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January 2016 Archives

January 4, 2016

Geopolitical Turmoil in the Oil Market

Monday, January 4, 2016

Tensions in the Middle East escalated quickly over the weekend following Iran's execution of a Saudi cleric. As of this writing, Saudi Arabia, Bahrain, and Sudan have broken diplomatic relations with Iran while the United Arab Emirates has recalled their ambassador from Tehran.


Fundamentals

Crude Oil prices, which had been on a steep decline recently, rebounded as the uncertainty spread throughout the Middle East. Saudi Arabia has been aggressively pumping oil, even with the lower prices. This strategy has drawn opposition from some OPEC members, including Iran. Volatile trading in Crude Oil followed the news as the markets opened for the first session of 2016. Prices first spiked and then retraced as Mideast tensions vied with news on a slowing Chinese economy. The full sized crude contract is a very large contact with each .01 movement reflecting a $10 movement. Traders need to remain alert even during the typical lulls that occur during holidays.

Technical Notes

Turning to the 3 month continuation chart, most of the signs are still showing a bearish trend. As of this writing, the 20 day SMA is still providing resistance. The 20 day SMA is still far below the 50 day SMA. $35 is still a support level, if prices break below that level, the next support level might be the $25 level, which was a previous level back in the early 2000's. 14 day RSI is a relatively neutral 53.64.

Dale Jennings, Commodity Analyst


January 5, 2016

New Year, New Worries Spark Gold

Tuesday, January 5, 2016

Gold futures started off the New Year with a strong close due to traders heading for higher ground amid Saudi Arabia-Iran tension and a sell-off in Chinese equities. Chinese manufacturing took another hit, as the Caixin China manufacturing purchasing managers index fell to 48.2 in December from 48.6 in November. This marks 10 consecutive months of sub-50 readings for the index. A reading below 50 indicates a contraction. The report gave traders in Shanghai renewed fears over the state of the manufacturing sector and sent Chinese stocks tumbling 7% and halting trading.

Fundamentals

The Chinese manufacturing fears are nothing new to the market, but there is growing frustration that all of the steps that the government has taken to stabilize the economy have failed to this point. This can be seen as mixed for Gold. On one hand, the knee jerk reaction drives traders to flight to quality plays like Gold. On the other hand, the continued slowdown of the Chinese economy and higher US interest rates all but eliminate the threat of inflation. While we are on the topic of inflation, the recent confrontation between Saudi Arabia and Iran over the Saudi execution of a prominent Shiite cleric presents an interesting conundrum for OPEC and the Oil market, as a whole. The Saudis have pumped Oil at a record pace and encouraged other members to follow suit, while Iran has called for price stabilization. The rift could create a new flood of Oil from OPEC countries, especially Sunni nations aligned with the Saudis. This could put further pressure on commodity prices and lessen inflation worries. The Dollar Index has been stronger over the past several sessions, which may pressure Gold prices. There is little negative news for the US currency, so traders have a largely neutral to slightly bullish outlook for the currency in the near-term.

Technical Notes

Turning to the chart, we see the February Gold contract bouncing off the 1050 level twice in recent weeks, confirming support at the level. However, prices have had a tough go of it trying to get upside momentum. As a result, the market has been largely range bound between the 1050 and 1085 levels. If the market is able to break the 1085 level on the upside, prices may trade into the 1100's, possibly testing the 1150 mark. On the downside, this support level can be viewed as especially critical, as failure to hold this support level could send prices toward the 1000 mark with momentum.

Rob Kurzatkowski, Senior Commodity Analyst


January 6, 2016

A Victim of its Own Success

Wednesday, January 6, 2016

Cocoa futures were the leader of a rather exclusive club of major commodity markets that actually posted a gain in 2015. In addition to Cocoa's +10% gain, only Orange Juice +8%, Cotton +6 and Sugar +2% were in the green on December 31. To paraphrase the popular TV show the "Biggest Loser" we saw Heating Oil post a -37% loss which led all commodities in the loss column in 2015, with a "Dishonorable Mention" going out to Palladium, which declined by -30% last year.

Fundamentals

The Cocoa futures market was one of the very few bright spots for commodity bulls in 2015, rising 10% in a year where major commodity-wide indices posted losses of over 24%. The Cocoa market experienced supply issues as dry weather conditions in the major growing regions of West Africa and Southeast Asia help to curtail production. The lingering El Nino weather event is expected to put further pressure on Cocoa producers as we begin 2016. The consensus from analysts is for the Cocoa market to experience a 100,000 ton deficit this season as the expected production loss should more than offset a modest expected decline in demand. However, as we begin 2016, Cocoa prices have failed to respond to bullish fundamentals, having fallen to 3-month lows on what appears to be long-liquidation selling by weak bulls. Markets in general started off on a sour note as equity and commodity prices fell on concerns of slowing economic growth, especially out of China, as well as a flair-up of Middle East tensions between Saudi Arabia and Iran. The most recent Commitment of Traders report shows a combined non-commercial and non-reportable net-long position in Cocoa of 65,681 contracts as of December 29. This was down just over 1,800 contracts for the week and leaves the market vulnerable to further long-liquidation selling should prices fail to rebound off of recent lows.

Technical Notes

Looking at the daily chart for March Cocoa, we notice that the recent steep price decline has caused the market to fall below the key 200-day moving average (MA) for the first time since May of last year. The fall below the long-term moving average most likely triggered long liquidation selling by trend following traders, as many systems use the 200-day MA as a determinant if a market is overall in a bullish or bearish trend. Notice that volume increased sharply the past two days, which adds additional credence to the belief that the bull market in Cocoa is in trouble. The 14-day RSI has moved slightly into oversold territory with a current reading of 29.20. Traders should pay close attention to price movement with the RSI at oversold levels to see if a price rebound occurs soon. Chart support is found just below the psychologically important 3000 price level at the August 24 low of 2994.Resistance is seen at the December 24 intermediate high of 3269.

Mike Zarembski, Senior Commodity Analyst



January 8, 2016

Unhappy New Years for Equity Bulls

Friday, January 8, 2016

This morning release of the December Non-farm payrolls report may be overshadowed by market participants given the wild market volatility we have seen this week. For those who may have missed it, the ADP National Employment Report was released on Wednesday with 257,000 private sector jobs created last month. This was above the 211,000 jobs created in the November report, with the service sector accounting for the bulk of the jobs created at 234,000. Large companies (those with over 500 employees) accounted for the biggest additions of new workers at 97,000 jobs, with small employers (1 to 49 employees) right behind at 95,000 jobs added. December's increase was the largest since December 2014 when 275,000 jobs were added.

Fundamentals

Global equity markets continue to experience a New Year's hangover as selling pressure continued from Shanghai to London to New York. Once again, the weakness began in China where the CSI 300 index fell by just over 7% shortly after the opening of trade which caused market circuit breakers to halt trading for the rest of the session for the second time this week. This drop caused an emergency meeting to be called by Chinese security regulators who have since announced that the new circuit-breaker will be suspended for the opening of trading on Friday. Analysts cite the Peoples Bank of China (PBOC) cut of the reference rate of the Chinese yuan for the sell-off in equities, as nations currency fell to its weakest level versus the U.S. Dollar since 2011. It appears that the PBOC is willing to let the value of the Yuan fall further as the country grapples with slowing economic growth. The continued sell-off in Crude Oil prices was also noted as a contributor to equity market volatility, as the lead month WTI Crude contract fell to its lowest levels in 11 years before a moderate price rebound occurred during U.S. trading hours. For 2015 U.S. Crude inventories rose by nearly 100 million barrels to just over 482 million barrels which is 36% above the 5-year average. This morning we will get the lasted data from the U.S. Bureau of Labor Statistics when they release the December Non-farm Payrolls report. Average estimates are for a gain of 200,000 jobs last month with the private sector expected to have contributed 194,000 new jobs in December.

Technical Notes

Taking a longer-term perspective, we will look today at the weekly continuation chart for the E-mini S&P 500 futures. We notice the 20-week moving average (MA) holding just above the 100-day MA as prices have moved downward since the recent highs made back in November of last year. The recent down move could be viewed as a possible bull flag formation but we would need to see prices close above the upper trending of the "flag" for confirmation. Two major support levels have yet to be tested including the August 2015 low of 1831.00 as well as the uptrend line drawn from the March 2009 lows which is currently near the 1700.00 price level. The 14-week RSI has weakened to a current reading of 41.99. This week's low of1931.00 is now seen as near-term support for the front month future, with the next resistance level found at 2075.00.

Mike Zarembski, Senior Commodity Analyst



January 11, 2016

Just A Job To Do

Monday, January 11, 2016

The December non-farms payrolls surprised to the upside, capping off a robust year for United States job growth. December showed a gain of 292,000 jobs, while October and November were both revised up by 50,000 jobs. The unemployment rate remained at the 5% natural rate of unemployment.
Fundamentals

The US Dollar Index is a measure of the value of the United States dollar versus a basket of currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and the Swiss Franc. The index is a weighted index, and the Euro represents 57.6% of the index, while the Swiss Franc only represents 3.6% A rise in the Dollar Index indicates that the US Dollar is gaining strength against the basket of currencies. Dollar Index futures are trading on the ICE exchange, and the front-month contract is extremely active and liquid. After bottoming out at the index's all-time low of 70.698 in the 2008 recession, the dollar index has recently strengthened, as the US is seen as one of the stronger developed economies. The recession era trade of short dollar and long commodities has been reversed, as the dollar is rising and commodity prices are falling.

Technical Notes

Turning to the 3-month chart, we see several bullish signs for the Dollar Index. The slope of the 20-day Simple Moving Average (SMA) has turned up and it looks ready to cross above the 50-day SMA. The divergence between the 20- and 50-day SMAs is narrowing as well. The 100 level has provided resistance, while support can be found at the 94 level. 14-day RSI is a perfectly neutral 50.10.


Dale Jennings, Commodity Analyst



January 12, 2016

Dollar Hit by Fed, But Remains King for Now

Tuesday, January 12, 2016

The Dollar Index finished down last week, after the FOMC minutes indicated the Federal Reserve may raise rates very slowly. The central bank's deliberations made mention of the fact the members of the Committee believe that inflationary pressure may not pose a problem. Future rate hikes may be more gradual on concerns that low inflation could be persistent. While the term deflation was not explicitly mentioned, it could reasonably be inferred that at least some FOMC members were concerned that it could be an issue if the bank raised rates too quickly.

Fundamentals

The release of last week's FOMC minutes should offer no surprises to traders, as the central bank has been alluding to paced rate increases for some time. The current state of the economy both in the US and abroad gives the Fed time to carefully plan their course of action, which is an enviable position for any central bank to be in. This was reinforced by last week's non-farm payrolls report, which showed the economy adding 292,000 jobs in December, eclipsing the estimate of 200,000. The escalation of tensions between Saudi Arabia and Iran, the alleged North Korean hydrogen bomb test, and the turmoil in the Chinese stock market have benefited the US Dollar and Japanese Yen. While the US economy is facing headwinds, it is in much better shape than Europe and China, which may add a layer of support for the greenback. A stronger Dollar could, however, make it tough for US manufacturing.

Technical Notes

Turning to the chart, we see the cash Dollar Index (DXY) holding above support at the 97.50 level. However, prices have been unable to capture any upward momentum. The oscillators have been neutral. For these reasons, it looks as though the Dollar Index could remain trapped in the 97.50-100.00 range for the immediate future.

Rob Kurzatkowski, Senior Commodity Analyst


January 13, 2016

An Embarrassment of Riches

Wednesday, January 13, 2016

While the steep decline in Crude Oil prices is definitely grabbing the attention of the media, another prominent energy source -- Natural Gas -- is also in the midst of a bearish trend. While prices did see a moderate rise the past couple of weeks on the forecast for colder temperatures, it is, after all, the "heart" of winter in the northern hemisphere. It now appears that the latest "cold spell" may not be as severe as originally thought, and some forecasters are calling for above normal temperatures to return as we move the calendar to February. U.S. Gas inventories are already more than 14% above the 5-year average for this time of year, and that is following a greater than expected draw from storage last week. While Natural Gas drilling rigs continue to fall, Gas demand continues to lag supplies, as continued improvements in drilling technology have lowered the costs of production -- particularly in the shale formations that have become a major "market disrupter" in the energy markets.

Fundamentals

Today's Xpresso title best explains the current situation in the U.S. energy markets, where an abundance of both Crude Oil and Natural Gas has sent prices to levels that were prevalent back in the 1980's and 1990's. Excluding the Strategic Petroleum Reserve (SPR), U.S. Crude inventories totaled 482.3 million barrels for the week ending January 1. To put this total into perspective, 20 years ago U.S. Crude inventories totaled 302 million barrels and front month Oil futures were trading below $20 per barrel. Going back even further to January 1986, U.S. Crude inventories totaled almost 327 million barrels and prices were near the $25 dollar per barrel level. The Oil market of 1985 and 1986 has some similarities to the current market environment, with prices falling from near historic highs at the time of more than $30 per barrel, to eventually forming what is now an historic low near $10 per barrel in April of 1986. With the exception of a "brief" price spike during the Gulf War, Oil prices remained relatively steady until May 2004, when Crude Oil futures finally surpassed the Gulf War highs and ushered in what could be argued was the start of the historic bull market in not only Crude Oil, but commodity prices in general. What can be gleamed from studying the past performance of commodity markets is that prices really tend to move in waves from bullish to bearish, with generally longer periods of relative price stability. The adage "this time is different" rarely is, as the general function of supply and demand continues unheeded in helping to influence market prices. Finally, it might behoove any serious market participant to enjoy a market trend while it lasts, as trying to pick market tops and bottoms is an extremely difficult proposition, and no one has that magical crystal ball that can predict when prices cannot rise any further or fall any lower with any degree of certainty.

Technical Notes

Looking at the monthly continuation chart for WTI Crude Oil futures, we notice prices attempting to test the $30 per barrel price line for the first time since 2003 for the lead month futures. Potentially more interesting is the 14-month RSI, which has fallen into oversold territory with a current reading of 25.20. The last time the monthly RSI was this low was back in 1986, just before the "major" low near $10 was made. While $30 appears to be a "psychological" support level, chartwise we do not see any major support until closer to $25 per barrel, with the next "major " support level seen at the November 2001 low just above $17 per barrel. The next significant chart resistance level is found near the May 2015 high around the 62.50 price level.

Mike Zarembski, Senior Commodity Analyst



January 14, 2016

Will the Earnings Recession Continue?

Thursday, January 14, 2016

Stocks continue to take a pounding to start the year, as the shockwave from the Chinese stock meltdown continues to reverberate in the markets. The fear that the economic slowdown will spread from China to the rest of Asia and beyond has triggered heavy selling pressure. However, US economic data and corporate profits do not appear to support such a pessimistic response from traders, at least to this point. It is likely the psychological impact of the once seemingly invincible Chinese economy continuing to falter that has triggered emotional, rather than rational selling.

Fundamentals

Stock traders have been driven by pessimism to start the year, despite US economic data being largely positive. Non-farm payrolls data showed a healthy increase in December payrolls, as well as an upward revision to November numbers. December's payrolls exceeded analyst estimates by 92,000, while the November revision added 50,000 jobs to the previously reported figure. All economic reports seem to point toward slow, steady expansion for the US economy. Furthermore, the Federal Reserve seems to be in no rush to raise interest rates, given the drop in Oil prices. Lower energy costs may delay inflation to the Fed's 2% target, which could delay further rate increases. Outside of the energy sector, lower petroleum prices could have a beneficial impact on corporate profits. Many traders, however, are not very optimistic about corporate profits in Q4. According to a Bloomberg poll, stock analysts are looking for a 7.2% drop in corporate earnings in Q4 of last year, extending the "profit recession." If the analysts are correct, it would mark the worst earnings for corporate America in over 6 years.

Technical Notes

Turning to the chart, we see the March E-mini S&P contract progressing toward the August sell-off lows near the 1850 level. This support level could be seen as fairly significant and could result in further declines. The recent sell-off has resulted in oversold conditions on the RSI indicator.

Rob Kurzatkowski, Senior Commodity Analyst


January 15, 2016

Will "La Nina" Awaken Slumbering Wheat Market?

Friday, January 15, 2016

"La Nina" or "the girl" is a lesser known weather phenomenon to the more famous 'El Nino" that we are currently experiencing. A La Nina usually sees cooling of sea surface temperatures near the equatorial waters of the eastern Pacific Ocean. For the U.S., this pattern can contribute to drier than normal conditions in the Central Plains and Southeast, with wetter conditions in the Pacific Northwest.

Fundamentals

Anyone who has followed the grain markets the past several months will note how quiet the U.S. Wheat market has been, as continued signs of growing world inventories are helping to offset rather bullish U.S. production estimates. On Tuesday, the USDA released its estimates for U.S. Winter Wheat seeding, and it appears that producers have responded to low Wheat prices by curtailing production for the 2016 season. All Wheat planting was estimated at 36.609 million acres, which was 2.85 million acres below last year's total. In fact, if the figures are accurate, it will be the second lowest Wheat plantings since World War 2. Hard Red Winter Wheat seedlings fell by 2.5 million acres to 26.5 million acres, with Soft Red Winter Wheat seeding down by a more modest 370,000 acres. While the "seedings" report was deemed bullish by many analysts, the USDA's grain stocks report had something for Wheat bears. The USDA raised its estimates for U.S. Wheat stocks by 30 million bushels to 941 million bushels. World Wheat inventories are estimated at 232.04 million metric tons, which would be an increase of 2.18 million metric tons from the previous estimate. The wild card for Wheat prices in 2016 could be the weather, as there is some discussion that a "La Nina" weather event may occur this year. In the past, a La Nina event helped produce cooler and drier conditions in many parts of North America, which has the potential to seriously affect Winter Wheat development this season.

Technical Notes

Looking at the weekly continuation chart for Chicago Wheat futures, we notice the market has been in a bearish trend since 2008 when historic highs were made. The market has been relatively rangebound the past few months as prices attempt to form a near-term bottom. Prices remain below both the 20- and 100-week moving averages, and the 14-week RSI is neutral to weak, with a current reading of 42.07. 456.00 is seen as near-term support for the lead month March futures, with resistance found at the October 2015 high of 531.50.

Mike Zarembski, Senior Commodity Analyst



January 19, 2016

Funds Lose Their Taste for Chocolate

Tuesday, January 19, 2016

Cocoa futures seemed to have stabilized for the moment, after plummeting to start off the year. Traders seemed to have lost patience with the market due to the lack of news coming out of West Africa. Traders had been sold on the idea of a large deficit for the upcoming crop, but it will be some time before any solid figures will be released for traders to digest. The long liquidation by hedge funds, which lightened their net positions to the tune of 22,000 contracts, had more to do with managing risk and not wanting to wait on demand figures rather than a shift in production outlook.

Fundamentals

While it will be some time before hard data is released, the likelihood of crop damage is relatively high due to the hot, dry Harmattan winds. The dusty, dry winds are a normal occurrence this time of year and can destroy small Cocoa pods and reduce soil moisture, leading to underdeveloped beans. Harmattan winds seldom get as intense as this season's winds have been to this point and there is significant chatter among farmers in the Ivory Coast that suggest the damage could be enormous. While the supply news looks as though it may be shaping up to be bullish, there are now questions about demand. China has been a growth market for fine chocolates, which have a high concentration of Cocoa. With Chinese economic data continuing to look grim, there is concern that there will be a slowdown for demand not only in China, but from the rest of the world. Last week's Cocoa grindings in Europe were extremely strong. The European cocoa grind rose 6.0% in the last three months of 2015.

Technical Notes

Turning to the chart, we see the March Cocoa contract breaking through support near the 3040 level. The next support level can be found near the 2800 level. The RSI has recovered from oversold levels due to the price stability over the past several sessions, but remains near oversold. Prices will likely have to cross back above the 3040 level in order to regain some momentum. On the downside, the 2800 level can be seen as critical support. Failure to hold there could result in heavy bearish pressure.

Rob Kurzatkowski, Senior Commodity Analyst


January 20, 2016

Bond Run Not Done?

Wednesday, January 20, 2016

Market participants in the Fed Funds futures market have lowered their expectations for another Fed rate hike at the March Federal Open Market Committee meeting (FOMC) to 37% according to the March 2016 Fed Funds futures contract. The odds were above 50% at the end of 2015, which was prior to the steep sell-off in global equity markets that has been attributed to slowing growth in China and slumping Crude Oil prices. It is not until the June 15 FOMC meeting that traders have priced in an above 50% chance of another rate hike.

Fundamentals

The historic bull market run for U.S. Treasury Bonds will not go quietly into the night, as prices appear poised for another test of recent highs. It appears that fixed income traders are concerned that the U.S. will follow the lead of China, which is experiencing slower economic growth as the world's most populous nation moves towards a consumer orientated economy. The wild price swings seen in global equity markets have also made investors nervous, which has benefited the long-end of the yield curve as funds move towards the relative "safety" of U.S. government bonds. Even the number of interest rate hikes in 2016 from the Federal Reserve is coming into question, as analysts question the Fed's desire to continue to raise the Fed Funds rate while inflation remains muted as commodity prices, and especially Oil prices, trend lower. Further Fed rate hikes could help to strengthen an already strong U.S. Dollar, which is already causing difficulties for U.S. multi-national corporations, who are seeing earnings suffer from overseas sales. Only in hindsight will we know if we are actually in the late stages of the 30-year plus bull market for Treasuries. Trying to pick a top has proven to be a very difficult exercise, and short-covering rallies by weak hands in the Treasury market appear to be the fuel that may keep the uptrend in force for a while longer.


Technical Notes

Looking at the weekly continuation chart for Ultra-bond futures, we notice prices breaking out to the upside from the symmetrical triangle technical formation. This pattern is considered a consolidation pattern, with the recent upside breakout appearing to be a signal that the uptrend is ready to resume. The only negative seen on the price breakout is that trading volume was not above average, which may increase the possibility of a false breakout. Prices are above both the 20- and 100-day moving averages, and the 14-week RSI has turned positive, with a current reading of 58.45. 168-05 is seen as the next major resistance level for the front-month futures, with support found at 150-08.

Mike Zarembski, Senior Commodity Analyst


January 21, 2016

Glut, Improved Iran Relations Doom Oil Prices

Thursday, January 21, 2016

Crude Oil futures are lower ahead of today's EIA inventory data. Because of the Dr. Martin Luther King Jr. holiday on Monday, the inventory report is being pushed back a day from its traditional Wednesday release. Crude Oil's price decline to 13-year lows has been a drag on the equity markets after energy stocks took another hit. The energy industry has been suffering the effects of cheaper Oil, which has resulted in decreased investment, layoffs and bankruptcies. The sharp declines in Oil prices has also been a thorn in the side of central banks, who have been attempting to fight off deflationary pressure. The Federal Reserve may delay additional rate increases when the central bank convenes in March. Across the Atlantic, the situation is more dire, as some are predicting that the decline in energy costs could result in inflation dipping into negative territory.

Fundamentals

Traders are expecting an increase of at least 2.3 million barrels last week, according to the consensus estimate. However, yesterday's API numbers showed an increase of 4.6 million barrels, which suggests the estimate could be on the low side. Despite the large drop in prices, Oil producers have not trimmed production enough to stabilize prices. US Crude Oil production peaked at 9.7 million barrels a day in April when prices were in the 50's. Production has only fallen to 9.2 million barrels a day, despite prices falling almost 50% since the April peak. China's economy rose at 6.9% in 2015, which was the slowest pace in 25 years, suggesting prior 2016 demand estimates could be a bit bloated. The past week and a half has shown major progress in US-Iran relations, which could lead to further easing of economic sanctions on Iran. This could lead to more supply at a time where Saudi Arabia and the US show very little sign of slowing production.


Technical Notes

Turning to the chart, we see March Crude Oil contract steadily declining and breaking through support at the $30 level. Prices have stayed north of the minor support area near 27.00. More significant support can be found the 25.00 level, which could be viewed as critical, as there is only minor support around 22.00 and the last line of defense around 18.00. Crude Oil prices may be able to gain some traction on solid closes above the 35.00 level. Prices are currently below the major moving averages. The RSI indicator remains fairly oversold, closing at 11.05, but it is not unusual for the indicator to fall into single digits in extreme sell-offs.

Rob Kurzatkowski, Senior Commodity Analyst

January 22, 2016

Natural Gas Rallies Ahead of East Coast Storm

Friday, January 22, 2016

The release of the Energy Information Administration's (EIA) weekly gas storage report showed a large Gas draw from storage but not as much as analysts expected. The EIA reported a storage draw of 178 billion cubic feet (bcf) last week to 3297 bcf. Market participants were looking for a draw of between 180 and 185 bcf. Gas supplies remain ample for this time of year and are currently up 16.7% from the 5-year average.

Fundamentals

Natural Gas futures are starting to buck the trend of sharply lower energy prices as the market has moved off of recent lows. It appears that traders have finally realized it is winter and have started to anticipate larger draws of gas from storage to meet heating needs. Analysts were looking for a Gas draw from storage as high as 185 billion cubic feet last week, which would be the largest draw this winter. Weather forecasts calling for a major winter storm to affect parts of the East Coast this weekend may also be lending some support to nearby futures with the anticipation of increased heating demand for the areas affected. The National Weather Service sees the potential for a large winter storm to move through the mid-Atlantic region beginning this afternoon, with the potential for some areas to receive as much as two feet of snow from this system. The Baltimore and Washington D.C. areas are expected to be among the hardest hit regions, with lesser amounts but still significant snowfall totals seen as far north as New York City and Philadelphia. While winter storm threats are helping to support Gas prices, longer term forecasts are calling for above normal temperatures to return to the eastern half of the U.S. heading into early February.


Technical Notes

Looking at the daily chart for February Natural Gas futures, we notice a potential bull flag formation developing. Trading volume was declining during the formation, which helps to add legitimacy to this technical pattern. However, we will need to see a breakout to the upside on higher than average volume for confirmation. Prices are still below the 20-day moving average and the 14-day RSI has weakened to a more neutral reading of 42.97. 2.044 is seen as the next support level for the February futures, with resistance found at 2.495.

Mike Zarembski, Senior Commodity Analyst


January 26, 2016

Can Coffee Make a Comeback in 2016?

Tuesday, January 26, 2016

After being one of the worst performing commodities of 2015, Coffee bulls are hoping for a turnaround in 2016. It does appear that the world may be heading toward a deficit year, but the demand side of the equation could be a problem. China, India and Brazil have been a major driving force for Coffee demand, as those countries' tastes grow increasingly Western. The recent economic headwinds faced by the BRIC countries could result in demand failing to meet these projections.

Fundamentals

Brazil had a bounce-back year in 2015, harvesting an estimated 58 million bags, up from 48.4 million bags in the drought stricken 2014 crop year. Some estimates suggest that the Brazilian harvest could hit 60 million bags. In Columbia, traders are looking for an output of around 14 million bags in 2015, up from 12.1 million bags in 2014. Traders may want to keep an eye on the El NiƱo weather pattern, which could linger well into this year. If it brings dryer weather to Columbia, bean quality there could be significantly reduced. Currency markets could be a limiting factor for Coffee prices. A stronger US Dollar has already weighed heavily on commodity prices and Coffee was no exception. Weaker Latin American currencies, in particular, could encourage farmers to export supplies as quickly as possible in exchange for US Dollars. Turning the focus to the global market, traders are looking for a smaller deficit of 2.5 million bags in 2015-16. The 2014-2015 crop year is estimated to have closed out at a deficit of 7 million bags. Ultimately, Brazil's success, or lack thereof, could be the major story for Coffee this year.


Technical Notes

Turning to the chart, we see the March Coffee contract drifting steadily lower. The slope of the down move is flattening, but has not yet shown a definitive sign of plateauing or bottoming out. Prices could drift down toward support around the 106.00 level or, possibly, even the 2013 lows near 101.00. Solid closes above the 100 day moving average may be needed to confirm a shift or change in the downtrend. Currently the oscillators are neutral, leaving the down open for possibly more downside.

Rob Kurzatkowski, Senior Commodity Analyst


January 27, 2016

Will Sleepy Cotton Market Awake this Year?

Wednesday, January 27, 2016

While China remains "King" when it comes to Cotton consumption, the country's apparent shift to a more consumer orientated economy along with pressure for increased wages for the Chinese workforce, may eventually lead to a shift in textile production from China to its "neighbors" in Vietnam and Pakistan where the costs of production are lower. While any major shift will take some time, China's out sized influence on Cotton prices may be in the early stages of waning, similar to that of the U.S. in the first half of the 20th century.

Fundamentals

While many commodity markets have seen increasing downward price pressure in 2016 and in the early stages of 2016, the Cotton market has been relatively stable since late summer of 2014. The Cotton story mainly revolves around China, which is the world's largest consumer of the fiber. Here the fundamental's do not appear positive for a Cotton price recovery, as weaker than expected Chinese economic growth coupled with huge government owned Cotton stockpiles have analysts' scaling down their expectations for Cotton demand in 2016. Although Cotton prices were relatively stable in 2015 mainly due to lower production out of Southeast Asia, the general price weakness seen in the commodity sector, but especially in Corn and Soybeans could influence U.S. producers to favor planting Cotton as opposed to other alternatives. This scenario has the potential to boost U.S. Cotton supplies at the same time global demand wanes. While it is still early for U.S. producers to commit to their planting intentions, we may need to see Cotton prices actually decline in order to discourage additional Cotton acreage from being planted in the U.S. this season.


Technical Notes

Looking at the weekly continuation chart for Cotton futures, we notice price have stabilized in a muted 10-cent price range for most of 2015. The recent price activity is similar to what occurred in the Cotton market from mid-2004 through mid-2007 which saw prices remain range bound prior to the start of the commodity wide bull market in 2008.Even then prices eventually fell sharply in 2009 prior to the start of the historic Cotton bull market in 2011. Back to 2016 we see prices hovering on both sides of the 20-week moving average which is consistent with expected market behavior of a consolidation pattern. The 14-week RSI is confirming the current status with a rather neutral reading of 45.80. Near-term support is seen at the January 2015 low of 57.05, with near-term resistance found at the September 2014 high of 71.49.

Mike Zarembski, Senior Commodity Analyst

January 28, 2016

Cold Blast Fails to Inspire Nat Gas Traders

Thursday, January 28, 2016

Natural Gas futures were higher four of the past six trading sessions, as traders awaited today's inventory report. The winter storm that hit the East Coast, dropping temperatures along with snowfall, is expected to have drawn down inventory levels. Traders are looking for a colder February to build upon this momentum, but can one month of weather driven demand really break Nat Gas prices out of their rut? Like the petroleum market, Natural Gas faces headwinds related to the more than ample inventory levels and demand that has been unable to keep up with production.

Fundamentals

Traders are expecting today's inventory data from the EIA to show a drawdown of 206 billion cubic feet (bcf) for the week ended January 22. Last week, Nat Gas saw a draw of 178 bcf. While this can be viewed as potentially short-term bullish for prices in the near-term, total US inventory levels are an estimated 3.297 trillion cubic feet. This is 19.1% above the same period last year and 14.3% above the 5-year average for this timeframe. There has been talk of OPEC cooperation, which could reduce petroleum production and underpin prices. This scenario could offer some outside market support for Nat Gas. It does not, however, solve the supply woes for the Natural Gas market. The shale boom has been a major contributor to the production increase for Nat Gas over recent years. The major threat to a price recovery is the number of drilled but uncompleted (DUC) wells. These are wells that can quickly be phased into service at the slightest hint of a demand recovery. DUCs are a major cause for concern for the bull camp and may continue to weigh on prices for the foreseeable future.

Weather models seem to have turned a bit in favor of the bull camp. Traders were expecting above average temperatures for the month of February. Some weather models are now calling for colder temperatures for the eastern two-thirds of the country, while the west is expected to remain relatively warm. This may offer some moderate price support in the near-term.

Technical Notes

Turning to the chart, we see the March Natural Gas contract grinding higher over the past week after dropping sharply. The slow move higher after the steep drop could be viewed as a potential bear flag, suggesting there may be downside risk in the near-term. The recent bounce in prices above the 2.25 level looked promising, only to fall apart over the course of several trading sessions. It is interesting to note that the momentum indicator has been moving down during the slow grind higher. This may be a hint that the recent bounce could be a head fake.

Rob Kurzatkowski, Senior Commodity Analyst


January 29, 2016

Will Oil Producers Finally Cry "Uncle"

Friday, January 29, 2016

Crude Oil futures shrugged off a larger than expected storage build last week, adding to the call of some analysts that a near-term bottom may be forming. On Wednesday, the Energy Information Administration (EIA) reported that U.S. Crude Oil inventories rose by nearly 8.4 million barrels the previous week. This was above pre-report estimates of a 3 million barrel increase. However, Oil prices rose following the EIA report, with traders citing a draw in Crude inventories in Cushing, Oklahoma, the delivery point for the NYMEX Crude contract. Not even the equity market sell-off following the statement from the 2-day Federal Open Market Committee meeting could derail the Oil market rally, which could be further evidence that a near-term low for Crude Oil is in place.

Fundamentals

2016 could be a very interesting year for the Crude Oil market, as prices have rebounded off multi-year lows on reports that OPEC and Russia may be in talks about potential production cuts to help curtail the oversupply of Crude seen globally. This speculation has triggered a bout of short-covering buying by weak Oil bears in a market that appears to have become oversold. Oil prices also may be getting a minor boost from equity prices, which have also rebounded moderately off 2-year lows. Any potential talks with OPEC members and Russia will need support from Saudi Arabia, OPEC's largest Oil producer. The Saudi's have resisted production cuts during the steep sell-off in Oil prices, fearing loss of market share. In the U.S., Crude Oil inventories continue to swell, with 8.383 million barrels added to storage last week. U.S. Crude inventories now total 494.9 million barrels, not including Oil storage in the U.S Strategic Petroleum Reserve, which is at an 80-year high. With Iran ready to "officially" re-enter the global Oil market and Oil production from U.S. shale formations not falling as much as expected, it may be difficult for Oil prices to sustain any serious rally attempt, barring any official announcement that OPEC is serious about curtailing Oil production.

Technical Notes

Looking at the daily chart for March Crude Oil, we notice prices attempting to form a "V" bottom. To confirm this technical pattern, we would like to see prices close above the December 14 low of 34.53, ideally on above average trading volume. Prices are currently hovering near the 20-day moving average (MA), although still well below the more significant 100-day MA which is currently near the 41.00 price level. The 14-day RSI has rebounded from oversold levels and has moved to a more neutral reading of 49.23. Support remains at the contract low of 27.56, with resistance seen at 38.29.

Mike Zarembski, Senior Commodity Analyst