Commodities Quarterly: Gasoline Gets The Headlines, Lean Hogs The Prize
Investing.com | Mar 31, 2021 03:46AM ET
Not many might have imagined the humble hog getting the better of OPEC+.
But as the curtains fall on the first quarter, it is lean hogs that win the top prize for commodity returns, despite gasoline’s extraordinary rebound from the pandemic’s lows.
Lean hog futures on the Chicago Mercantile Exchange are on track to end the quarter up almost 44%, just ahead of the 43% gain for gasoline futures on the New York Mercantile Exchange.
That isn’t all. On Tuesday, CME’s benchmark lean hogs contract set another milestone, hitting a life-of-contract high of $1.06 per lb, aided by tightening supplies and robust demand.
The CME's lean-hog index, a two-day weighted average of cash hog prices, meanwhile, hit $97.38 per hundredweight, its highest since October 2014.
Hogs Rally Rides On US Grilling Fervor, African Swine Flu /h2
US consumer demand for pork is rising as the traditional summer grilling season approaches. Americans are eagerly preparing their decks and backyards for barbecue parties as the weather warms and President Joseph Biden promises that COVID-19 vaccinations will be available for 90% of the adult population by Apr. 19.
The restaurant sector is also stocking up on pork products in anticipation of a return to indoor-dining from lockdown reopenings.
Don Roose, president of Iowa-based US Commodities, says he expects the rally in hogs to continue, adding:
"The hog market is just strong. Disease issues across the hog belt in the Midwest have been huge."
Disease has been a problem not just with the US hog herd.
An early catalyst for the US hog rally was the African Swine Fever which wiped out 60% of the pig population in China—the world’s largest pork consumer as well as producer responsible for supplying 30% of the world’s needs. To meet its demand for pork, China has turned heavily to US imports.
The American Farm Bureau Federation said in a report two weeks ago that ASF outbreaks have risen in China for several months now, with new hotspots reported in at least five separate provinces since the year began.
The federation adds:
“With so much uncertainty emerging, it is very difficult to know the full impact of the increase in outbreaks on current and future production. This is intensifying the already existing uncertainty around official recovery numbers.”
Fundamentals aside, technical action is also supportive for lean hog futures.
Investing.com has a “Strong Buy” recommendation for CME lean hogs, with a three-tier Fibonnaci resistance forecast first at $1.0072, then $1.0094 and finally at $1.0129.
Should the contract weaken, then a three-stage Fibonacci support is expected to form, first at $1.0002, then at 99.80 cents and finally at 99.45 cents.
Gasoline Run Backed By US Summer Driving Forecasts, OPEC+ Cuts/h2
The surge in gasoline comes on the back of the roaring rebound in the entire petroleum complex, driven by production cuts of OPEC+.
The 23-nation OPEC+—made up of the 13-member Saudi-led OPEC, or Organization of the Petroleum Exporting Countries, and 10 non-OPEC nations steered by Russia—is withholding at least seven million barrels per day of crude supply from the market.
Those cuts have helped US crude and UK’s Brent oil to a 25%-gain for the quarter. They’ve also given the oil complex a ton of headlines as OPEC+ meets again on Wednesday and Thursday to ponder production quotas for May onward.
While NYMEX gasoline at $2 per gallon on Wednesday was below the quarterly high of $2.17 hit on Mar. 15, analysts expect it to peak again along with an expected increase in US road travel through August.
US gasoline sales for 2021 have exceeded prior-year levels for the first time since last March, according to an Oil Price Information Service report carried by Reuters on Tuesday.
However, demand still trails pre-pandemic levels, and the year-on-year increase is a bigger reflection on last year's demand destruction rather than strong economic recovery this year, the report said.
US oil consumption crashed by 27% in April last year from the year prior, as aircraft were grounded and people were forced to remain at home to curb the spread of the coronavirus.
Gasoline same-store sales for the week ended Mar. 20 were 10.1% higher than 2020, said the report, which surveyed 25,000 fuel stations nationwide. Sales were still 16% below pre-pandemic levels.
Since the start of 2021, gasoline volumes have mostly ranged between 15% to 18% below prior-year levels, the report said.
Brian Norris, executive director of retail fuels for OPIS, added:
“The real measure of recovery will be a return to pre-pandemic levels. It's there that progress remains slow and, looking at gasoline, we still have a long way to go."
Like lean hogs, technical indicators are also supportive for gasoline futures.
Investing.com has a “Strong Buy” recommendation for NYMEX gasoline, with a three-tier Fibonnaci resistance forecast first at $2.0112, then $2.0254 and finally at $2.0485.
Should the contract weaken, then a three-stage Fibonacci support is expected to form, first at $1.9650, then at $1.9508 and finally at $1.9277 cents.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.
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