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February 2014 Archives

February 4, 2014

Manufacturing Data Pressures Oil Prices

Tuesday, February 4, 2014

Weaker Chinese economic growth could negatively impact Crude Oil demand and put bearish pressure on prices. The Chinese Purchasing Managers' Index fell to 51 in January, which was in line with estimates, but down from December. After digging deeper into the report, the number could be viewed as troubling. Manufacturing continues to slump, which could have a negative impact on raw material purchases. Also, the weaker data could be taken as a sign that the Chinese government's crackdown on shadow banking could be working. In order to cut down on non-transparent transactions, the Chinese government is putting pressure on their economy.

Fundamentals

China is not the only country facing a manufacturing slowdown. The ISM released its manufacturing data, which showed much weaker factory activity. The ISM Index came in at 51.3, down from 56.5 in December, and missed the consensus estimate of 56.0. Manufacturing is slowing at a time of year when refinery utilization is already slow. In the past 10 years, refinery use declined in the first quarter of the year. This could lead to another supply build in the US, barring a supply disruption or unexpected increase in demand. This Wednesday's EIA report is expected to show Crude Oil inventories rising 2 million barrels. Equity markets may continue to weigh on Oil prices. The S&P shed 40 points during yesterday's trading session.

Technical Notes

Turning to the chart, we see the March Crude Oil contract unable to mount a successful attempt to break through minor resistance near the 98.80 level. The Crude Oil market is currently technically overbought, which may have contributed to the selling pressure. Prices also failed to break through the 100-day moving average.

Rob Kurzatkowski, Senior Commodity Analyst


February 5, 2014

Hot Dry Weather in Brazil Catches Coffee Bears Snoozing

Wednesday, February 5, 2014

The most recent Commitment of Traders report shows trend-following traders were holding an overall net-short position in Arabica Coffee futures of just over 15,000 contracts as of January 28th. This was just prior to the explosive price rally seen the past few trading sessions, and it appears that the huge increase in price volatility can be attributed to these large speculative accounts being caught on the wrong side of the market. Commercial traders were also net-short prior to the rally, which might be limiting the enthusiasm for further hedge selling, at least until it appears that the speculative buying has run its course.

Fundamentals

As many long-time futures traders will attest to, the Arabica Coffee futures market can see price moves become quite volatile, especially if weather conditions in the growing regions of South America become unfavorable -- particularly in Brazil, which is the world's largest Coffee producer. Well, the weather gods were not kind to the major Brazilian Coffee growing region in January, as rainfall totals were the smallest in nearly 8 years, with few signs for any immediate relief from current hot, dry weather conditions. The dour weather forecasts have caused many Coffee traders to abandon hopes of a 60 million bag Brazilian crop and a global Coffee surplus, with talks now of a potential global Coffee deficit, especially if the Brazilian government's estimate of a below 50 million bag crop proves accurate. This potentially dramatic change in the supply picture for Coffee this coming year has generated a huge buying frenzy in the futures market, with the lead month March contract rallying over 24 cents per pound in just 6 trading sessions, as bears are forced out of their short positions. With prices rising almost 20% in just a few trading sessions and the daily charts becoming parabolic, we may begin to see some hedge selling enter the market, especially if prices continue to rise. Some producers may wish to take advantage of the price rally to move physical Coffee to market, especially with the value of the Brazilian Real vs, the U.S. Dollar near 5-year lows. A weak Real would likely induce Brazilian holders of commodities that are traded in Dollars to increase sales, as producers would receive more Reals once the currency conversion takes place. Although the market does appear overbought in the near-term, especially given the huge percentage move in just a few trading days, we must remember that even at current price levels, the market is still trading well below recent highs. Should trend-following traders not only close out the current net-short position, but reverse and move to a net-long stance, the bullish Coffee run could get the needed "jolt" to move even higher!

Technical Notes

Looking at the daily chart for March Coffee, we cannot help but notice the "parabolic" price move the past several trading sessions, as prices rallied well over 20 cents per pound! On Tuesday, it appears that some more aggressive selling has finally come into the market, just prior to prices testing the 140.00 price area. Prices are now well above both the 20 and 200-day moving averages, with recent trading volume running well above recent averages. The 14-day RSI has moved well into overbought territory, with a current reading of 76.78. 138.00 is seen as the next resistance level for the March contract, with little in the way of more formidable technical resistance until prices move above 150.00. Support is now found near the January 7th high of 122.60.

Mike Zarembski, Senior Commodity Analyst


February 6, 2014

Sugar Heats Up on Brazilian Drought

Thursday, February 6, 2014

Sugar prices have rebounded over the past five trading sessions after prices broke the 15.00 mark on the downside. Sugar prices have been in a vicious downtrend for two years, as global supplies continue to outpace demand. Drought conditions in Brazil have threatened crop yields in the country. Not only is this the hottest January on record for the nation, but Brazil has also seen the smallest rainfall over the same period in 20 years. Brazil is the world's largest producer and exporter of Sugar.

Fundamentals

In addition to the dryness in Brazil threatening crops, India has postponed plans to boost its exports. Prior to the decision, traders were concerned that the world's second largest producer was going to dump more supply on the global market, which would have exacerbated the supply glut. At this point, India continues to defer subsidies to Sugar mills, which would have given mills incentives to export. Funds have lightened up their short position on the news, but still hold a very substantial short position. The large net fund short should act as support for prices in the near-term and has the potential to quickly drive prices higher.

Technical Notes

Turning to the chart, we see the March Sugar contract forming a sharp reversal after spending a few days teetering near the 15.00 mark. Yesterday's price action suggests the reversal may be short lived, as the March contract formed a spinning top on the daily chart. The market settled just above the 50-day moving average and could build momentum if prices manage to stay above the average.

Rob Kurzatkowski, Senior Commodity Analyst


February 7, 2014

Bond Rally Stalls Ahead of Payrolls Report

Friday, February 7, 2014

Analysts are expecting the U.S. employment picture to have improved in January, after non-farm payrolls rose by a disappointingly anemic 74,000 in December. The private sector employment report compiled by ADP and Moody's Analytics showed that 175,000 jobs were added last month, with 160,000 of those jobs in the services sector. The widely-watched manufacturing sector shed 12,000 jobs according to the report. Traders are anticipating the Bureau of Labor Statistics to report that between 175,000 and 190,000 jobs were created in January, with the private sector accounting for about 160,000 of the increase. The unemployment rate is expected to remain steady at 6.7%, although much focus will be placed on the labor force participation rate, which has fallen to 35-year lows at 62.8%, with nearly 92 million Americans not in the labor force.

Fundamentals

Those pundits calling for the end of the historic U.S. Treasury Bond bull market have once again been proven wrong, as concerns over the growth prospects of emerging economies combined with uncertainly over U.S. job creation has kept investors interested in U.S. government debt as a "safe haven" investment. Bond prices have remained relatively firm, despite the continued tapering of Bond purchases by the Federal Reserve which announced a further reduction in Bond purchases of 10 billion per month to 65 billion per month last week. 30-year Bond yields which were approaching 4% for the first time since 2011 pulled back to 3.67% prior to the release of the January employment report. With current yields near the low end of the recent range (between approximately 3.50% and 3.98% since July), buyers may be hesitant to purchase Bonds at current levels -- especially prior to an employment report that is expected to show an improvement in the employment picture from the end of 2013. However, should the jobs report once again disappoint, a test of 3.50% would not be out of the question.

Technical Notes

Looking at a weekly yield chart for the 30-year Treasury Bond for the past 10 years, we notice what appears to be a double-bottom formation as yields approached 2.5% back in late 2008, as well as again in the summer of 2012. Since the July 2012 lows, yields have rallied nearly 1.5%, but still remain well below the average highs of the past 10 years. If we chart the Fibonacci retracement from the July 2012 low to the recent high in yields, we note that 30-year yields have retraced about 23.6%. Should we see further "flight to safety" buying or if the January payrolls report proves to be weaker than anticipated, a test of the 38.2% retracement is not out of the question, which would see yields fall below 3.40%, aided by stop orders being triggered should yields fall below psychological and technical support at 3.50%. It would take a move above 4.00% to reinforce the belief that the Bond bull market is on "life support".

Mike Zarembski, Senior Commodity Analyst


February 10, 2014

Was "Mother Nature" to Blame for Poor Employment Data?

Monday, February 10, 2014

Although most media reports will focus on the disappointing 113,000 increase in U.S. Non-farm payrolls in January, many years of following the markets and the reaction to the monthly employment report has taught us that it is more important to focus on the "details" of the report. The Labor Department's annual benchmark revision was reported on Friday, and here we saw some good news, as U.S. payrolls were adjusted upward by 369,000 jobs from April 2012 through March 2013. The important construction sector added 48,000 jobs in January, vs. a loss of 22,000 in December. This increase is even more impressive given the brutal winter weather seen in a large section of the U.S last month. Even the broader measure of the labor market, the so-called "U6" unemployment rate, which includes "marginally attached" and "discouraged workers" as well as those working part-time who would prefer full time employment fell by 0.4% to 12.7% in January and is well below the 14.4% reading this time last year. Just like it is important "not to judge a book by its cover" it may be equally important not to "evaluate an economic report by its headline"!

Fundamentals

It was a wild ride for financial futures traders Friday morning, after the release of the always highly anticipated Non-farm Payrolls report. Just like in December, analysts and traders were way more optimistic than Labor Department statisticians, as January payrolls rose by a lower than expected 113,000 jobs. The unemployment rate fell by 0.1% to 6.6%, as the labor participation rate rose to 63.0%, vs. 62.8% in December. Although the "headline" numbers were viewed as a disappointment, especially after a weak December report, we should note that the November and December employment "revisions" showed an increase of 34,000 jobs combined. A brutally cold and snowy winter in much of the U.S. is being blamed for the weak jobs figures, with Dallas Federal Reserve Bank President Richard Fisher stating that the harsh winter seen so far this year would have an impact on the economy. Traders were unsure how to treat Friday's numbers as seen by the wide price swings, but up and down in stock indices and Bond futures after the report was released. However, it does appear that the Federal Reserve may not be swayed from altering their continued tapering of Bond purchases on the basis of the last two employment reports, as Fed governors will wish to see further evidence of a change in the U.S. economic growth from other indicators that are not being affected by the wrath of "Mother Nature".

Technical Notes

Looking at the daily continuation chart for the mini-Dow futures (symbol YM), we notice the tough start to 2014, as the index is currently down about 900 points from the last days of 2013. After a brief move below the 200-day moving average (MA), the index has rebounded from oversold levels, as measured by readings below 30 on the 14-day RSI, but still remains below the short-term 20-day MA by nearly 300 points. Volume has been declining on the recent recovery, which is not a good sign for continued strength. Support is found at the recent low of 15276, with resistance found at 15983.

Mike Zarembski, Senior Commodity Analyst


February 11, 2014

Gold Demand Heating Up, Eyes Turn to Yellen

Tuesday, February 11, 2014

Gold futures continue to grind higher, despite disappointing economic data. Emerging market currency weakness and safe haven buying have been driving forces behind the recent strength in precious metal prices. While recent economic data has not bad enough for traders to hit the panic button, it has been soft enough for investors to quietly buy up metal. Today will be an interesting day for precious metal traders, as it marks the first time Janet Yellen will face Congress since becoming the new head of the Federal Reserve. Her testimony will be closely watched, especially for mentions of Fed tapering of the asset purchase program.

Fundamentals

The fundamental outlook for Gold has improved slightly in recent weeks. The China Gold Association indicated that the country's demand for the yellow metal had increased by 41 percent to a recorder 1,176.4 metric tons in 2013. Chinese Gold production surged in 2013 to 428 metric tons, but this only made up 36 percent of domestic demand. Because of this, China will continue to be a major importer of Gold going forward. The World Gold Council had indicated that China surpassed India as the world's largest Gold consumer. US Mint had sold 62,500 Gold coins in the month of January, which is a 63 percent increase over December and the highest sales figure for the American Eagle coins since April. Silver coin sales by the US Mint had sold 912,388 troy ounces in January, up from 845,941 in December. Gold may find continued support from the Platinum market which is facing labor turmoil in South Africa. Talks to end a strike that has derailed production in the world's largest Platinum mines has been postponed until later this week.

Technical Notes

Turning to chart, we see the April Gold contract continue to grind higher since making a relative low in late December. Prices are now entering a band of resistance between 1270 and 1289, which will be a test for the market in the near-term. Prices closed above the 100-day moving average yesterday; however, the April Gold contract hardly did so in convincing fashion. Several solid closes above the 100-day moving average may be viewed a bullish over the intermediate term for Gold.

Rob Kurzatkowski, Senior Commodity Analyst


February 12, 2014

Bears Retreat as USDA Lowers Corn Inventories Forecast

Wednesday, February 12, 2014

Multi-year lows for Corn prices have triggered increased buying interest according to the USDA. In the February Supply/Demand report released on Monday, the USDA lowered its estimate for 2013-14 Corn stockpiles to 1.481 billion bushels, vs. the January estimate at 1.631 billion bushels. The forecast was well below the average analyst estimate of 1.6 billion bushels, as the USDA raised its estimate for U.S. Corn exports. Global Corn stockpile estimates were also lowered to 157.3 million metric tons (mmt). The USDA kept steady its estimate for Brazilian Corn production at 70mmt, but lowered its forecast for the Argentinean harvest by 1mmt to 24mmt this season.

Fundamentals

Corn bears are starting to get a bit nervous, as talk of sub-$4 Corn futures prices have, so far, failed to materialize, as Corn prices have moved higher to start the year. A short-covering rally may be gaining some momentum after the USDA lowered its forecast for U.S. Corn inventories this season. Larger than expected U.S. Corn export sales were behind the lower inventory estimate, as the USDA upped its export forecast to 1.6 billion bushels, which is up 150 million bushels from the January estimate. The increase in Corn exports comes despite projections of record Chinese Corn inventories this season! Even though it appears that Chinese Corn imports may fall, willing buyers from other Asian nations such as Japan and South Korea should more than make up for any decrease in Chinese purchases. The U.S. will need to see strong export totals,, as Corn carryout totals will still be large despite the lower estimate. As a comparison, U.S. Corn carryout for 2012-13 was 821 million bushels, vs. nearly 1.5 billion bushels for this season. The next wildcard for Corn prices will be the amount of planted acres dedicated to Corn this spring. The recent price rally for new-crop December Corn futures may encourage more producers to consider Corn on swing acreage this season. This belief is leading many analysts to raise their Corn acreage estimates to between 94 and 95 million acres. We will get the first "official" government estimate on March 31st when the highly anticipated prospective plantings report is released.

Technical Notes

Looking at the daily chart for March Corn, we note what may be shaping-up as a "rounded bottom" formation culminating in the downward price spike and subsequent upside reversal made back on January 10th. Prices appear to be running into some chart resistance near the 450.00 level, which is a price level not seen in the March futures since late November. The 14-day RSI is approaching overbought levels, with a current reading of 65.99. The most recent Commitment of Traders report shows that non-commercial traders have started to become net-long Corn futures by adding over 56,000 new net-long positions during the week ending February 4th. Commercial traders were selling contracts to the large specs, as the commercial net-long position decreased by over 55,600 contracts. Non-reportable traders continued to hold a rather large net-short position at 142,936 contracts. Support is seen at the recent low at 406.25, with resistance found at 450.00.

Mike Zarembski, Senior Commodity Analyst


February 13, 2014

Cocoa Shines Ahead of Valentine's Day

Thursday, February 13, 2014

Cocoa futures continue their march higher, driven by speculation that Valentine's Day chocolate sales will outside last year. The forecast by the National Confectioners Association is calling for a 1.9 % increase in Valentine's candy sales to $1.057 billion. Chocolate makes up roughly three quarters of total sales for the holiday.

Fundamentals

The Valentine's Day holiday is not the only supportive force driving the Cocoa market. Overall chocolate sales are expected to reach record levels in 2014 and inclement weather remains a threat to production. Indonesia has been hit with heavy rains, which is expected to delay the harvest and threaten flowering in the world's third largest Cocoa producing nation. Ivory Coast arrivals have been much better than previously expected, rising 16 % over last year from the start of the season. However, drought conditions in the Ivory Coast could adversely impact the midcrop, lowering both output and quality. Potential El Nino weather conditions could reduce global output, which is already expected to fall short of demand to the tune of 105,000 tons. World production tends to be lower in El Nino years. The weather pattern tends to cause heavy rains and flooding in South America while triggering drought conditions in Southeast Asia and Australia.

Technical Notes

Turning to the chart, we see the May Cocoa chart continuing to push higher after a brief hiccup at the beginning of the year. The uptrend in prices is not as steep as the July-October period. Volatility has increased in recent weeks, but the up channel is flattening. The RSI indicator is showing overbought levels, which may hinder further advances in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


February 14, 2014

Will Bullish Traders Finally Sweeten on Sugar?

Friday, February 14, 2014

Both large and small speculative accounts have been aggressively covering short-positions in Sugar futures lately, with the Commitment of Traders report showing non-commercial and non-reportable traders reducing their net-short position by over 25,000 contracts the week ending February 4th. This was the main catalysts behind the over 1.50-point rally in prices during the week. Although prices are now off recent highs seen late last week, we are still seeing some short-covering buying emerge, as traders fear being caught short should weather forecasts in Brazil continue to call for hot, dry weather.

Fundamentals

After trading near 3 ½-year lows, front month Sugar futures are trying to find a bottom, as dry weather conditions in the growing regions of Brazil have traders reconsidering holding short positions. Analysts are starting to revise their projections downward for the 2014/15 Brazilian Sugar Cane crop, originally estimated near 600 million metric tons, due to dry conditions which may hurt yields later this year. Although some weather forecasts are calling for improving conditions in the coming weeks, it may be too late to assure another bumper crop this season. There has even been some talk by private forecasters that the global Sugar market may actually be in deficit this coming year, as the 3-plus years of surplus have been drawn down due to increased demand at current low prices and potential production issues, although the general consensus is for a moderate 1 to 1.5 million ton surplus. Traders will be keen on following government policies out of India, which is the world's second largest Sugar producer. Earlier this week, the Indian government announced a plan to offer financial incentives to Sugar millers to encourage raw Sugar exports, as domestic prices have fallen below the cost of production. This announcement may help to cap any major rally attempts in the near-term, as the market attempts to absorb increased supplies in the coming weeks.

Technical Notes

Looking at the daily chart for May Sugar, we notice what appears to be a "bull flag" formation on the chart. This bullish technical pattern still needs to be confirmed, but has gained some acceptance following the strong rally seen on Wednesday. One may question why volume is rising during the formation of the "flag," which is unusual for this particular pattern. In this case, we can account for some of this anomaly by noting that we are in the "rollover" period, when traders are transitioning positions from the soon-to-expire March futures and into more distant expiration months, which tends to increase overall trading volume. The recent rally off 3 ½ year lows has sent prices back above the 20-day moving average (MA), but still well below the 200-day MA, which is currently near the 17.36 price area. Although recent price gains were likely tied to short-covering buying, further gains will most likely be hard-fought following the recent announcement regarding export subsidies for Indian Sugar mills. The potential for increased supplies in the cash market may allow commercial buyers to be patient in meeting their mid-term needs by allowing prices to move lower before booking purchases. The next chart resistance level is seen at 16.58, with near-term support found at 15.57.

Mike Zarembski, Senior Commodity Analyst

February 19, 2014

China's Policies Key for New-Crop Cotton Prices

Wednesday, February 19, 2014

Current analysts' estimates predict an increase in U.S. planted Cotton acreage this coming season, following a sub-par season when U.S. Cotton production totaled only 13.2 million bales. There is talk in the trade that U.S. producers may plant up to 1 million additional acres to Cotton this season, which would bring acreage totals back above 11 million acres. Although it is too early to predict what Mother Nature will throw at Cotton producers this coming season, we should note that growing areas in the southwest, especially in Texas, have benefited from additional moisture levels this winter, which will likely help the Cotton crop get off to a good start this spring. This could increase average yields and allow U.S. Cotton production to increase significantly after three consecutive sub-par seasons.

Fundamentals

For Cotton traders, the focus will likely continue to be on China, as the world's largest consumer of this commodity is in the early stages of a potential shift from being an aggressive buyer to support government held stockpiles towards possibly releasing some of its reserves into the domestic market. The timing of this shift is what is keeping Cotton traders and producers up at night, as a rapid release of stockpiles could depress global prices. But a gradual shift away from aggressive purchases could still support prices, as supplies outside of China are rather tight. As we move ever closer towards spring in the Northern Hemisphere, we will begin to turn our attention to prospective plantings for the upcoming season. Current estimates are calling for a moderate increase in U.S. Cotton acreage, as new-crop futures are looking attractive, especially as compared to competing crops such as Corn. Increases in Cotton production this year could become an issue for producers later this season should Chinese buying decrease sharply, which would allow global stockpiles outside of China to swell and potentially cause a fairly sharp decline in new-crop prices if China is not willing to absorb excess global inventories.

Technical Notes

Looking at the daily chart for new-crop December Cotton, we notice prices becoming rangebound, with a price boundary between 75 and 80 cents per pound. Trading has been slow in the new-crop months so far this year, however trader interest may likely increase as we move closer to the USDA prospective plantings report due out at the end of March. Prices are currently hovering near the 20-day moving average (MA), but remain slightly below the 200-day MA currently near the 78.85 price level. Near-term support is seen at the February 3rd low of 75.96, with near-term resistance seen at 80.00.

Mike Zarembski, Senior Commodity Analyst


February 20, 2014

Brazilian Coffee Crop Drying Up?

Thursday, February 20, 2014

Drought conditions may have caused irreparable damage to the Brazilian Coffee crop for the upcoming season. Brazil produces roughly a third of the world's Coffee exports. News was spreading that drought conditions were damaging crops to a greater degree than previously expected. The growing region had rain last week, which did snap a streak of 6 straight weeks of drought conditions. While farmers welcome rain, they would like to see sustained moisture that is able to penetrate the soil instead of running off.

Fundamentals

The Coffee market is coming off of a surplus year, so near-term supplies of bean are more than ample. However, the unusually hot, dry conditions could turn the tables, resulting in a supply deficit in the upcoming crop year. Farmers are hoping that there will be enough rain in the next 15-20 days before they reassess the health of crops again. The dry season in Brazil runs from April to September, making it imperative that Coffee crops receive moistures over the next month and a half.

Technical Notes

Turning to the chart, we see the May Coffee contract rising to the highest price levels in 15 months. Prior to slowly turning higher in early November, the RSI indicator bottomed out prior to prices. The recent spike in prices has resulted in the May futures contract rising to fairly over-bought levels at 87.92. The next upside resistance level comes in near the 175.00 level.

Rob Kurzatkowski, Senior Commodity Analyst


February 21, 2014

Oats Quietly Stage Historic Bull Run

Friday, February 21, 2014

The dynamics of the Oat market have changed significantly from one of the more popular crops grown in the upper Midwest to more of an afterthought, as Corn and Soybean production has become more profitable for producers. U.S. producers planted 3 million acres to Oats in 2013, which is down from over 20 million acres 40 year ago. Oat usage for animal consumption has fallen dramatically over the years and accounted for significantly less than 1% of U.S. feed grain production last year.

Fundamentals

The relatively unknown Oat futures market is in the midst of a historic bull market run, as shipments from Canada, the world's largest Oat exporter, have been delayed due to logistical issues. Record crop production in Canada this past season has increased the demand for rail cars which are used for shipment of grains for the export market. This increase in rail car demand has created a back-log for grain shipments out of Canada, with Oats taking a back seat to more "important" crops such as Canola and Wheat. Oat shipments are running over 20% behind year ago levels, causing some concerns that U.S. end-users may be caught short of supplies in the near-term. This potential supply squeeze is forcing-up the price of Oat futures, as traders fear some millers may buy near-term futures with the potential to utilize the delivery process to obtain needed supplies. Supply tightness can be seen in the March/May Oat spread, where the front month March futures are trading at a 35-cent premium to the May contract. Front month Oat prices have even surpassed the price of front month Corn. This is an occurrence that has happened rarely over the past 40 years!

Technical Notes

Looking at the daily chart for March Oats, we notice what might be a double-top formation which would be confirmed should prices fail to close above the previous high of 467.25 made back on February 7th. Given that a logistics issue is the main catalyst behind the historic price rise, we could see a sharp price decline as soon as Oat shipments from Canada increase. Prices are above both the 20 and 200-day moving averages, and the 14-day RSI remains below overbought levels, with a current reading of 65.42. The recent high of 467.25 is seen as a key resistance level, with support seen at the January 28th low of 402.00.

Mike Zarembski, Senior Commodity Analyst


February 24, 2014

What Happened to the U.S. Natural Gas Glut?

Monday, February 24, 2014

This past Thursday, the Energy Information Administration (EIA) released its weekly Gas storage report and the numbers were historic. 250 billion cubic feet (bcf) of Gas was drawn from storage during the week ending February 14th, which was the 4th consecutive week of a 200 bcf plus draw. Gas inventories have fallen to their lowest levels in February since 2004. Although current Gas inventories are becoming tight, many traders are looking at the recent price rally to initiate short positions in more distant contract months in anticipation of increased Gas production due to higher prices, which makes Gas drilling more profitable for more marginal producers. While this would seem to be a logical theory, we must consider the possibility that the U.S. could also face a warmer than average summer, which would trigger an increase in Gas usage for cooling and potentially prevent adequate amounts of Gas to be placed in storage prior to the start of next winter's heating season. If this were to occur, we could see Gas prices closer to the levels seen back in the mid to late 2000's, when prices of $4 were viewed as a floor and not a ceiling.

Fundamentals

The "sleepy" Natural Gas market of the past 2 years is a thing of the past, as an unusually harsh winter for most of the U.S. has caused Natural Gas demand to soar. Natural Gas is the main fuel used for heating for nearly half of U.S. households, and this season's cold and snowy weather has taken a huge bite out of U.S. Gas inventories. The most recent EIA Gas storage report shows U.S. Gas inventories falling to 1.443 trillion cubic feet (tcf) for the week ending February 14th. This is over 1 tcf below last year's totals, and nearly 34% below the 5-year average. With Gas storage levels becoming tight, the market has seen aggressive buying by both speculators and end-users have emerged, particularly for the lead month March futures, which is normally the last "unofficial" month of the winter heating season. In the last month, the March futures have gained over $2, and the notoriously volatile Mar/Apr spread, known in the trade as the "widow maker", has moved to a $1.25 March premium vs. a $0.25 March premium less than 2 weeks ago. Although higher overall prices for Natural Gas should encourage increased production in the coming months, especially once frozen wells have thawed, in the near-term, weather forecasts calling for another bout of arctic cold for the eastern and central parts of the U.S. through the beginning of March could see traders continue to buy near-term futures, particularly the April contract, once the March futures expires on Wednesday.

Technical Notes

Looking at the daily chart for March Natural Gas, we notice prices went parabolic last week, moving nearly $1 in just three trading sessions. Prices seem to have found some resistance at 6.400, as some good selling has emerged near this price level. Option traders have been aggressive in the out-of-the-money March calls, as a spike in implied volatility triggered short-covering buying in strikes ranging from $7 to $10 last week, despite these options having less than a week left before expiration, with the futures trading near $6. "Rich" premiums for these options have lured some premium sellers into the Natural Gas options market that would not normally have an interest in this product. This should make for interesting options expiration on Tuesday, as market participants position themselves for a potentially "interesting" trading session on Wednesday when the March futures go off the board. The 6.400 price level remains as resistance for the March futures, with support found near 5.500.

Mike Zarembski, Senior Commodity Analyst


February 25, 2014

Banks Cutting Off Chinese Real Estate Sinks Copper

Tuesday, February 25, 2014

Copper futures faced some pressure yesterday due to concerns over Chinese demand for the metal. The official Shanghai Securities News reported that some banks in China have tightened their real estate loans. The publication indicated that companies in industries related to construction, such as steel and cement, are having a more difficult time getting loans from banks. This suggests that Copper demand could be softer than expected. Also, it appears that private sector banks are following the lead of the central government In trying to curb the real estate market.

Fundamentals

Shanghai inventory data seems to confirm that firms are having some difficulty obtaining loans. Construction accounts for roughly 40 % of Chinese Copper demand. Shanghai Copper inventory levels have increased for a second consecutive week. Shanghai Futures Exchange inventory levels have risen to 9-month highs as of February 21. LME inventory levels fell to 162,125 tons, which are 14 month lows, signaling that supplies may be shifting from London to Shanghai.

Technical Notes

Turning to the chart, we see the May Copper contract trading up to 3.300 before falling back. Prices were unable to hold the 100 day moving average, which comes in just below the 3.300 mark. The RSI indicator was showing overbought levels, which likely contributed to the weakness. The momentum indicator has been relatively flat, even as prices and the RSI indicator rise. This may be viewed as negative in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst


February 26, 2014

Distillate Supplies Tighten as Spring Approaches

Wednesday, February 26, 2014

The bullish price moves for both Heating Oil and Gasoline received additional support from the Crude Oil market, where front-month futures are trading near 4-month highs. Oil prices have been supported by a continued drawdown of inventories held in storage in Cushing, Oklahoma, which is the delivery point for the NYMEX WTI futures. Even though analysts expect storage builds of around 1 million barrels when the Energy Information Administration (EIA) releases the data in its weekly energy stocks report, supplies in Cushing may continue to see draws, which would be supportive for bull spreads in the WTI futures.

Fundamentals

The Heating Oil futures market (now known as Ultra-Low Sulfur Diesel) usually garners traders' attention in the late fall, as prices can become volatile as the winter heating season progresses. This season we have seen U.S. inventories become rather tight, as seasonal demand for Heating Oil remains robust due to rather harsh weather in the northeastern U.S this winter. Overall, distillate demand is up about 6% from this time last year, led not only by above average demand for distillates used for heating, but also robust demand for U.S. distillate exports. This one-two punch on the demand side comes at a time when historically refineries begin seasonal maintenance, which will in turn likely cause lower production of Oil products such as Diesel and Gasoline. As spring approaches, we will see refining capacity switch its focus towards the production of Gasoline, and in particular, the production of "summer grade" Gasoline, which is required by law in many major metropolitan areas. This may help to further tighten middle distillate supplies in the coming months, especially if signs of a global economic recovery continue.

Technical Notes

Looking at the daily chart for April Heating Oil, we notice what may be the beginning of a "bull flag" formation. Further confirmation of this bullish pattern would occur if trading volume (outside of roll activity) declines, as prices form the "flag" and a breakout of the upper bounds of the flag on higher than average volume would be needed to confirm the pattern. Prices are above both the 20- and 200-day moving averages, although the 14-day RSI has started to trend lower, with a current reading of 56.37. Near-term support for April Heating Oil is seen at 3.0126, with resistance found at 3.0884.

Mike Zarembski, Senior Commodity Analyst


February 27, 2014

Aussie Dollar Faces Challenges

Thursday, February 27, 2014

Weakening base metal prices have taken their toll on the Australian Dollar, which has stalled near the 0.9000 level. The Aussie Dollar has also stalled due to the fact that traders have been averting risk and growth currencies. Currency traders are also keeping a close eye on the recent drop in the Chinese Yuan's exchange rate. There is speculation that the People's Bank of China was the driver of the Yuan's decline, suggesting the central bank may be looking at widening the price band of the currency. A weaker Yuan has the potential for a weaker Aussie Dollar.

Fundamentals

The slowing of the Chinese economy, especially the housing market, has traders concerned that it could slow the pace of the Australian economy. The two nations are key trade partners, with Australia producing much of the raw materials used in industry and construction in China. The Australian government is expected to reduce its spending, which is expected to have a moderately negative impact on the local economy. The Reserve Bank of Australia is expected to maintain looser monetary policy and keep interest rates steady. Mining has seen a fall-off in investment, which is expected to continue. BHP Billiton, the world's largest mining company, withdrew from developing a new coal terminal project. The company is, instead, focusing its spending on more profitable projects, while closing loss-making mines, cutting staff and postponing new projects. This could test the Australian government to keep unemployment rate near multi-year lows of 5.75 percent.

Technical Notes

Turning to the chart, we see the March Australian Dollar hitting the proverbial wall near resistance at the 0.9020 level. If prices can manage rallying through 0.9020, the Aussie Dollar may test the 0.9250 level. The RSI indicator was showing overbought levels, which may have contributed to the lackluster performance in recent sessions.

Rob Kurzatkowski, Senior Commodity Analyst


February 28, 2014

Bulls Favoring Soybeans as South American Weather Woes Continue

Friday, February 28, 2014

The annual USDA outlook forum held last week produced some bearish views for both Corn and Soybean prices this season. For Soybeans, the USDA lowered its average price for cash Soybeans to $9.65, vs. $12.70 last season, as the projection for U.S. Soybean ending stocks nearly doubled to 285 million bushels in 2014. All this is predicated on higher U.S. production as well as increased Soybean export competition from South America. However, if South American Soybean production estimates continue to be lowered, we may see the U.S. capture additional Soybean export business which could help to put a dent in the expected increase in Soybean carryover come fall.

Fundamentals

Commodity bulls are back in the Soybean camp after less than ideal weather in Brazil during the growing season has analysts lowering their estimates for the nation's crop. This season's South American Soybean crop began on a rough note, as hot and dry weather in both Brazil and Argentina plagued the Soybean crop during early development. However, the opposite problem has recently emerged, where heavy rainfall, especially in Brazil, has caused harvest delays. In addition, wet weather has increased the formation of fungal disease, which could further depress yields. Some analysts are starting to lower their estimates for the Brazilian Soybean crop due to weather issues. Current tight global supplies combined with potentially lower South American production have sent old-crop Soybean futures to 5-month highs, with the front-month March contract nearing the $14 per bushel level. New-crop November Soybeans have seen a more muted price rise, as traders are starting to factor in the potential for higher U.S. Soybean planted acreage this season, mainly at the expense of Corn given current new-crop futures price levels. Spread traders have noted that the old crop/new-crop Soybean spreads have widened considerably, with the May14/Nov14 spread gaining over $1 per bushel since the start of 2014. We should get a better feel for the potential size of U.S. Soybean plantings in the coming weeks when the USDA releases the data from its Prospective Plantings survey on March 31st.

Technical Notes

Looking at the daily chart for May Soybeans, we notice prices spiked higher on Thursday, trading just over 1445.00 before aggressive selling entered the market and propelled prices lower to end the session. This negative technical price action could be the start of a much needed price correction, as the bull market may need to catch its breath after a nearly $2 price rise in February. Prices are now well above both the 20- and 200-day moving averages, and the 14-day RSI has moved well into overbought territory, with a current reading of 79.06. Thursday's high of 1445.50 is now seen as resistance for the May futures, with support seen near 1325.00.

Mike Zarembski, Senior Commodity Analyst