Fresh from the Trading Room: Got commodities?

Investors are closely watching the upcoming U.S. GDP and Core PCE numbers to see if they align with the current cooling CPI numbers.

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Crude oil is consolidating within a tight range, supported by an ascending trendline. The bullish technical setup remains intact, and a breach above 80 will likely trigger the next leg higher.

After completing an ascending triangle bottom, soybean meal prices rallied over 10% in days. They have since retraced to retest significant support around 365.

Soybean has completed a double bottom pattern, experienced a rapid rally, and is now consolidating near the double bottom neckline.

Corn prices have completed an ascending triangle bottom, broken out from the neckline, and are now retesting the resistance-turned-support around 460.

The Commitment of Traders (CoT) report shows near historical high commercial long positions in corn, typically marking significant local bottoms.

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Amid the chaos of conflicting macroeconomic indicators, many market participants are left baffled. For instance, the latest PPI number came in hotter than expected, only to be followed by a cooler core CPI that aligned with market expectations, along with signs of cooling in the labor market. Policymakers are walking a tightrope; the complexity of the situation makes the "Goldilocks" scenario—where growth picks up but inflation declines further—the least likely outcome, in our opinion.

Compounding the issue is the fragility of the current financial market. The commodities market, dormant for much of the past two years, is now experiencing heightened volatility, lopsided positioning, and outsized moves. As we covered in January, metals have been the next sector to experience similar thrusts. Gold decisively broke out from a multi-year resistance in March and shows no signs of slowing down. Silver also managed to break out from a multi-year triangle and is currently testing a significant resistance level of $30/oz. Additionally, copper reached an all-time high above $5/lb, with the term structure showing extreme backwardation, where the front month trades at a high premium to the following months, suggesting possible disruption in the physical market.

Naturally, the question is, what's next? In our opinion, agricultural commodities are primed for a move. Take corn, for example: after months of decline, prices have formed a convincing bottom and started to reverse higher. Based on the CoT report, the positioning is still extreme by historical measures, with commercials holding the largest long positions in history—previously marking major bottoms in corn prices. Moreover, summer is typically the most volatile season for U.S. grains and oilseeds, with factors such as weather, planting, harvesting, and stocks all impacting the crops at this time of the year. All these factors point to a rotation of market interest and potential upward pressure on agricultural commodities in the coming days.

In addition, energy commodities, such as crude oil, have also formed interesting technical setups after a period of consolidation. Given the current global geopolitical situation and the state of the U.S. economy, we lean towards the upside for crude oil prices. However, we remain aware of the upcoming OPEC+ meeting in June, which could bring short-term uncertainties. We would consider using crude oil weekly options to mitigate such risks while maintaining exposure based on our bullish views.

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We consider expressing our views via the following hypothetical trades¹:

Case study 1: Long corn futures

We would consider taking a long position in corn futures (ZCN4) at the current price of 453, with a stop-loss below 443, a hypothetical maximum loss of 453 – 433 = 20 points. Looking at Figures 4 and 5, if the bottom reversal continues, corn prices have the potential to reach 500 and subsequently 600, resulting in 500 – 453 = 47 and 600 – 453 = 147 points, respectively. Each corn futures contract represents 5,000 bushels; each point move in the corn futures contract is USD 50.

Case study 2: Long crude oil protective put

Considering the bullish outlook and the potential near-term uncertainty brought by the upcoming OPEC+, we would consider taking a protective put strategy on crude oil by buying one crude oil future (CLN4) at the current price of 79, and buying one weekly put option at a strike price of 77 that expires on 7^th  June (LO1M4 77P) at a premium of 1 point. As shown in the payout diagram below generated by CME's QuikStrike Strategy Simulator, a protective put strategy can effectively mitigate the short-term downside risk of the upcoming OPEC+ meeting on 1^st June. The hypothetical maximum loss happens when oil prices drop below 77 by the option expiry. The loss amount is 79 – 77 + 1 = 3 points. The position enjoys the upside of long futures. Based on Figure 1, it has the potential to reach 88, resulting in a hypothetical profit of 88 – 79 – 1 = 8 points. Each point move in both crude oil futures and weekly options contract is USD 1,000. CME has an OPEC Watch Tool that calculates the probabilities of outcomes based on the weekly and monthly crude oil options that expire around the meeting.

¹ Examples cited above are for illustration only and shall not be construed as investment recommendations or advice. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. Please refer to full disclaimers at the end of the commentary.

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