This morning I sat down with Michelle Rook on AgWeb's Markets Now for a discussion about oil prices, as well as the grain and cattle markets. You can watch the full conversation here:

Michelle Rook: Welcome to Markets Now. I'm Michelle Rook with Darin Newsom, Senior Market Analyst with Barchart. Well, early here on Thursday, we have livestock all in the red. Greens are back to the plus side. We've got crude oil. Well, it's over $10 higher right now, but it's been up more than that during the early morning. All right, Darin, let's talk about why crude oil is up. Basically, the war is not over in Iran, apparently.

Darin Newsom: Yes, [laughs] I think most rational people knew that. I don't know that it was actually wise for the US president to go in front of the world on Wednesday night and say a lot of what he said, because what we've seen was expected because we knew that the war wasn't over. We knew it wasn't going to be over anytime soon. We knew that the Iran premier was not actually asking for a ceasefire. These are all things that are floated to get market reaction. Yes, markets came down, but nothing had changed.

All it took was the next headline saying how the US is going to destroy Iran. It's going to put it back into the Stone Ages and this, that, and everything else. Markets did what algorithms are trained to do, and that is get triggered to start buying again. That's exactly what happened. As you mentioned, we've seen skyrocketing energy prices, the energy sector as a whole, overnight through Thursday morning.

Michelle: For sure. This is the largest supply disruption for crude oil, basically in history, shutting down the Strait of Hormuz, right?

Darin: I would say so. Yes, the US has been in all kinds of conflicts in the Middle East, and the Middle East has had its own regional conflicts. At the end of the day, the Strait of Hormuz was usually kept open, and now we're looking at it most likely getting shut down for an indefinite period of time. This doesn't bode well for prices. You can't use technicals, you can't use fundamentals, but the market seems to be building some upside momentum here early in April.

Michelle: How high do you think crude oil prices could actually go?

Darin: Well, let's see. We took them below zero in, what was that, 2020.

Michelle: Yes, during COVID.

Darin: Maybe, who knows, $200, $300, I don't know. It does bring to mind back in 2008 when all of the talk was about $150. The crude oil was around $140 at that point, the West Texas Intermediate. The problem was, as I've argued at the time, that the forward curve was actually in a carry or contango in New York terms, so there was no fundamental support. By the end of that year, by the end of 2008, it actually wound up down around $33.

This time around, as we're pushing up towards $120 and so on, the forward curve is in strong backwardation or inverse, meaning that this is supported by the commercial side, due to what you just asked about the disruption of supplies, and demand is still there. Putting a target out there is difficult to do. It could go as high as possible before it uncovers much sun because nobody's going to step in front and sell this thing, at least not long-term at this point.

Michelle: That's right. Energy markets sharply higher, trading headlines, and the grains are back up higher, trading the same headlines, right?

Darin: Yes. Again, there's no fundamental change in the grain markets. There hasn't been for quite some time. I know a lot of folks come on and talk about, yes, these markets are still fundamentally driven. Well, let's be honest, they're not. The fundamentals don't change 30, 40, 50 cents per day. It doesn't happen. Even longer-term, we can't really point at fundamentals because these things, as I talked about in morning commentary and as I've talked about seemingly many times over the last number of months and years, is that these markets have no memory. They don't remember what happened yesterday.

If they don't remember what happened yesterday, then they have no clue as to what the fundamentals actually are. It is simply the latest headline. When we see a market move like this morning, all we have to do is turn towards the news and look to see what's being traded and what triggered the algorithms. We can talk weather. We can talk crop conditions and progress and all of that nonsense. At the end of the day, it's still what is the headline, how was it designed to trigger the algorithms? That's all there is to it. That's all there is.

Michelle: It's also about money flow, though, Darin, because we've had money that went into the crude oil market but come out of, say, the equity market, the precious metals market, and some of it has been going towards the grain market. Funds have added to their length. Do they keep doing that here, do you think?

Darin: I think so. You're absolutely right. Part of this algorithm trade that we're seeing, again, based on headlines, is the flow of money, and that's what sets trend. All we have to do is watch the trend, and we can see what the flow of money is doing. We do know that money is coming out of equities, and it is going into energies, and it is going over into grains. I think this could continue because it is still based on the fear of inflation long-term.

I know Chairman Powell came out, and I found it interesting. He came out earlier this week and said that the FOMC isn't really concerned about overall inflation. They're still watching more of the employment and jobs. This immediately worked to affect the Fed Fund Futures Forward curve, take the possibility of a rate hike out this fall, at least here earlier this week. We'll see what happens now. This all boils down to the fear of inflation. What is the energies market going to do? It is carrying over into the grains sector.

Some of the other sectors are still lagging a bit. The buying does seem to be coming from outside sources, from rolling out of other market sectors and into the grains.

Michelle: Right. Funds are also buying in the grains because they're really of relatively low value compared to a lot of other things, too, right?

Darin: Yes. If we look at the long-term charts and long-term price ranges, yes, wheat, corn, soybeans have moved a little bit, but these markets are still down near their lows. If we just look at what is the potential of these markets, obviously, that's attractive. If we see inflation start to skyrocket, they are attractive to long-term investment money. This could continue to bring some of that money coming out of equities into grains.

Michelle: Will we also see money come into the grain trade because of a fear that maybe we can't get fertilizer where it needs to be, not only in the US, but globally? Is there a fear of some of that maybe trimming acres, trimming yield?

Darin: Yes, I think so. I think we can see that more in the corn market. I think this is where the real concern is. Who knows what acres is going to be? We didn't learn anything this week about acres that we didn't already know. What does it actually turn out to be? The input costs will be skyrocketing. Again, we've talked about diesel fuel. Nitrogen fertilizer is skyrocketing as well. I keep using that word.

Again, a lot of the world nitrogen moves through the Strait of Hormuz as well. If these input costs continue to go up, number one, it could create a late change in acres, what's actually planted. Number two, it could change how much fertilizer and so on gets applied to these crops, whatever does get planted. That could potentially cut into yield. Then let's say Mother Nature decides to close out the trifecta and decide to play a little bit nasty this year. That could make things more interesting in the corn market.

Michelle: Absolutely. Higher shipping prices, higher transportation costs at some point. Do we start feeling that as well in lower demand for grains or any other commodities or not?

Darin: It's hard to lower demand for US grains when it took itself out of the global market. We've done this over the last 10 years. Yes, it certainly could because there seems to be a good deal of premium right now into US prices versus, say, some of the big competitors, if we look at the soybean chart between Brazilian beans at Port versus the US soybean supplies at the Port of New Orleans. It's an incredible difference where it still favors, a great deal, the Brazilian supplies.

Obviously, freight out of the United States seems to be going up, and even though we don't have a lot of demand and we've taken ourselves out of the game, this could certainly cut into what demand there was.

Michelle: We have not seen necessarily an impact on protein demand yet, though. Let's talk about that. If you have higher gas prices, the Dow has been lower, the equity sector, that's having an impact on the cattle market this morning, and there's some long-term impact we could see too, right?

Darin: I think so. You touched on something that I worked on a long piece with Barchart that was released this week, talking about this very scenario. I've said, and I'll continue to say, that this could be the tipping point for the US cattle and beef industries, for the beef markets, because again, there's no incentive for producers to increase supplies, to increase the herd. If we see a reduction in feed availability and an increase in feed costs, that even puts a bigger damper on the thing.

Then it comes down to consumer demand. That has been the backbone of what's held this beef market up. If, all of a sudden, we're having to pay $1, $2 more per gallon of gas, I think beef is going to be one of those markets that dies along the wayside as disposable income goes somewhere else. I think we're going to see more protein choices possibly go over to poultry of some kind. There is a chance that we could see an uptick in pork. I think the big winner is going to be chicken and turkey, poultry in general. I think the big loser is probably going to be beef.

Michelle: Yes. It's not a one-to-one relationship either, but if you lay an S&P chart over a cattle chart, there's a lot of correlation there, isn't there?

Darin: There really is. I think that's starting to concern some of the long-term traders in the live cattle market in particular. They're seeing this, and they're seeing—I probably shouldn't call it a meltdown— but a sharp sell-off in the US stock indexes, particularly the S&P 500. That is going to lead to some fund selling in the cattle markets as well.

Michelle: Yes. Unfortunately, we were just up at contract highs yesterday in live cattle and new highs for the move in the feeders. You don't think the very strong fundamentals that we have with those tight numbers can override some of those outside negatives?

Darin: This is where it gets really interesting because, again, that's bringing fundamentals into play. I don't know that we can. If we get some sort of reversal that everyone's going to be talking today, I don't think we can rely on technicals either. As my friend in the cattle industry likes to say, the herd sizes may be smaller, but each animal is coming out larger. We really haven't seen a big difference in the availability of beef or in the beef supplies themselves.

We do still have some bullish fundamental rates, but recently, we've seen some pressure, particularly in live cattle future spreads, indicating that the commercial side has been getting concerned, looking ahead at what could happen with the demand side of this market. If they've already started selling and then funds pick up on that, or the algorithms pick up on that, and then add to what we see in the US stock indexes, this thing could turn quickly.

Michelle: Thanks so much, Darin Newsom, Senior Market Analyst with Barchart and Markets Now.