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December 2013 Archives

December 2, 2013

Cotton Prices Resume Declines as Chinese Sales Loom

Monday, December 2, 2013

The large storm that moved through the southern portion of the U.S last week may have damaged portions of the Cotton crop awaiting harvest. This allowed prices to rally to 1-month highs just prior to the Thanksgiving Day holiday before profit-taking selling capped weekly gains. Although most of the U.S. Cotton crop has been harvested, any damage to the remaining crop would reduce the supplies available for the U.S. to export in the coming year.

Fundamentals

Cotton futures have been mired in a bearish trend, as global supplies have overwhelmed demand. The lone bright spot this year was the steady buying by China, which was accumulating Cotton to expand state controlled reserves. Analysts estimate that China now has enough Cotton in reserve to meet domestic demand for nearly 18 months! However, on Tuesday of last week, China announced that it would begin auctioning off some it its Cotton reserves. Normally, this news would be viewed as extremely bearish, however traders note that the minimum floor price for the auction is over 60% above current world prices, and interest from domestic mills should be minimal. Going into 2014, traders fear that Chinese mills may not need to import much Cotton, and instead may rely more on state-owned reserves to meet their requirements. If true, this could keep a ceiling on any cotton price rallies, especially if large Chinese Cotton imports do not materialize in 2014.

Technical Notes

Looking at the daily chart for March Cotton, we notice prices have become range bound for most of November, as the market seems to have found a near-term floor above 77 cents per pound. The 14-day RSI has moved out of oversold territory, and is now reading a more neutral 44.69. The "spike" low of 76.65 made on November 22nd looks to be support for March Cotton, with resistance found at the November 6th high of 80.52.

Mike Zarembski, Senior Commodity Analyst

December 3, 2013

Gold Pounded on ISM Data

Tuesday, December 3, 2013

Gold futures suffered heavy losses yesterday on speculation that the Fed may, in fact, be ready to begin tapering aggressively. The ISM Index jumped at its fastest pace in more than two years, showing an unexpected increase in US manufacturing activity. This Wednesday's release of the Fed's Beige Book will give traders a clearer idea about what the FOMC will be focusing their attention on in the coming weeks and months.

Fundamentals

With unemployment already stabilizing, the stronger ISM manufacturing data may have all but sealed the deal for Fed tapering. Outside of the US, global equity prices have rallied and economic indicators have shown significant improvement. This indicates we may be in the midst of a global recovery while inflation remains tame, which can be seen as a double whammy for precious metal prices. The Federal Reserve is expected to reduce its monthly asset purchases from $85 billion to $70 billion at their March meeting. In addition to reducing asset purchases, the Fed may slowly begin easing other stimulus to stave off inflation. This could result in a firming of the US Dollar, which may continue to pressure Gold prices. Even if the Fed doesn't take additional firming measures, a 17.6 percent reduction to Bond buying may be enough to push the greenback higher versus the majors.

Technical Notes

Turning to the chart, we see the February Gold (GCG14) contract breaking out of the narrow trading range, suggesting prices may test the 1200 level. Fairly significant support can be found near the 1180 level. The Gold market could potentially face very significant selling pressure if the 1180 level is not held. The RSI is showing oversold conditions, which may be supportive of prices in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


December 4, 2013

No Silver Lining for Precious Metals Bulls

Wednesday, December 4, 2013

Speculators in the futures markets have been steadily shedding their positions in both Gold and Silver, with the most recent Commitment of Traders report showing that combined non-commercial (large speculators) and non-reportable (small speculators) traders shed nearly 23,000 Gold contracts off their net-long positions during the week ending November 26th. For Silver, the decline was less, but a net 2,544 net-long positions were liquidated during the same time period. Given the steep losses for both Gold and Silver so far this week, it is possible that speculators may actually become net-short the precious metals, especially Silver, in the coming weeks.

Fundamentals

The glass is certainly more than half empty for Gold and Silver bulls in 2013, as futures prices for these precious metals have fallen sharply since the beginning of the year. There are several reasons behind the poor performance of Gold and Silver this year, with the first being the move by investors to rebalance their portfolios away from so called "safe haven" investments by moving funds into global equity markets -- especially the U.S. equity markets, where most of the major stock indices are trading near record highs. Secondly, a resurgence in the value of the U.S. Dollar vs. many of the of the major global currencies makes the purchase of U.S. Dollar denominated commodities, such as the precious metals complex, more expensive for non-Dollar buyers, which helps to lessen global demand. Finally, what might perhaps be the biggest recent influence in the decline of interest in both Gold and Silver is the belief by many traders that the Federal Reserve will begin to taper its purchases of U.S. bonds in the next few months. This would take away some of the fears that inflation rates would increase sharply in the coming months, especially from current subdued levels, due to the enormous amounts of stimulus being placed in the global economy. The timing for a possible Fed taper seems to be creeping ever closer, at least in some traders', minds, every time data is released that shows improving economic conditions. The latest "good news" for the economy came on Monday, when the closely watched Institute for Supply Management (ISM) manufacturing index for November rose to a reading of 57.3, which was the highest reading since April. Index readings above 50 indicate expansion in the manufacturing sector, and are another indication that the U.S. economy continues to strengthen, but also help to weaken the resolve of all but the most hardened precious metals bulls, as both Gold and Silver prices continue further into bear market territory.

Technical Notes

Looking at the daily chart for March Silver futures, we notice prices have fallen over 20% from the recent highs made in back in August of this year. A 20% price decline is considered by many traders as a gauge that a commodity is in a bear market. Prices are moving further away from both the 20 and 200-day moving averages (MA), which is a "bearish" signal for both long and short-term momentum traders. The 14-day RSI has just recently reentered oversold territory, with a current reading of 28.81. We note the last time the 14-day RSI reached oversold levels for Silver it took a reading below 20 in the RSI before a short-covering rally emerged. The next major support level for March Silver is not seen until the 18.600 price area, with resistance seen at the 20-day MA, which is currently near the 20.620 price level.

Mike Zarembski, Senior Commodity Analyst


December 5, 2013

Crude Oil Turning Point?

Thursday, December 5, 2013

Crude Oil futures jumped on a sharp drop in US inventory levels, as key pipelines worked down surplus inventory. The Fed's Beige Book also gave traders reason to hope that economic conditions will continue to improve. Economic activity in New York, Atlanta, Cleveland, Richmond, Minneapolis and Dallas showed moderate economic expansion. Meanwhile, Chicago, Philly, Kansas City and San Francisco posted more modest growth numbers. While consumer spending has been rising going into the holiday season, retailers are concerned that spending may not be as strong for the duration of the holiday season.

Fundamentals

The EIA reported that Crude Oil inventory levels fell 5.6 million barrels for the week ended November 29. Traders were expecting a decline of only 1.25 million barrels on the week. TransCanada Corp. is expected to start the southern portion of the Keystone XL pipeline in early January. This section of pipeline is expected to let Oil flow from the NYMEX delivery hub in Cushing, OK to Port Arthur on the Gulf Coast. This may alleviate the supply glut at the tank farm. At their meeting in Vienna, OPEC agreed to maintain its production target of 30 million barrels a day, which is what the market was expecting. The Oil cartel, however, did not give any indication as to the course of action it would take if Iranian and Libyan Oil returned to the market. The US Dollar pared recent gains, which also supported prices. The December Dollar Index did manage to hold the 80.50 support level thus far. If the index is not able to hold, the greenback may tumble in the near-term, which could be seen as supportive of Oil prices.

Technical Notes

Turning to the chart, we see the January Crude Oil (CLF14) shooting through near-term resistance at the 95.00 level. The RSI indicator has moved from oversold to near overbought levels over the course of several sessions. It is interesting to note the positive divergence between the RSI and momentum indicators and Crude Oil prices. Both indicators bottomed out in early November, but Crude Oil itself did not reach a near-term low until several sessions ago. This suggests prices could be set to reverse.

Rob Kurzatkowski, Senior Commodity Analyst


December 6, 2013

Will the Fed be the Grinch that Stole the Year-end Stock Rally?

Friday, December 6, 2013

"Analysis Paralysis" is a common ailment for many traders, as the slew of economic data released each business day is a bit overwhelming to assess in a timely manner. Even worse are the seemingly contradicting conclusions one can reach based on which report is currently on the radar. For example on Wednesday, the ADP/Moody's Analytics Private Sector Payrolls Report showed that the services sector added a rather strong 176,000 jobs in November. However, just a few hours later, the November ISM Non-manufacturing index showed a decline to 53.9, vs. 55.4 in October. But even more interesting, perhaps, was the drop in the employment index to 52.5, vs. 56.2 in October. This indicator shows that job growth in the service sector slowed last month, which was the exact opposite of what one would likely conclude based on the ADP payrolls data! It is no wonder that the Federal Reserve is being very conservative in announcing any tapering on Bond purchases, as the voting members of the Federal Open Market Committee (FOMC) really want to see conclusive evidence that economic growth is on a sustainable path prior to any removal of the current over-accommodative monetary policies currently in place.

Fundamentals

"Will they or won't they?" seems to be the question on traders' minds in regards to a possible December start date for the Federal Reserve to begin tapering its Bond purchases. Although the general consensus is that the Fed will not begin its tapering until sometime in the 1st quarter, some analysts believe that the Fed may act as soon as the December FOMC meeting due to improving economic data. U.S. new home sales rose sharply in October to an annual rate of 444,000. The 25.4% increase in sales from September was the largest month-to-month increase in over 30 years! In addition, the widely watched tally of private sector payrolls released by Automatic Data Processing (ADP) in conjunction with Moody's showed that 215,000 jobs were added in November, vs. the 178,000 economists were expecting. If accurate, this would be the largest monthly gain in a year. Even the October revisions were positive, with ADP increasing October payrolls to 184,000 jobs created, versus the originally reported 130,000 jobs. The service sector showed the largest increase in employment, with 176,000 jobs added last month. Even though improving economic data may spur the Fed to act sooner to curtail Bond purchases, the recent up-tick in Bond yields may cause the Fed to be more cautious in announcing the start of any reduction in stimulus measures for fear that rising borrowing costs may slow the current economic recovery. This may buy the Fed more time to be prudent in evaluating 4th quarter data in its entirety prior to beginning any reduction in Bond purchases, which would push out any announcement of tapering until the end of the 1st quarter of 2014 and prevent equity bulls from receiving any coal in their Christmas stockings courtesy of the Fed.

Technical Notes

Looking at the weekly continuation chart for the E-mini S&P 500 futures (current front month symbol ESZ13), we notice the market is shaping-up for a down week, which would be the first since late September. The 14-week RSI reached overbought levels during the past week, so we may be in the midst of a long overdue price correction. Of course, this may be a moot concern should equity traders view this morning's Non-farm Payrolls Report bullishly. Last week's high of 1812.50 remains resistance for the front month E-mini S&P 500, with support found at 1736.50.

Mike Zarembski, Senior Commodity Analyst



December 9, 2013

Speculators Cutting their Sugar Intake

Monday, December 9, 2013

Although the current supply situation in Sugar seems firmly in the bear camp, the longer-term prospects are not as dire. Global Sugar consumption is expected to increase the next several years, as rising demand from developing nations and current lower global prices are expected to generate nearly 9 million metric tons of additional demand in the next 5 years according to the Sugar trading firm Czarnikow. This additional consumption, if realized, will help to trim any potential global surplus in the coming years.

Fundamentals

The sell-off in the Sugar market has been an impressive sight to behold, with prices falling a near vertical 3 ½ cents per pound since prices briefly "spiked" above the 20-cent level back in October. Sugar supplies remain more than ample for the coming season, with the International Sugar Organization estimating the potential surplus at nearly 5 million metric tons. Sugar production has increased the past several years, as high world sugar prices in 2011 and 2012 encouraged production expansion by major Sugar producing nations. On top of the huge Sugar Surplus, recent weakness in the value of the Brazilian Real has also been a negative factor on prices, as it encourages Brazilian producers to export Sugar overseas because the Dollars they receive for their exports will convert back to more Reais at current rates. It appears that speculative traders were caught holding a large net-long position in Sugar futures just prior to the sell-off, with long liquidation selling adding additional pressure to prices on top of bearish supply fundamentals. The most recent Commitment of Traders (COT) report shows non-commercial traders shedding over 22,000 net-long contracts during the week ending November 26th. With the March futures down nearly 0.75 points since the COT data was collected, it would not be a surprise if the speculative net-long position fell by another 10,000 to 15,000 contracts this past week.

Technical Notes

Looking at the daily chart for March Sugar, we notice prices attempting to forge a near-term bottom on Thursday, after falling to multi-year lows. Prices have been in a near free-fall the past several weeks, as long liquidation selling has overwhelmed the few "bargain hunting" buyers trying to pick a bottom in the current bear market. The 14-day RSI has rebounded slightly from recent lows, but remains firmly in oversold territory, with a current reading of 21.97. 16.00 is seen as the next major support level for March Sugar, with resistance found at the November 19th high of 17.85.

Mike Zarembski, Senior Commodity Analyst


December 10, 2013

Chinese Imports Stoke Copper Optimism

Tuesday, December 10, 2013

Copper futures posted their third positive day in the past four trading sessions on traders' optimism that improved economic conditions will improve US demand for the metal. Precious metals have floundered lately, as improved economic conditions could warrant a scale-back of easing in the coming months, reducing inflation premium. The perception that economic risks have dissipated has also sucked some of the risk premium out of Gold and Silver. China has also seen a rise in Copper imports, suggesting 2014 estimates for demand may be on the low side.

Fundamentals

China imported 435,613 tons of Copper during the month of November, which is an increase of 7%, year over year. It is also a nice jump from October imports of 406,708 tons. China accounts for 40% of global Copper consumption. On the economic front, China's trade surplus rose from $31.1 billion in October to $33.8 billion in November. This is China's biggest trade surplus in almost 5 years. Germany's disappointing industrial output was of some concern to traders, as the nation is the European Union's largest economy. This bit of negative news in Germany was not enough to derail the rally based on US and China optimism. The large short speculative position in the Copper was reduced last week, according to the Commitment of Traders ("COT") report. The COT report showed non-commercial traders were short 27,477 contracts, which is a reduction of 4,270 contracts from the prior week. The short position is large enough to give traders reason to be concerned about a short-covering rally.

Technical Notes

Turning to the chart, we see the March Copper (HGH14) contract forming a double-bottom pattern, suggesting prices may be set to reverse. The measure of the move suggests prices could move above the 3.30 mark in the near-term. The RSI indicator is nearing overbought levels, which may impede prices in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


December 11, 2013

Treasury Prices Stabilize after Strong Jobs Report

Wednesday, December 11, 2013

Speculators have been adding to their net-short positions in 10-year Note futures with the most recent Commitment of Traders report showing non-commercial traders (large speculators and commodity funds) adding just over 9,500 new net-short positions during the week ending December 3rd. However, it was the non-reportable traders (usually small speculators) where the net-short position really grew, with an additional 56,222 contracts added. This was prior to Friday's unemployment report and may account for the recent rally in treasury prices as weak bears covered short-positions once commercial buying entered the market.

Fundamentals

This past Friday's U.S. Non-farm payrolls report (NFP), which showed that 203,000 jobs were created in November, sparked a brief but severe sell-off in Treasury futures with the 10-year Note yield surging over 2.93% for the first time since September. Market participants now seem to believe that the Federal Reserve will begin its tapering of bond purchases possibly as early as this month, although some time in the 1st quarter of 2014 is the most likely time frame for the Fed to begin removing some of its monetary stimulus. However, bond traders seemed to have somewhat a change of heart over the weekend and the 10-year note yield fell below Friday's lows as renewed buying interest emerged, especially from foreign buyers, as yields approached 3%. It appears that traders have now resigned themselves to the fact that the Fed will begin to taper its bond purchases in the coming weeks, but low inflation readings will allow the Fed to keep short-term interest rates low for quite some time. It is also likely that the recent increase in price volatility for the Treasury complex may begin to ease as analysts now believe that the Fed will be conservative in removing monetary stimulus and any tapering of bond purchases will occur gradually as Fed members will want to prevent any yield "spikes" that could derail the still fragile economic recovery.

Technical Notes

Looking at the daily continuation chart for 10-year Note futures (front month TYH14), we notice the "spike" lows generated after the NFP report on Friday corresponded with a test of oversold levels for the 14-day RSI. Once 10-year prices recovered, fresh buying emerged as it appears that there is strong buying support starting to emerge as yields begin to approach 3%. Despite the recent rally, it appears that the intermediate trend now favors the bears as prices remain below the 20 and 200-day moving averages as well as prices remaining below the intermediate uptrend line drawn from the 2007 lows. For long term traders and investors, this bull market in treasuries remains in force and would take a monthly close below the 110-00 price level (4.722% yield assuming a 6% coupon), before one could reasonably call an end to this historic bull market.

Mike Zarembski, Senior Commodity Analyst


December 12, 2013

Cold Wave Heats Up Natural Gas Market

Thursday, December 12, 2013

Natural Gas futures continue to rally, as the frigid cold weather that has battered the country from coast to coast is expected to fuel demand. The forecast for the next 6 to 10 days calls for cooler than normal weather for this time of year, which may continue to support Gas prices in the near-term. Technically, it appears that the Natural Gas market may be headed for a test of the highs made in May of this year near the 4.444 level.

Fundamentals

The National Weather Service has forecast that weather conditions will be colder than normal across the continental US through the Christmas holiday. This is expected to result in a larger than normal drawdown in inventory levels. Today's EIA data is expected to show Natural Gas inventories falling by 84 billion cubic feet for the week. The 5-year average decrease for the week is 76 billion cubic feet. Much of country is seeing heating demand for Natural Gas at near January levels. The cooler weather, tighter inventories, and depressed prices certainly set the stage for a nice rally in Gas prices over the past several weeks. However, over the longer-term, recent developments were not as bullish for the market. The EIA forecast that production will increase by 0.98 billion cubic feet per day to 71.43 billion cubic feet per day. This is a 1.4% increase over record levels in 2013. The EIA also expects demand to decline by 1.6% to 69.58 billion cubic feet per day.

Technical Notes

Turning to the chart, we see January Natural Gas rallying over the past month, with very little resistance. Prices easily glided through resistance on the continuation chart near 3.82, and prices tested continuation chart resistance near 4.35 during trading yesterday. The RSI indicator is extremely overbought, coming in over the 93% mark this morning. This, coupled with resistance, could impede Natural Gas prices in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst

December 16, 2013

Is the Historic Soybean Bull Market on its Last Legs?

Monday, December 16, 2013

Looking ahead to the 2014 Soybean crop, current favorable weather conditions in South America favor the potential for a record harvest this season, which should help alleviate current tight supplies. However, bullish traders will note that the key pollination period will not occur until February, so there is no guarantee that current estimates will hold. Looking at the potential for the U.S. Soybean crop next season, we note that new-crop November 2014 Soybean prices are just over 2 ½ times that of new-crop December Corn, which is about the average price ratio of the past 35 years. Although with new crop Corn trading well below $5 per bushel, there is some talk that producers may dedicate more acreage towards Soybeans next season, but the price ratio for the 2014 crop is yet to price in this scenario.

Fundamentals

Soybean futures received some bullish news last Tuesday, as the USDA lowered its estimate for U.S. ending stocks by 20 million bushels to 150 million bushes. This figure was below average estimates for closer to 155 million bushels, and if true, would lower the stocks to usage ratio below 5%. It appears that the appetite for U.S. Soybeans remains strong, with the USDA raising its estimates for U.S. exports by 25 million bushels. However, as we move into 2014, traders must be prepared for a potentially record-breaking Soybean harvest out of South America. The USDA remained conservative in its estimate for Brazilian production at 88 million tons. This was just over 2 million tons below the current Brazilian government estimate at just over 90 million tons. The USDA did raise its estimate for the size of the Argentinean Soybean crop to 54.5 million tons, although this was also below traders' forecasts. Current tight Soybean supplies have moved the futures term structure into a backwardation through the November 2014 futures, which is the first "new-crop" month for next year's production. Bull spreads have been widening since August, but may see some pressure in early 2014 once the South American crop is ready for harvest. This would be especially true if China, the world's largest Soybeans importer, decides to cancel some U.S. purchases in favor of South American Beans.

Technical Notes

Looking at the weekly continuation chart for Soybean futures starting with calendar year 2000, we notice prices have been in an overall bullish trend since the end of 2001, when the front month futures were trading below 420.00 per bushel. Since that time, we have seen Soybean prices rise over four-fold and reach all-time highs in 2012. If we look at the most recent leg of this bull move which began in the latter half of 2006, we notice that the uptrend line drawn from the 2006 lows has been tested recently. A weekly close below 1186.50, should we see it, may signal this latest bullish phase has come to an end.

Mike Zarembski, Senior Commodity Analyst


December 17, 2013

Mexico Opens Up Oil Fields, Market Yawns

Tuesday, December 17, 2013

Crude Oil futures finished higher yesterday, despite the news that Mexico ended its 75-year-old barrier to foreign investment in its Oil fields. Mexico has largely missed out on the Gold rush in Oil over the past decade due to the country's limited output, despite having one of the larger Oil reserves in the Western Hemisphere. Citigroup predicts that Mexican output of Crude Oil will more than double to 2.5 million barrels a day. This could add to a supply surge coming out of the US and Canada due to expanded pipeline capacity.

Fundamentals

Crude Oil futures were able to recover despite overnight data indicating that Chinese PMI had fallen for the first time in three months. Brent Crude Oil advanced, dragging the WTI contract, after Libyan rebels refused to hand over control of three Oil ports to the government. This was a setback to those familiar with the situation, as there was optimism that real progress had been made. Traders are looking forward to this Wednesday's EIA inventory report to see if the destocking of Cushing, OK will continue. The Obama administration expanded its list of companies that it would target to block their trading activity due to their business ties to Iran. This could strain relations between the two nations even more and do away with some of the good will built between the nations in recent months.

Technical Notes

Turning to the chart, we see the February Crude Oil (CLG14) contract rebounding from recent lows to test the 200-day moving average. Prices failed to advance beyond the average, which suggests prices could slump in upcoming sessions. The RSI indicator is near overbought levels once again, which could be seen as bearish in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


December 18, 2013

Cocoa Bulls Take a Breather as Prices Consolidate

Wednesday, December 18, 2013

Speculators have been on board the Cocoa bull move for several months and have built an impressive net-long position. According to the most recent Commitment of Traders report, the net-long speculative position has exceeded 92,000 contracts, with non-commercial traders (large speculators or commodity funds) holding nearly 84,000 of those let-long positions as of December 10th. This record long position could be vulnerable to a steep sell-off should recent support levels fail to hold as sell-stops are triggered.

Fundamentals

After a nearly 5-month-long rally, Cocoa prices have reached a consolidation phase, as traders begin to re-access their positions after the $700 per ton price rise. Now that we are several months into the 2013-14 crop year, we are starting to see signs that Cocoa production has rebounded after rather disappointing production totals last season. So far this season, Cocoa arrivals at ports in the Ivory Coast are running ahead of last year's pace, which should help to alleviate tight supplies which forced commercial buyers to raise their bids in order to obtain inventory. Cocoa grinders have been eager to obtain Cocoa supplies the past several months, as the profit margins available from processing Cocoa into Cocoa butter were quite attractive. Now that it appears that production is rebounding, at least for the first part of the season, we may see prices begin to retreat - i.e., unless continued strong demand for Cocoa products continues into the new year or West African Cocoa production declines sharply in January.

Technical Notes

Continuing our year-end long-term outlook for commodity and financial futures prices, we are viewing the weekly continuation chart for Cocoa futures. The first thing we notice is that the 1000 per ton price level has been a major support level going back nearly 40 years, as price dips below 1,000 per ton were short-term in nature. The bull market run during the 2010-11 season that sent prices over 3700 per ton for the first time since 1980 still fell way short of the record 5300 per ton price seen at the peak of the 1977 historic Cocoa bull market. For the past several years, the 2000 per ton price level has been seen as a major floor for Cocoa prices, which may be difficult to break through unless global Cocoa demand falls sharply.

Mike Zarembski, Senior Commodity Analyst


December 19, 2013

Will the Bear Market "Corntinue"?

Thursday, December 19, 2013

Large trend following traders have become rather heavily short Corn futures with a net-short position totaling over 165,000 contracts according to the most recent Commitment of Traders report. However, the sharp sell-off in Corn prices this season has a side effect for Commodity Index funds which will need to purchase thousands of additional Corn futures during the annual rebalancing. These upcoming purchases could be enough to trigger a short-covering rally with buy stops being triggered as Corn bears exit the market ahead of the index fund buying.

Fundamentals

The old trading adage that "the cure for high prices is high prices" certainly can be applied to the Corn futures market the past few seasons, as record high prices gave producers ample reasons to increase Corn plantings this past season. After trading over $8 per bushel back in the summer of 2012, front month futures prices have dropped nearly by half as increased production out of the U.S., as well as South America, has helped to alleviate formally tight global supplies. U.S. Corn production increased by over 3.2 billion bushels in the 2013-14 season versus the previous season, when a severe drought over most of the Midwest caused yields to plummet. Going into the 2014-15 season, current expectations are for a slight reduction in U.S. planted Corn acreage with early estimates ranging between 91.5 and 92 million acres vs. 95.3 million acres this past season. However, if we assume average trend line yields this year we could see a potential crop size of nearly 14 billion bushels which if realized would be a record harvest. Although it appears that Corn prices might be headed back towards prices levels seen the past 20 years or so, lower Corn prices could spur increased global demand, especially from China, which may be aggressive buyers in 2014 to help replenish government owned reserves while prices are near recent lows.

Technical Notes

A look at the weekly continuation chart for Corn, we notice that even with Corn prices nearly 50% lower than that seen in 2012, we are still trading well above average prices of the past 40 years. With the exception of the last 4 to 5 years, Corn traded in a price band between $2 and $4 per bushel with one exception, from 1973 up to the start of the commodity bull market in 2008. Should significant buying not be found at current price levels, we may see near-term Corn futures trade with a 3 handle for the first time since 2010, with little long term support seen until the $3 per bushel price level.

Mike Zarembski, Senior Commodity Analyst


December 20, 2013

Bottom Drops Out of Gold as Taper Looms

Friday, December 20, 2013

After much speculation and bantering, the FOMC finally announced that it will begin tapering next month, which triggered a sell-off in precious metals. The Fed will cut its monthly asset purchases to $75 billion from $85 billion. The size of the reduction was a bit smaller than some expected, so the shockwaves were not as great as they could have been. Barring a miracle run in the final two weeks of the year, Gold is slated to make its first annual decline in 13 years.

Fundamentals

While the Federal Reserve is reducing its purchases of assets, the central bank is expected to keep interest rates near zero for the foreseeable future. This may result in inflation reaching Fed target levels, which could be supportive of Gold prices down the road. In the near-term, the bear camp is in full control. Many bulls were hoping that the FOMC statement would indicate that the bank would hold off until at least March. The news shook many remaining longs out of the market, so they can live to trade another day. Yesterday's close below the $1,200 level dealt a psychological blow to long holders. While Fed policy is grabbing the headlines, South African mines are facing a crisis. The price of the metal has fallen while production costs and miners' salaries have risen, which threatens to shutter mines. The supply threat will likely play second fiddle while traders focus on Fed policy and inflation, but it does put a floor under metal prices. The question is how low that floor is.

Technical Notes

Turning to the chart, we see the February Gold contract breaking the key psychological support level at 1200. The February contract did manage to settle above the June low of 1187. If prices are unable to hold this support level, Gold risks doing more chart damage. The RSI indicator is hovering above oversold levels, despite the heavy selling.

Rob Kurzatkowski, Senior Commodity Analyst

December 23, 2013

Copper Prices Stagnant Despite Fed Tapering

Monday, December 23, 2013

Speculators are holding a net-short position in COMEX Copper, with the most recent Commitment of Traders report showing the combined non-commercial and non-reportable position totaling a net-short 17,314 contracts as of December 10th. This net-short speculative position will be put to test by the rebalancing of commodity index funds, with the DJ-UBS commodity index increasing the weighting of Copper by 0.23% to 7.51%, which will require index fund managers to purchase Copper contracts early in 2014.

Fundamentals

Copper traders have seen a rather tranquil last half of 2013, as the market moved into a consolidation mode following a steep sell-off in prices at the start of the year. The Copper market appears trapped between conflicting fundamentals, with bulls touting the steady drawdown of Copper stocks in LME warehouses, which are currently over 40% lower than the highs seen back in June. In addition, China's State Reserve Bureau (SRB) is planning on building state-owned reserves of industrial metals in 2014, including potentially 300,000 tons of Copper and nearly 150,000 tons of Nickel. The SRB has a goal of accumulating 2 million tons of Copper by 2015, and may be an aggressive buyer on price dips. In the bearish camp, we note Copper prices are well above historic price levels, although the huge appetite for commodities out of China may be contributing to a "new normal" price range for the red metal for years to come. The news last week that the Federal Reserve would begin to taper-back its bond purchases by 10 billion per month has triggered a strengthening of the U.S. Dollar, which is generally viewed as bearish for commodities priced in Dollars, as it makes purchases more expensive for non-Dollar users. As we head into 2014, it appears that the direction for Copper prices may depend on whether the global economy continues to gain traction, which should help to support commodity prices including Copper. Or, will a stronger Dollar combined with sluggish economic growth prospects curb commodity demand and keep Copper prices well below recent historic highs.

Technical Notes

Looking at the weekly continuation chart for Copper, we notice that until 2005, Copper's upper price band was $1.50 per pound, but that all changed once China's huge appetite for commodities combined with the start of the parabolic price move in the U.S. housing market sent Copper prices to record highs that reached well over $4.50 per pound in 2011. Of particular interest is the violent move that occurred once the "bubble" burst in the U.S. housing market, with Copper prices falling from record highs, which were at the time above $4, to a low near $1.25 per pound, at the nadir of the financial crisis. The price move back into the historic price range was very short-lived, as prices made new all-time highs just 2 years after the price collapse. This seems to confirm the belief that Copper prices may now be trading in a new more elevated price band, with a floor now seen between $2.50 and $2.75 per pound, as opposed to the previous historic price support level around $0.50 per pound.

Mike Zarembski, Senior Commodity Analyst


December 24, 2013

Natural Gas Keeps Humming Along

Tuesday, December 24, 2013

Front month Natural Gas futures have risen to their highest level since the summer of 2011 due to the blast of cold weather hitting the central US. The east coast has had unseasonably warm temperatures the past few days, but forecasters are expecting the cold front hitting the Midwest to spread to the east coast through the first week of January. This could cause demand for Natural Gas to spike in the near-term.

Fundamentals

US Natural Gas inventories fell by 285 billion cubic feet (bfc) in the week ended December 13th, which is the biggest decline since the EIA began tabulating inventory data. This week's inventory data could very well show another record drawdown in inventories, which may squeeze shorts out of the market. Speculative shorts in the Natural Gas market decreased last week. The December 17 Commitment of Traders (COT) report showed short bets on the Natural Gas market fell by 15,812, to 128,846. While it does look like there was already some short-covering, the large position suggests that a short squeeze still has the potential to cause a violent spike in prices.

Technical Notes

Turning to the chart, we see February Natural Gas (NGG14) contract breaking through resistance at the 4.40 level on the continuous chart. Prices have remained above the resistance level for the past two sessions. Yesterday's price action formed a gravestone doji, hinting at a possible near-term reversal. A follow-through selling day, especially below the 4.40 mark, could validate the reversal. The RSI remains in overbought territory, which threatens to derail the rally.

Rob Kurzatkowski, Senior Commodity Analyst


December 30, 2013

Cotton Consolidation Continues

Monday, December 30, 2013

The first "official" forecast from the USDA for the 2014-15 Cotton market will not be released until February of next year. However, traders and analysts are already starting to analyze potentially likely supply and demand scenarios that could determine what type of market we will see for Cotton in 2014. The biggest element of any forecast is what will be the Chinese government's intention in regards to further purchases for state-owned reserves. Any rally in prices may curtail further purchases as China may decide to unload some of its huge reserves on domestic users in order to help curb inflationary pressures. However, should global prices begin to weaken; we may see China aggressively import Cotton, despite already large supplies, in order to take advantage of lower prices.

Fundamentals

After an historic price spike during the 2010-11 season, Cotton prices have returned to their historic price range of the past 40 or so years despite large purchases by China the past year. China appears to be taking advantage of sharply lower Cotton prices this past year to replenish state-owned reserves, which were depleted during the 2010-11 bull market when Cotton prices traded over the $2 per pound price level. As we are nearing the start of 2014, the outlook for Cotton prices is mixed, with bulls noting an improving global economic outlook that could spur increased demand for commodities including Cotton. In addition, with new-crop Cotton prices currently below 78 cents per pound, many analysts believe that U.S. Cotton production will fall next season, as alternate crops, such as Soybeans, become more attractive for producers to plant given current market prices. On the other side of the Cotton equation, market bears will argue that the large Chinese purchases will help to curb demand next year as the world's largest Cotton producing and consuming nation begins to sell some of the state owned reserves in the domestic market. Either way it does appear that baring a major supply shock, Cotton prices may remain range bound next year as the market appears to be near a supply and demand equilibrium, with prices expected to remain within a 20 cent price range from current prices.

Technical Notes

Looking at the weekly continuation chart for Cotton futures going back to the early 1970's, we notice prices have generally traded within a 75-cent per pound price band for most of the last 40 years. The big exception being the 2010-11 season when prices went 'parabolic", soaring to an almost unthinkable $2 per pound level at a time when prices over $1 per pound were a very rare occurrence. We need to note however, that prices became extremely unstable at those lofty levels as end-user demand plummeted and global production rebounded which gave further credence to the old adage that "the cure for high prices is high prices" and shows that some of what we learned in economics class about the supply and demand curve vs. prices actually works in the "real world' occasionally!

Mike Zarembski, Senior Commodity Analyst


December 31, 2013

Cocoa Bulls Take Foot Off the Gas Pedal

Tuesday, December 31, 2013

Cocoa futures have fallen for three consecutive sessions amid speculation that the supply situation will improve. The West African harvest is expected to pick up the pace in the coming weeks, as the Ivory Coast and Ghana are expected to see seasonal dryness. The dry weather should allow farmers to accelerate their harvesting of crops. Cocoa has also found a bit of selling pressure due to traders taking profits going into year end. The price of Cocoa had increased by more than $600 per ton since July, and traders are content lightening their positions at this time.

Fundamentals

The progress of the West African harvest has been very good up to this point, and the weather suggests that there should not be any impediments going forward. Ivory Coast arrivals have also been very healthy to this point. While these developments are favorable for the supply situation over the short-term, the longer-term situation suggests supplies could be stressed for several years to come. According to the International Cocoa Organization, Cocoa consumption is expected to outpace output by 70,000 tons for the 2017-2018 crop year. This suggests that any sort of sell-off could be short-lived. Analyst forecasts suggest prices could rally up to the $3300-3500 range by the end of next year.

Technical Notes

Turning to the chart, we see the March Cocoa contract forming a small double-top formation, suggesting prices could trade down to support at the 2650 mark. It is interesting to note that the RSI indicator peaked in early December, and that the indicator was diverging from prices. The move below the 20-day and 50-day moving averages can be seen as negative over the short-to-intermediate term. Failure to hold the 100-day moving average may add to the negative sentiment.

Rob Kurzatkowski, Senior Commodity Analyst