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November 2013 Archives

November 1, 2013

It's all in the Details for Fed Watchers

Friday, November 1, 2013

The Fed's seemingly "glass half full" outlook for U.S. economic growth got additional support from a surprisingly strong Chicago Purchasing Managers Index (PMI) figure. The Chicago PMI jumped to 65.9 in October, up over 10 full points from September and well above the highest analyst estimate. This was the highest reading since March 2011 and the largest month-to-month increase in over 30 years. Solid gains were seen in the employment index (57.7 vs. 53.2 in September) as well as in the reading on new orders (74.3 vs. 58.9 in September). The sheer size of the index gains has made some economists skeptical that this reading may be an outlier rather than an assessment of growth in all regions of the country. However, should further data confirm a strengthening economy, we may see both equity and bond prices decline, as the odds of a Fed tapering in the 1st quarter of 2014 would likely increase.

Fundamentals

The Federal Reserve made it fairly clear to market participants that it is keeping its foot on the monetary stimulus gas pedal a bit longer, as no starting date to begin the tapering of its Bond purchase program was announced in the statement released at the end of the two-day FOMC meeting this past Wednesday. However, analysts who enjoy parsing through the verbiage of Fed statements appear to have interpreted a less dovish tone coming from Fed voting members, which triggered a sell-off in both equity and Bond prices. Although there were few changes in the latest Fed statement from that of the previous meeting, it was a bit of a surprise to many traders that there was no mention that economic growth would see any significant headwinds as a fallout from the two-week Federal Government shutdown. Market participants seemed to be expecting the Fed to use the recent government shutdown as a significant factor to continue its bond buying program well into 2014. One of the more "notable" changes in the recent Fed statement was the removal of concerns by Fed officials of tightening financial conditions due to rising interest rates, especially for mortgages, and its effects on the housing market. However, this time the Fed commented that the housing market is still recovering, but at a slower rate. The Fed still appears ready to begin slowing its Bond buying should economic conditions warrant, but will continue to closely monitor economic data and will "await more evidence" that economic growth is sustainable prior to any changes in its accommodative monetary policies, which include the tapering of its Bond buying program.

Technical Notes

Looking at the daily continuation chart for Treasury Bond futures (US), we notice that the head and shoulders bottom formation has run into some headwinds, as prices are finding some solid resistance at the "neckline" of this technical pattern. Trading volume has slowed the past few months, as this potential "bottoming" formation has formed. Prices remain above the 20-day moving average (MA), which is providing some comfort for short-term bullish traders that prices may still move higher once the recent price correction has run its course. Resistance remains at the July 22nd high of 136-00, with support found at the 20-day MA, currently near the 133-30 price level.
Mike Zarembski, Senior Commodity Analyst


November 4, 2013

Is the Oil Bull Market Running Out of Gas?

Monday, November 4, 2013

Although U.S. Oil demand continues to weaken, there are signs that demand from Asia may start to rise. First, we have some positive news on the manufacturing front from China, where the Chinese purchasing managers' index rose to 51.4 in October vs. a reading of 51.1 the previous month. Index readings above 50 shows expansion for the manufacturing sector with continued upward momentum in the index potentially signaling an end to slower economic growth out of the world's most populous nation. In addition, traders in the oil-tanker market have noted lease rates for very large Crude carriers (VLCC) have risen sharply for Oil shipments from Middle East ports to Asia. This may be another signal that economic growth in Asia is poised to improve.

Fundamentals

The bullish bias that has penetrated the psyche of Crude Oil traders for the past several years is being put to a test of late, as prices hover near 4 month lows. U.S. Oil inventories rose by nearly 4.1 million barrels last week to 383.9 million barrels according to the U.S. Energy Information Administration (EIA). Lower oil demand from refiners, many of which have cut utilization rates due to seasonal maintenance, has allowed U.S. oil inventories to increase sharply the past several weeks. This increase in supplies has caused the term structure of WTI Crude oil futures to shift to a contango, (where near-term prices are trading at a discount to deferred contract months) out through the February 2014 contract. Not even lower gasoline supplies could help to stem Crude oil's slide, as traders note that weak demand for refined fuel has kept gasoline inventories well above last year's levels. Signs that Libyan oil production may increase has stymied the rally in the Brent vs. WTI Crude oil spread which was trading at nearly 7 month highs. One outside factor that may be weighting on oil prices is the recent rally in the U.S. Dollar, which is bearish for commodity prices, including Oil, as it makes dollar denominated commodities more expensive for non-dollar buyers.

Technical Notes

Looking at the daily continuation chart for Crude Oil futures (CL), we notice prices are now trading below both the 20 and 200-day moving averages as prices have fallen to 4-month lows. The 14-day RSI has turned weak and in fact, has just slipped into oversold territory with a current reading of 28.81. Although bears certainly seem to have short-term control over oil prices, we should note that the longer-term trend still favors Oil bulls as prices remain above the major uptrend drawn from the major lows that were put in place back in 2009. Near-term support is found at the June 24th low of 92.67. Resistance is seen at the October 28th high of 98.82.

Mike Zarembski, Senior Commodity Analyst

November 5, 2013

Cocoa Going Cold?

Tuesday, November 5, 2013

Cocoa futures have fallen $121 after making contract highs last month, as Ivory Coast port arrivals remain well ahead of last season's pace. The pace of arrivals may, however, be slowing a bit, which may eventually lead to the bull camp regaining the upper hand. In addition to early port arrivals, the recent wave of selling pressure can be attributed to overbought conditions. The Cocoa market has been in a strong uptrend since July. Funds have been strong buyers of Cocoa, as it is one of the only soft commodities facing supply shortages rather than surpluses.

Fundamentals

In the near-term, the improved harvest weather conditions and reports of strong port arrivals may continue to dominate Cocoa market news. There is also some concern that processors and chocolatiers have already finished their Cocoa purchases ahead of the holiday season. This seasonal dip in demand could overshadow the upcoming shortfall. Bean supplies for the 2013-2014 season are expected to finish roughly 203,000 metric tons short of demand. This would be smaller than the 221,000 ton deficit for the 2012-2013 growing period. Global chocolate confectionary sales are expected to top $117 billion next year, which would be an increase of 6.2%. The Commitment of Traders report showed traders were net long 67,131 contracts (futures and options), which is a week over week increase from record levels of 64,466 contracts. The large spec possession could result in further declines, barring fresh bullish news.

Technical Notes

Turning to the chart, we see the December Cocoa contract breaking below the uptrend line. Prices are also trading below the 20-day moving average, suggesting that a near-term low may be in place. Prices have managed to hold the 50-day average so far, but a breakdown below the 50-day moving average could bring heavier technical selling.

Rob Kurzatkowski, Senior Commodity Analyst


November 6, 2013

Cheap Threads

Wednesday, November 6, 2013

Cotton prices fell to the lowest levels since January on concern that China will be releasing supply from its massive inventories. The reserves are expected to make their way to textile mills in China, which could curb the need for US imports. This could cause domestic supplies of raw Cotton to swell.

Fundamentals

Since 2011, China made strategic purchases to bolster its Cotton supply, which resulted in its reserves swelling to five times their previous levels. China has been hoarding Cotton to aid farmers. Global production has exceeded demand for the fourth consecutive year, but the government there is expected to end its stockpiling program. The Chinese economy is simply not growing fast enough to spur Cotton demand, and the Chinese government wants to encourage farmers to curb their production. During this four-year supply glut, the US and Brazil have adapted and trimmed production, while Chinese farmers have continued to increase production. Industry groups hope that China liquidates excess reserves in an orderly manner, but there is no guarantee that dumping will not occur.

Technical Notes

Turning to the chart, we see the December Cotton contract (CTZ13) trading sharply lower for 12 consecutive sessions before posting a very modest gain yesterday. Prices really accelerated lower after breaking support at the 82.50 level. There is support near the 74.00 and 72.50 levels. Yesterday's price action formed a dragonfly doji with a long lower shadow, which may be foreshadowing a near-term reversal. The RSI is extremely oversold at a minuscule 0.88%. The momentum indicator took a slight turn higher, hinting at a possible near-term reversal, or bounce. groups hope that China liquidates excess reserves in an orderly manner, but there is no guarantee that dumping will not occur.

Rob Kurzatkowski, Senior Commodity Analyst

November 7, 2013

Will the Real Cause Sugar to Sour?

Thursday, November 7, 2013

Sugar prices fell on speculation that a weakening Brazilian real will spur growers to liquidate stocks. Brazil's economy is facing a myriad of problems, including rising deficits, which may continue to punish the nation's currency. The Brazilian government has defended its policy, which has growers concerned that the government will continue to be fiscally irresponsible.

Fundamentals

Traders are concerned that Brazilian Sugar growers will continue selling heavily. Near-term supply fundamentals are really a mixed bag for the Sugar market. Production in both India and Brazil is on the higher side of expectations. There is talk that India could export 3 million tonnes of the sweetener this season. In Eastern Europe, production of beet Sugar is significantly lower, which may make users more reliant on cane Sugar. China is expected to import roughly 2.6 million tonnes of Sugar this year, which is large, but nowhere near the 4.5 million tonnes the nation imported in 2011-2012. China may also phase out its Sugar stockpiling program, which has spent $3 billion the past two years. Like Cotton stockpiling, stocking Sugar is uneconomical and does not discourage farmers from overproducing. Instead, the government may offer direct payment to farmers.

Technical Notes

Turning to the chart, we see the March Sugar (SBH14) contract trading just below the 50-percent Fibonacci retracement from the August low close to the October high close. Prices may come down to test the 61.8-percent retracement at 17.85 next. There is also chart support near the 17.75 level. If March Sugar is unable to hold support here, prices may test the high 16.00's. The recent wave of selling pressure has resulted in the RSI indicator falling into oversold territory, which may offer support in the near-term. nation imported in 2011-2012. China may also phase out its Sugar stockpiling program, which has spent $3 billion the past two years. Like Cotton stockpiling, stocking Sugar is uneconomical and does not discourage farmers from overproducing. Instead, the government may offer direct payment to farmers.

Rob Kurzatkowski, Senior Commodity Analyst


November 8, 2013

Is Dr. Copper on Sabbatical?

Friday, November 8, 2013

A potential bubble forming in the Chinese housing market is a looming concern for Copper demand, as any attempts by the Chinese government to slow the growth of property development could crush demand. China is the world's largest consumer of Copper and the construction industry accounts for nearly 40% of the demand, as Copper is a key component in both pipes and wiring.

Fundamentals

Copper Traders seem to be taking a "wait and see" attitude towards forming an opinion on the direction of the market as prices remain range bound. Improving economic data out of China is in conflict with rising Copper stockpiles seen in Shanghai, as well as with forecasts calling for a Copper production surplus in 2014. Last week, the China Manufacturing Purchasing Managers Index rose to a reading of 50.9 in October from 50.2 in September, which was the strongest reading in 7 months. However, U.S. factory orders rose by only 1.7% in September, with orders for non-defense capital goods actually falling by 1.3%. A recent rally in the value of the U.S. Dollar versus a basket of major currencies may be tilting the direction of Copper prices slightly in favor of Copper bears as a strengthening greenback generally makes commodity price more expensive for non-dollar buyers. Market sentiment could swing to the bullish camp should the Federal Reserve begin to taper back its bond purchases sooner than anticipated. This event could signal to traders that Federal Reserve officials believe there are clear signs that that rising economic growth levels is now on a sustainable path, which if true, could trigger increased demand for base metals such as Copper.

Technical Notes

Looking at the daily chart for December Copper, we notice prices drifting to the lower end of the recent price consolidation pattern as the market continues to move further away from both the 20 and 200-day moving averages (MA). The 14-day RSI is weak with a current reading of 41.60. Support is found at the September 12th low of 3.1915, with Resistance seen at the 20-day MA, currently near the 3.2840 price level.

Mike Zarembski, Senior Commodity Analyst

November 11, 2013

ECB Surprises Traders with Interest Rate Cut

Monday, November 11, 2013

While the ECB was in a rate cutting mode on Thursday, the Bank of England (BOE) left its benchmark interest rate unchanged at 0.5% in addition to leaving the target amount of bond purchases unchanged at 375 billion pounds. The rate of economic recovery in the U.K. appears much stronger than the rest of Europe, with solid gains seen in both the industrial and service sectors. Traders have been bullish on the British Pound recently which has caused the U.K currency to rally to 9 months highs against the Euro. This week BOE Governor Mark Carney will announce its economic projections for the coming months, with analysts looking for an increase in the country's growth forecast, although traders expect Governor Carney to stress that the BOE will remain accommodate in its monetary policies until the unemployment rate declines further.

Fundamentals

The European Central Bank caught many forex traders off-guard on Thursday, when it announced that it is lowering its benchmark interest rate to a record low of 0.25%. Weaker than anticipated readings on inflation in the Eurozone is allowing the ECB to remain accommodative in its monetary policy as well as economic data that portrays the current economic recovery as "fragile". Euro zone inflation has been running well below the ECB's target rate of near 2% with October's data showing inflation running at a 0.7% rate. News of the rate cut sent the value of the Euro currency tumbling against most major currencies, with the December Euro futures falling by over 200 pips after the interest rate announcement was made. The rate cut announcement was greeted more positively by bond bulls as short-term yields for most Euro zone nations government debt fell to multi-month lows. A better than expected GDP reading from the U.S., as well as stronger economic growth outlook for the U.K. may keep the Euro in a defensive mode against both the Dollar and the Pound as we approach the New Year.

Technical Notes

Looking at the daily continuation chart for the Euro FX futures, we notice prices falling sharply after the interest rate cut announcement was made but recovering a good portion of the day's losses by the close of trading. The sell-off did take prices below the uptrend line drawn from the major low made back in July. Trading volume has been decreasing of late but "spiked" higher on the ECB rate decision. The 14-day RSI remains weak with a current reading of 37.53. The 200-day moving average (MA) currently near the 1.3230 price level should act as support for the December contract, with resistance found at the 20-day MA, currently near the 1.3549 price level.

Mike Zarembski, Senior Commodity Analyst


November 12, 2013

Reversal or False Hope?

Tuesday, November 12, 2013

Coffee futures had a key reversal pattern on the daily chart on Thursday, but will there be enough momentum from technical buying to change the course of the market? Tropical Storm Haiyan may delay the Vietnamese harvest, which could make a small dent in the global surplus of beans in the near-term. This may be enough to influence shorts to take profits and liquidate their short positions. There has been unrest among Brazilian Coffee growers over sagging prices, which could lead to some sort of government intervention.

Fundamentals

The weakness in the Brazilian Real could trigger further selling from Brazilian Coffee growers, which may compensate for the slower exports from Vietnam. Traders may want to keep an eye on the cash market to see if Brazilian farmers are indeed dumping crop. The problem that Brazilian Coffee growers face if they choose to go this route is that it may be unprofitable to dump beans onto the market. Growers have been fed up with low prices, which have caused them to rack up debt at an alarming pace. Coffee growers have called for the Brazilian government to step in and support prices. What sort of price supports, if any, the government could institute remains up in the air. The failure of the Coffee futures market to break through the $1 mark on the downside could spur demand from roasters. Coupled with a smaller near-term Vietnamese supply, cash buying from roasters could influence traders to cover their short positions. The non-commercial speculative net short position is well over 20,000 contracts, suggesting short-covering has the potential to drive prices higher very swiftly.

Technical Notes

Turning to the chart, we see the December Coffee contract forming a key reversal after hitting a new contract low on Wednesday. The two sessions after the key reversal have not offered the type of followthrough that bulls would be looking for. Yesterday's close, in particular, is not very strong. That being said, reversals can occur when there is a period of choppiness and indecision. The RSI continues to show oversold technical conditions, which could be supportive of prices in the near-term. It is of interest to note that the momentum indicator is continuing to move lower, despite the bounce in both price and RSI, which can be seen as bearish divergence.

Rob Kurzatkowski, Senior Commodity Analyst

November 13, 2013

O.J. Bears get Freshly Squeezed

Wednesday, November 13th, 2013

Although traders expected Florida Orange yields to fall in the 2013-14 crop year, few expected the USDA to lower its estimate by over 8 million boxes from last season's 133.6 million boxes. The potentially small "risk premium" to futures prices should the citrus growing regions of central and southern Florida experience freezing temperatures this winter.

Fundamentals

The generally sleepy Frozen Concentrate Orange Juice (FCOJ) futures market awakened with a vengeance after a government report last week predicted that this coming season's Florida Orange crop will be the lowest in nearly 25 years. On Friday, the USDA released its first estimate for this season's Florida Orange crop, which came in at 125 million 90-pound boxes. If accurate, this would be the lowest Florida Orange production in 24 years! There are a myriad of reasons behind the sharp decrease in Orange production, including an outbreak of citrus greening disease, which causes unripe fruit to fall from trees prematurely. In addition, abnormally dry weather in parts of northern and eastern Florida has resulted in smaller fruit size being observed in the hardest hit areas, although the largest Orange producing counties in the central part of the state are not currently experiencing drought conditions. One bright spot in the USDA report was an increase in the potential juice yield, which was raised from 1.59 gallons per box to 1.60 gallons per box. Although it appears that the supply side of the FCOJ market looks to be tight in 2014, we must note that the demand picture is hardly bullish, as retail sales of Orange Juice declined to levels not seen in nearly 15 years, which can primarily be attributed to high retail prices for Orange Juice in supermarkets. Analysts are also speculating that this shift in consumer demand towards alternative morning beverages, such as exotic fruit juices and energy drinks, may be permanent. If true, this could keep U.S. Orange Juice consumption near decade lows for some time to come.

Technical Notes

Looking at the daily chart for January Orange Juice, we notice prices moving above the 200-day moving average for the first time since mid-September, after breaking out to the upside on higher than average volume once resistance near 125.00 was breached. Momentum is strong, although nearing overbought levels on the 14-day RSI, with a current reading of 68.63. Non-commercial traders (usually large speculators or funds) were holding a net-short position of nearly 2000 contracts, according to the Commitment of Traders report and just prior to the bullish USDA crop production report, which caught many of these large traders on the wrong side of the most recent price move. Given the limited liquidity seen in OJ futures, prices may continue to move higher, as those caught short the market continue to liquidate their positions. The September 13th high of 142.75 is seen as the next resistance level for January OJ, with support found at the November 1st high of 126.10.

Mike Zarembski, Senior Commodity Analyst


November 14, 2013

Retail Drives Silver Coin Demand, But is it Enough?

Thursday, November 14, 2013

Silver bears continue to control trading, as traders believe that the Fed may begin tapering as early as December. Fear of tapering has sent jitters down the spines of metal bulls, as a more hawkish Fed policy would likely mean a decrease in the odds for high inflation. Traders are also not convinced that it is time to hang up the "Mission Accomplished" banner with regard to the economic recovery. Many believe that the strong showing in the most recent Non-farm Payrolls report and unemployment rate is an anomaly, and that it may be a bit premature to curb stimulus. Traders may wish to keep a watchful eye on today's confirmation hearing for Janet Yellen to become the new Federal Reserve Chairwoman. She was one of the chief architects of the Fed's stimulus packages, most notably the bond buyback program.

Fundamentals

Silver demand from smaller investors remains robust, however demand has been lacking from funds and large investors. Sales of American Eagle Silver coins reached almost 40.2 million ounces since the beginning of the year, according to the US Mint, which is a new annual record. The previous record was 39.9 million ounces in 2011. American Eagle coin sales can be viewed as a benchmark for retail demand for Silver. The price of Silver is on pace for its first annual decline since 2000, and the lower prices, coupled with the uncertainty during the government shutdown, made Silver coins appealing to retail investors. Outside markets have been less than supportive for metals. Energies, in particular, have seen weakness in recent weeks, which has been a black cloud over commodities. Traders have been rebalancing portfolios for margin reasons and the desire to lessen their commodity exposure.

Technical Notes

Turning to the chart, we see the December Silver contract breaking out of a triangle/wedge pattern on the daily chart to the downside. This suggests prices may, potentially, trade down into the low 17's. Thus far, prices have been able to hold minor near-term support at 20.557. If prices can make a stand at this support level, Silver could potentially bounce and invalidate the downside breakout form the triangle/wedge pattern. The recent weakness in Silver prices has resulted in the RSI moving into oversold territory, which may be supportive in the near-term. stors. Outside markets have been less than supportive for metals. Energies, in particular, have seen weakness in recent weeks, which has been a black cloud over commodities. Traders have been rebalancing portfolios for margin reasons and the desire to lessen their commodity exposure.

Rob Kurzatkowski, Senior Commodity Analyst


November 15, 2013

Will the Recent Oil Price Decline Help Cure "Pain at the Pump"?

Friday, November 15, 2013

Oil Bears received some good news from the weekly EIA energy stock report, which was delayed by 1 day due to the Veterans Day holiday on Monday. The report showed that U.S. Oil inventories increased by 2.640 million barrels last week, which was well above traders' estimates of a build of about 1 million barrels. Even more bearish was the large increase in inventories at Cushing, Oklahoma, which is the delivery point for the NYMEX WTI contract. Here inventories rose by a larger than expected 1.691 million barrels, which raises the total Oil in storage to over 38 million barrels. This is a 6 million barrel increase in the past 7 weeks, and should help to support bear spreads in the nearby futures as the contango widens out through the April 2014 contract.

Fundamentals

The bull market in Crude Oil has run into some serious headwinds, led by the surging output of Crude Oil from the United States. In October, U.S. Crude output surpassed imports for the first time in nearly 20 years, with production totaling 7.7 million barrels per day (bpd) vs. imports of only 7.6 million bpd. The increase in production is due mainly to new drilling techniques that are extracting Oil from previously difficult to access shale formations. The outlook for Oil production in 2014 is even brighter, with the Energy Information Administration (EIA) projecting average output to rise to 8.5 million bpd next year. It is not only the increase in Oil production that is starting to fan bearish sentiment for the Crude market, but a slowing of demand for "black gold" that has analysts revising their price forecasts lower. The EIA expects U.S. Oil demand to rise by only 0.1% in 2014, which is well below the 15% plus increases in production that are forecast for the coming year. Higher Oil production in the U.S. has also been a significant catalyst, along with continued export disruptions out of Libya for the widening price premium of Brent Crude Oil over the U.S. benchmark West Texas Intermediate grade. These fundamental factors have caused the Brent vs. WTI spread to trade at its largest Brent premium in 7 months and have negated analysts' forecasts for WTI to regain its price premium to Brent by the end of 2013.

Technical Notes

Looking at the daily chart for January WTI Crude Oil (CLF14), we notice the 20-day moving average (MA) crossing below the 200-day MA. This is generally viewed as a bearish price indicator which would be supported should chart support at recent lows fail to halt the recent downward price move. However, Thursday's price action found new buyers emerging after the market moved below recent lows, which may be a signal that a short-covering rally may be near. The 14-day RSI is attempting to move out of oversold levels, but current readings are still weak at 38.52. Support is seen at the June 24th low of 90.40, with resistance seen at the 200-day MA, currently near the 96.75 price level.

Mike Zarembski, Senior Commodity Analyst

November 18, 2013

Sugar Bulls Bitter as Prices Tumble

Monday, November 18, 2013

Large speculators have been caught adding to their net-long positions just prior to the recent sell-off, and the steepness of the recent price decline may be attributed to momentum traders heading for the exits. The most recent Commitment of Traders report shows non-commercial traders holding a net-long position of over 223,000 contracts as of November 5th. Even though this is almost 8,000 contracts less than the prior week, it still leaves the market very vulnerable for further price declines as the speculative net-long position continues to be liquidated.

Fundamentals

The recent rally in Sugar prices has failed to gain traction, as prices have fallen over 2 cents per pound since the recent highs were made in mid-October. Sugar temporarily broke out of its long-term bearish trend, due mainly to concerns that the port facility fire in Brazil would help to tighten supplies in the near-term. However, it appears that the port fire did little to disrupt the Sugar trade, and traders returned their focus to the current global Sugar surplus that is being added to by a potential record Sugar Cane harvest in Brazil this season. The large Cane harvest is keeping Sugar mills in operation for longer than expected, which will add to supplies of processed Sugar available to export. Continued weakness in the value of the Brazilian Real vs. the U.S. Dollar is also a negative factor for Sugar prices, as a weak Real encourages producers to export Sugar as sales in Dollars outside of Brazil which will generate more Reais for producers when converting currencies. Although current supply and demand fundamentals seem to favor the bear camp, some analysts note that producers are not aggressively hedging next year's Sugar production at current price levels, which could be a sign that commercial traders anticipate that prices may rebound in 2014.

Technical Notes

Looking at the daily chart for March Sugar (SBH14), we notice the "spike" top that took place back on October 18th. Since that time, prices have been in a near "freefall", as long liquidation selling has overwhelmed recent buying interest. We should note that trading volume has been lighter than average during most of the price decline, which actually may be adding to recent price weakness, as large traders have been finding it difficult to move large positions on any given day. This seems to be leading to active selling interest each day on any attempts to rally prices. 17.35 is seen as the next support level for the March contract, with resistance seen at the 200-day moving average, currently near the 18.46 price area.

Mike Zarembski, Senior Commodity Analyst


November 19, 2013

Can Crude Hold in the Face of Tapering?

Tuesday, November 19, 2013

Crude Oil futures had another losing session yesterday, as traders prepare for the possibility of Fed tapering soon. New York Fed President William Dudley stated that he is "getting more hopeful" about the US economy, strongly suggesting the central bank may be path to reducing stimulus soon. The consensus among analysts is that the FOMC will not begin tapering until its March 18-19 meeting; however, traders do not want to get caught off guard in the off chance that the Fed will begin tapering sooner. Technically, Crude Oil is approaching significant support near the 90.00 level. If the Oil market cannot hold $90, the selling floodgates may, potentially, open.

Fundamentals

In addition to overtures from the Fed that the days of cheap money may be over, the Crude Oil market remains oversupplied. Last week's EIA report showed US inventory levels increasing more quickly than expected and there are signs that this trend may continue. Saudi Arabia shipped the largest amount of Oil since November 2005. With little demand improvement, this suggests that global supplies should be more than sufficient to cover current global demand. The fear premium has been evaporating from Oil prices, as Iran plans to resume talks with the five permanent members of the UN Security Council and Germany on November 20th. Iranian output has fallen 16 % since tougher sanctions were imposed during mid-2012. The unrest in Libya has disrupted European exports from the country, which could increase the Brent Crude premium over WTI. If the situation there does not improve, the unrest could be supportive of Oil prices.

Technical Notes

Turning to the chart, we see the January Crude Oil contract (CLF14) consolidating just above minor support near the 92.00 level. If the market cannot hold 92.00, prices may test more stout support at 90.00. The 90.00 mark can be viewed as an important support level for Crude Oil, which, if broken, could result in further selling pressure. The down move prior to the recent chart consolidation suggests a downward bias in the near-term. Recent selling has resulted in the RSI indicator remaining in oversold territory.

Rob Kurzatkowski, Senior Commodity Analyst


November 20, 2013

Corn Futures Fall as EPA Lowers Ethanol Mandate

Wednesday, November 20, 2013

Ethanol futures have held up rather well considering the recent lowering of the EPA renewable fuels mandate. January 2014 Ethanol futures (ACF14) are currently trading over 10 cents per gallon higher than the recent lows that were made back in early November, just prior to the EPA announcement. U.S. Ethanol production had peaked back in 2011, with nearly 14 billion gallons produced. A look at the daily chart for the January contract shows what may be a double-bottom formation, with support seen near recent lows at 1.550.

Fundamentals

Corn traders finally received word last week that the Environmental Protection Agency (EPA) is proposing to lower the amount of Ethanol required to be blended in gasoline for the first time since the biofuel mandate was placed into law back in 2007. Originally, the law required refiners to blend over 14 billion gallons of Ethanol into gasoline in 2014. However, lower gasoline demand by U.S. motorists made the requirement nearly impossible to meet, as it would require raising the amount of Ethanol blended into gasoline above the current limit of 10%. Ethanol amounts above 10% could potentially cause damage to engines that were not designed to run on higher amounts of the alcohol based fuel. The EPA has proposed lowering the 2014 mandate to between 12.7 and 13.2 billion gallons, which would be lower than the mandated requirements of the past two years. The reduction in the biofuel mandate would help to lower Corn demand for use in Ethanol production, which accounted for approximately 35% of the U.S. Corn crop in 2013. Although Corn demand for fuel production is set to decline going into 2014, U.S. Corn exports for use as livestock feed are currently running ahead of USDA forecasts, as lower U.S. cash Corn prices are encouraging buyers to secure supplies ahead of the start of the South American Corn harvest. With 2014 rapidly approaching, Corn traders may turn their focus towards the potential size of the South American Corn crop, as well as awaiting the first official estimate of U.S. Corn acreage for the 2014 season, which is scheduled to be released towards the end of March.

Technical Notes

Looking at the daily chart for March Corn (CH14), we notice prices trading near contract lows following the EPA Ethanol mandate announcement. Prices are now pulling away from the 20-day moving average, and momentum has turned weak, with the 14-day RSI holding just above oversold levels with a current reading of 31.78. Support is seen at the psychologically important 400.00 price level, with resistance found at the November 12th high of 449.50.

Mike Zarembski, Senior Commodity Analyst


November 21, 2013

Gold Market Rocked

Thursday, November 21, 2013

Gold futures were temporarily halted yesterday after prices dropped $11 within a minute in early trading. The 20-second halt occurred after a sizable trade triggered the exchange's "stop-logic" mechanism to prevent cascading. The large trade may have been the result of technical selling or a larger long holder throwing in the towel on their position. The December Gold contract broke through several technical levels on the day, which added to the fundamental weakness of the market.

Fundamentals

Longs continue to liquidate positions, as traders' appetite for precious metals wanes. Comments on Monday from outgoing Fed Chairman Ben Bernanke, which may be interpreted as favoring expansionary policy, failed to inspire Gold bulls. These comments strongly suggest that the Fed will not begin tapering during their December meeting. The reason the dovish comments failed to inspire bulls is that traders were already targeting the March 18-19 FOMC meeting as the beginning of the tapering cycle. The FOMC minutes from the October meeting suggest that the central bank viewed the negative effects of the government slowdown to be temporary and limited. The Fed highlighted that several risk factors for the economy remain without hinting at further prolonging of expansionary policy. This suggests that economic growth may slowly grind higher. The US Dollar Index held a key technical level, suggesting the greenback may firm-up in the near-term. If the Dollar is able to post solid gains, bears may maintain in control of the market for the foreseeable future.

Technical Notes

Turning to the chart, we see the December Gold contract breaking the recent low close of 1268.00, as well as support near the 1260.00 level. This suggests prices could approach the 1200 mark in the near future. If prices are unable to hold 1200, the Gold market could grind lower and test the 1085.00 mark. The result of recent selling is oversold conditions on the RSI, which may help to stop the bleeding.

Rob Kurzatkowski, Senior Commodity Analyst


November 22, 2013

Is Wheat's Retreat Complete?

Friday, November 22, 2013

On the Wheat export front, Egypt was reported to have purchased 120,000 metric tons of milling Wheat on Monday, with Russia seen as the likely seller. On Tuesday, the USDA reported that U.S. private exporters sold 110,000 metric tons of Soft Red Winter Wheat also to Egypt for the current marketing season that began on June 1st. Going into 2014, the U.S. may see its Wheat export business increase, as competitive cash prices for U.S. Wheat in conjunction with high quality supplies available could swing grain buyers to the U.S. once Eastern European and Black Sea supplies are drawn down.

Fundamentals

Grain traders appear to be paying little attention to the Wheat futures market lately, as prices seem to be biding time prior to the next major price move. Competition for Wheat sales is increasing with India, Russia and France providing aggressive offers for current Wheat tenders. On the supply side, analysts are looking for a potentially huge U.S. Hard Red Winter Wheat crop in 2014 with some traders forecasting production of over 1 billion bushels this coming season. Producers in the Central Plains may add additional acreage for Wheat production, especially with new-crop K.C. Wheat futures trading just under $7 per bushel. Any additional Wheat acreage will most likely come at the expense of Corn, with new-crop December 2014 futures hovering near $4.50 per bushel, making Wheat a more attractive planting option for some producers. Current global Wheat supplies remain ample, with the USDA projecting world Wheat supplies at 881.96 million metric tons for the 2013-14 season, vs. 854.87 million tons in the 2012-13 marketing year. Although there are some concerns that Wheat production in the Southern Hemisphere may fall below previous estimates, prices may need to drift even lower to draw fresh buying into the market.

Technical Notes

Looking at the daily chart for new-crop July 2014 K.C. Wheat futures, we notice that the steep sell-off that took prices from just over 750.00 to under 700.00 in the span of 1 month is starting to lose momentum, as the market appears to be consolidating. The 14-day RSI has moved into oversold territory, with a current reading of 29.22. Should the recent lows near 685.00 hold, it may confirm a double-bottom formation on the daily chart. Support is found at 685.00, with resistance found at the 20-day moving average, which is currently near the 711.00 price level.

Mike Zarembski, Senior Commodity Analyst


November 25, 2013

Natural Gas Prices Rally on Cold Weather Forecast

Monday, November 25, 2013

Natural Gas traders eagerly anticipate the weekly Energy Information Administration (EIA) Natural Gas storage report as a gauge to determine both industrial and consumer demand for the fuel. However, interest increases dramatically beginning in November, which is the "unofficial" start to the winter heating season. This past Thursday's report was the first "winter" draw of the season, with a draw of 45 billion cubic feet (bcf). This was above the average analyst estimate of 36 bcf, and well above the 5-year average of a 2 bcf draw.

Fundamentals

The popular 1940's hit "Baby, It's Cold Outside" certainly is an appropriate theme song for the latest weather forecasts, which are calling for below normal temperatures through the beginning of December for the entire eastern half of the U.S. This cold weather outlook, as winter is rapidly approaching, has already sparked the interest of Natural Gas bulls, and has sent futures prices to 4-week highs. Natural Gas inventories are currently 2% below last year's total for this time of year at 3.789 trillion cubic feet (tcf), although slightly above the 5-year average. Increased consumer demand for heating may keep Gas inventories from reaching record levels this season, despite Gas production totals that are near record levels. This sharp increase in Gas production is due to the development of shale-gas formations and the use of sophisticated drilling techniques such as hydraulic fracturing, which has become a game-changer for U.S. energy production and may eventually make the U.S. a major Natural Gas exporter in the coming years.

Technical Notes

Looking at the daily chart for May Corn, we notice that since October of last year, prices seem to have formed a consolidation pattern, with the upper boundary near the 770.00 price level and the floor near 675.00, though some may argue that the break below 700.00 was short-lived and an outlier. The 200-day moving average is hovering near the 700.00 price level, which is adding to the importance of this level as a support area. The 14-day RSI has turned neutral to weak, with a current reading of 41.85. Support is seen at 703.00, with resistance found at the February 1st high of 747.50.

Mike Zarembski, Senior Commodity Analyst


November 26, 2013

Coffee Rally Cools as Price Support Efforts Disappoint

Tuesday, November 26, 2013

Both Brazil and Vietnam are expected to have Coffee price support programs enacted to help stem the sharp prices declines seen this year due to a global production surplus. Brazil's plan involves allowing Coffee producers to defer interest payments on loans until 2015. This may allow producers to hold Coffee off the market until prices become more favorable, instead of selling into a declining market to obtain needed funds to pay down debts. However, given the potentially huge coffee surplus expected in 2014, many producers may wish to sell at current price levels as concerns that cash prices may fall even further make storing current production a losing proposition.

Fundamentals

Arabica Coffee bulls received a rude awakening this past Friday as prices fell sharply from 1 month highs after word of a Brazilian government plan to help support Coffee prices was deemed insufficient given current ample inventories. The major Coffee producing regions of Central and South America saw large gains in production this season at the same time that demand has turned sluggish. Brazil saw a record "off year" crop and Columbian Coffee production rebounded after several years of disappointing crops. Coffee production in Vietnam, the world's largest producer of Robusta Coffee, is also expected to produce a record or near record crop this season, which could pressure London Coffee (Symbol: LKD) futures prices in the near term. Near ideal growing condition so far in Brazil have some analysts looking for a record 2014-15, crop which if true, could see Coffee prices move below $1.00 per pound for the first time since 2006.

Technical Notes

Looking at the daily chart for March Coffee, we notice prices rebounding slightly on Monday after Friday's "bearish reversal" which capped the rally to 1 month highs. We should note that trading volume was light during the recent price rally and Friday's decline occurred on slightly higher trading volume. The 14-day RSI is holding near neutral territory with a current reading of 46.40. This past Friday's high of 112.00 should act as near-term resistance for the March futures, with support found at the recent low of 104.15.

Mike Zarembski, Senior Commodity Analyst


November 27, 2013

Have Bullish Traders Cocoa Cravings Come to an End?

Wednesday, November 27, 2013

Both large and small speculators have been Cocoa bulls lately, with the most recent Commitment of Traders report showing a combined net-long position of just over 85,500 contracts as of November 19th. This was a gain for the week of over 2,700 contracts and occurred just as the market reached its near-term top. Should the March futures fail to make new highs soon, we may see a bout of long liquidation selling, especially if near-term chart support is violated.

Fundamentals

The entire "softs" complex, with the exception of Cocoa, has been in a bearish funk for most of 2013, as ample supplies and lackluster demand have kept prices at bay. Now it appears that the bullish price move for Cocoa might be running out of steam in the short-term. After a nearly $650 per ton rally since July, the lead month March Cocoa contract is running into some resistance as prices move above the $2800 per ton level. Some analysts believe the recent sell-off is nothing more than profit-taking by weak longs after the lead month futures contract traded at 26-month highs. Reports out of the Ivory Coast, the world's largest Cocoa producing nation, have Cocoa arrivals at ports for export running over 40% above last year's levels, which should help to bring needed supplies to buyers. Improving weather conditions over a large portion of the West African Cocoa production region is viewed as a bearish factor for the upcoming harvest. Although the supply side of the Cocoa market is starting to turn slightly bearish, the demand picture is still firmly in the bulls' camp. Global Cocoa demand is expected to exceed production for the second consecutive year, as improving global economic conditions are reinvigorating demand for luxury items such as chocolate. Cocoa stocks in North American warehouses are beginning to tighten, which should add support for the New York traded futures.

Technical Notes

Looking at the daily chart for March Cocoa, we notice prices selling off sharply on Tuesday, following several failed attempts to trade above recent highs at 2820. We note a rather large bearish divergence in the 14-day RSI, which has failed to make new highs along with the March futures contract. The next support level for March Cocoa is seen at the 20-day moving average, currently near the 2720 price level. Resistance remains at the recent high of 2820.

Mike Zarembski, Senior Commodity Analyst

November 29, 2013

Brent vs. WTI Spreads Dominate Oil Traders' Interests

Friday, November 29, 2013

The weekly Energy Information Administration (EIA) energy stocks report had few surprises for Oil traders this week, as U.S. Crude Oil inventories rose as expected for the 10th straight week. The EIA reported U.S. Crude inventories rose by 2.953 million barrels last week to 391.4 million barrels, which is the highest inventory reading since late June. Gasoline inventories also increased last week, rising by 1.751 million barrels according to the EIA, as refinery capacity utilization rose by 0.8% to 89.4% last week.

Fundamentals

The major thesis for the Crude Oil market in 2013 was that the spread between the price of Brent Crude Oil (the global benchmark grade) and WTI Crude Oil (the U.S. benchmark grade) was to narrow sharply, as a shift in the direction of Oil pipelines from Cushing, Oklahoma to the Gulf of Mexico was supposed to trim the glut of Crude Oil in storage at the NYMEX delivery point. This had kept WTI futures prices trading at an historic discount to Brent Crude. However, with a little over a month to the end of the year, front month Brent is trading at an $18 plus premium to WTI futures, as U.S. Oil inventories continue to build. One factor behind Brent's outperformance to WTI is the continued surge in North American Oil production due to drilling in shale formations using unconventional techniques, such as horizontal drilling and hydraulic fracturing. This nontraditional production has allowed the U.S. to produce more Oil domestically than it imports for the first time since 1995. Brent prices have been supported by the continued labor unrest in Libya, where a strike by workers at Oil export terminals has reduced Oil output from North Africa's largest producer. In addition, Oil traders seem skeptical that a 6-month agreement to loosen some of the economic sanctions against Iran, in return for curtailing some work on the country's nuclear program, will have any long lasting effect on the amount of Oil being shipped from one of the Middle East's largest Oil producers.

Technical Notes

Looking at the daily spread chart for January Brent (IBF14) vs. WTI (CLF14) futures, we notice the spread continuing to widen as upside momentum increased once the spread traded above previous resistance at a 12.50 Brent premium. With the spread widening by nearly $13 since October and the 14-day RSI moving into overbought territory (currently reading 75.55), a downward price correction appears long overdue. The next resistance level is seen at an 18.50 Brent premium, with support found at a 14.80 Brent premium.

Mike Zarembski, Senior Commodity Analyst