which will change dynamics across asset classes—remained elusive at the weekend. What's been lingering was a report that US President Donald Trump planned to move ahead with tariffs on $200 billion of Chinese goods, risking retaliation from Beijing.

On the economic calendar, US jobs numbers for August will be the main data set for investors look out for, with a forecast jobs growth of 191,000 versus July’s 157,000.

Gain Or Loss For Crude With Summer’s End?

Angst from tariff battles aside, energy bulls had a good month as well as a stellar final week in August.

Brent 300 Minute Chart

Crude prices, led by UK Brent, ended August up nearly 2 percent on bets that a renewed global shortage could occur from US sanctions imposed on Iran exports which begin in early November. US crude returned above the key $70 per barrel mark, though it slipped at the start of September trade. Gasoline rallied to the $2 per gallon level.

“It was as recently as June that many predicted oil prices would be lower in late 2018 and into 2019,” said Matthew Tuttle of Tuttle Tactical Management, a Stamford, Connecticut-asset manager overseeing $550 million in exchange-traded funds with exposure to energy securities, among others.

While crude’s bearish outlook was largely transformed by the fallout from Trump’s cancelling of the Obama-era US-Iran nuclear deal, other global ramifications were also pushing oil higher, Tuttle said. “Venezuela’s meltdown could cause a big increase in crude prices, to even $100 per barrel, depending on weather conditions this winter. The Brent (-WTI) spread also will increase and cause increased gas prices this winter,” he added.

Additionally in energy, natural gas stayed within striking distance of the $3 per million metric British thermal units (mmBtu) as money managers boosted their positive bets on the fuel ahead of last week’s largest stockpile growth in two months.

Energy bears, meanwhile, have counterarguments on why US crude will continue sliding this week and gasoline could move substantially below $2 per gallon. They point to the end of the peak summer driving period in the US, marked by Monday’s Labor Day holiday, and how that will affect refining demand for crude as well as direct consumption of gasoline.

Natural gas could also retreat further from the $3 per mmBtu target if the late summer heat forecast by weather services fails to show up, causing a slack in air-conditioning demand.

Investing.com's technicals called for a "Strong Buy" in US crude, with Level 3 Fibonacci resistance only seen at $71.05. With gasoline, however, it was a "Strong Sell," with the strongest resistance projected at $2.0242 per gallon. For natural gas, the outlook was "Neutral."

Beware Palladium’s Lure

While gold closed down for a fifth straight month in August—a losing streak only matched previously in 2013—palladium continued to provide alpha, or outperformance, to discerning precious metals investors.

Palladium 300 Minute Chart

Used mainly for purifying gasoline engine emissions, palladium has turned around after two straight months of losses, to settle on Friday at 10-week highs of $980.30, providing a gain of 5 percent to market bulls. While Investing.com’s technicals called for a “Strong Buy” in palladium, the Fibonacci Level 3 resistance it projected was only at $987.97 – suggesting limited upside ahead.

ADM Investor Services also believes the risk of holding palladium is growing, especially without a US-China trade deal which might result in hefty auto tariffs for Beijing. “It would be foolish to think that palladium prices will hold up in the event that optimistic trade hopes are dashed,” ADMIS said in a pre-weekend note. “The $950 level has become some form of bull/bear/resistance line in the sand.”

Cocoa: Runaway Gains May Continue

Among soft commodities, cocoa would be the market to watch after a blistering 14 percent gain in August—the largest move across the commodities spectrum.

Cocoa 300 Minute Chart

The commodity, used for confectionery and beverage products, continues to hold a “Strong Buy” recommendation on Investing.com’s daily technical outlook, with a Level 3 Fibonacci resistance of $2,284 per tonne versus Friday’s settlement of $2,333—signaling a potential upside of nearly $50. Although cocoa appeared technically “overbought, there could be “enough long-term fundamental concerns in the crop to add to positions”, said Peter Mooses of RJO Futures.

While supply/demand news out of main growing region West Africa has been volatile, there is little chance that production will recoup crop losses from earlier in the season to pressure prices, he said. “If transportation blockage starts to affect key growing areas' ability to move their cocoa, prices may reflect this short-term issue,” Mooses said. A “weather premium may also be added to the equation this time of season. Look for $2,400 to be the next target level.”