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Paragon Commentary

Futures File: Oil & Cattle

Apr 26, 2019

Oil Gushes & Drops

Oil prices shot to a six-month high this week amidst ongoing concerns about global supply shortages.

The United States has imposed economic sanctions against Iran and Venezuela due to political concerns in both nations, curtailing supply from the world’s 5th- and 11th-largest oil producers.

Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) has been maintaining a self-imposed production cut to limit supply and boost prices, which was overwhelmingly successful. Since the agreement last December, oil prices have exploded from $43 per barrel to over $66.60 this week.

However, prices took a sharp drop on Friday, falling as low as $62.28 after President Trump said that he called OPEC and told them to lower prices. OPEC made its production cut last December in spite of President Trump’s requests, but the deal expires in June, which could lead to renewed political wrangling over the world’s most valuable commodity.

 

Cattle Dive Lower

Cattle prices plunged this week to a five-month low to trade Friday near $1.15 per pound.

U.S. cattle production has been rising, which is putting pressure on prices, but the primary driver appears to be investment funds bailing out of their positions in the cattle market. Investors large and small often place money into the commodity markets, but large investment funds can have an oversized impact, especially on smaller markets like cattle. These investors previously held big bets on higher cattle prices, and as they liquidate their profits, the market collapsed by 7.5 cents per pound this week.

Wild market swings can make life difficult for producers and end users of commodities, as their long-term financial planning can be complicated by big moves, but they can also take advantage of aberrant prices by hedging future production and purchases.

Hog prices declined as well after news broke that China didn’t buy any U.S. pork last week. Pork prices have been buoyed on expectations that China will need to import U.S. pork due to the ongoing African Swine Fever in that country. Despite the decline, June hog prices are still exceptionally high at 90 cents per pound on Friday.

As a result, summer cookouts may feature more beef and less pork as cattle’s premium to hogs is relatively small, keeping burgers and steaks affordable compared to hot dogs and pork chops.

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