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July 2016 Archives

July 1, 2016

Panic in the Streets of London!

Friday, July 1, 2016

Today's Spotlight Market: Just a week ago, worldwide markets were shocked when voters in the United Kingdom voted narrowly to leave the European Union in a non-binding referendum. The British Pound plummeted, along with the FTSE 100 and most European and United States equity markets. The United Kingdom and European Union appear to be headed for an extended period of economic and political turmoil. Mark Carney, Governor of the Bank of England, has indicated that he believes interest rate cuts may be necessary, and he believes the economic outlook is deteriorating due to so much uncertainty.

Fundamentals

Prime Minister David Cameron immediately announced his resignation, setting off a leadership battle in the UK House of Commons. Theresa May, who was a Remain supporter and Michael Gove are the two main challengers as of this writing. To add to the political chaos, there was revolt among the Parliamentary members of the opposition Labour party, starting when Leader of the Opposition Jeremy Corbyn sacked Hilary Benn in the middle of the night last weekend. Over 2/3 of the Shadow Cabinet subsequently resigned and Mr. Corbyn lost a vote of no confidence. This sets-up a possible leadership battle for the Labour Party as well in the weeks ahead. To add to the confusion, the third major party in the UK, the Scottish National Party, has indicated that they do not wish to abide by the results of the referendum. They claim, since Scotland voted overwhelmingly to remain in the European Union, that Scotland should consider a vote on independence from the United Kingdom. All of these changes may very well lead to political realignment in the United Kingdom. Under the Fixed Terms of Parliament Act, there is no need to call a general election until 2020, but the resulting leadership changes and potential for cross-party alliances, may result in an early general election.

Technical Notes


The referendum results jolted a previously choppy to mildly bullish market into strong bear territory within hours. The 20-day Simple Moving Average (SMA) quickly turned below the 50-day SMA, and the curve is steepening. 14-day Relative Strength Index is a bearish 32.84.

Dale Jennings, Commodity Analyst


July 6, 2016

Up, Up and Away!

Wednesday, July 6, 2016

The Treasury yield curve continues to flatten, with the 2yr/10yr curve down 13 basis points the past month to a positive 1%. For the year, the curve was lower by 95 basis points, which likely is a sign that investors and traders are concerned about the global economic outlook. Should the curve become inverted, however, where short-term yields rise above longer-term yields, then any talk of a possible recession here in the U.S. may have some real validity. For those "Fed Watchers", the Fed Funds futures markets are currently pricing an almost 99% probability of the Fed keeping interest rates unchanged at the September Federal Open Market Committee Meeting. In fact, there is a higher probability, although a very remote 1% probability, of an interest rate cut at the September meeting than that of a rate hike. Something very few market participants would have dreamed of at the end of 2015.

Fundamentals

Today's Xpresso title is the current assessment of the U.S. Treasury Bond market as Prices continue to go towards unchartered territory. Cash 30-year Treasuries are currently yielding 2.142% as of this writing, which on the surface seems extremely low given the time to maturity, but when compared to current yields in Europe and Japan likely looks "attractive" to institutions needing to invest in government bonds. While the recent "Brexit" vote in the UK has primarily been responsible for the recent leg of the up-move, we must remember that U.S. Treasuries have been in an overall long-term bull market since the early 1980's! This week will be especially interesting for Bond traders, as we have U.S. non-farm payrolls for June to be released at 7:30 am Chicago time on Friday. After May's disappointing 38,000 new jobs created, analysts are looking for a significant rebound in the employment data, with an average estimate of 170,000 to 180,000 new jobs being created in June. Also important will be the data on hourly earnings and average hours worked to see how worker wages are faring. Prior to Friday's data we will get the private sector employment data from ADP this morning. We should remember that ADP did not show the large drop in new jobs created in May like the "official" government data, so it will be interesting to see if May's report was an anomaly or the start of a trend for slower jobs growth as the global economy continues to face headwinds.

Technical Notes


Looking at the daily continuation chart for Treasury Bond futures, we note Bond prices holding the upside "breakout" following the "Brexit" vote last week. Prices are now pulling away from the 20-day moving average, as trading volume has been steady to rising the past week despite the Independence Day holiday here in the U.S. The 14-day RIS has become quite volatile and recently has rebounded to move back into overbought territory, with a current reading of 73.77. Chart support is seen at the June 16 high of 171-07, with upside resistance difficult to gauge, as we are in unchartered territory for prices, but many traders are eyeing 180-00 as a potential psychological resistance area for the September futures. Cash market traders note the 2% yield as a major support level for the 30-year Bond.

Michael Zarembski, Senior Commodity Analyst

July 11, 2016

Who Wants to be a Party Leader?

Monday, July 11, 2016

The Monetary Policy Committee of the Bank of England is scheduled to meet for the first time since the European Union referendum on July 14, 2016. UK consumer confidence fell sharply following the referendum decision to leave the European Union. The Monetary Policy Committee will surely take this into consideration when they meet. Currently, UK interest rates are at 0.5%, which although low by historical standards, are actually higher than many developed countries. This gives the Bank of England room to cut without having to immediately resort to the hot button issue of negative interest rates.

Fundamentals

The political scene in the United Kingdom continues to remain chaotic. The governing Conservative party may have settled on a leader and new prime minister as Angela Leadsom abruptly quit the leadership race after being harshly criticized over remarks she made about motherhood. Barring any other surprises, this leaves Theresa May to take over as prime minister within days. The opposition Labour Party is also facing a leadership race as Angela Eagle formally announced she is standing for party leader. There are still outstanding questions surrounding Jeremy Corbyn, the current leader, and does he automatically qualify for the leadership ballot. Meanwhile, the question of a snap general election is still outstanding. It isn't unprecedented for the UK to change prime ministers without a general election, power transferred between Tony Blair to Gordon Brown in 2007 and from Margaret Thatcher to John Major in 1990. However, a leadership change in the governing party as well as potential change in the opposition party following a controversial referendum might be justification for a snap general election.

Technical Notes


Turning to the 3 month continuation chart, the Pound continues to be in total bear market territory. 14 day RSI indicates a severely oversold market at 17.81 A series of lower highs and lower lows has been the recent pattern and now the 1.30 level is proving to be a stiff resistance point. The 20 day Simple Moving Average (SMA) is not only well below the 50 day SMA, but the curve downward continues to stiffen. All of these moves have been reinforced by strong volume, so there are no technical signs of a bull market to be found.

Dale Jennings, Commodity Analyst


July 13, 2016

Stocks Rise on Earnings, Stimulus Hopes

Wednesday, July 13, 2016

The stock market has shrugged off economic fears brought on by weaker indicators and the Brexit to post new highs. Many traders have been paring their expectations of further interest rate increases from the Federal Reserve. Japanese Prime Minister Abe's party won a resounding victory in elections over the weekend. Abe ordered a new round of fiscal stimulus, but the size and exact details of the stimulus are not known at this time. The Japanese Prime Minister has been aggressive in attempting to get his country's economy back on track, and the election victory gives him a free hand to draft economic policy. Japanese stocks responded well to the announcement, and it had a positive impact on global stocks.

Fundamentals

A major force behind the strength of the S&P is traders' belief that the earnings recession may have ended in the first quarter of this year. The recovery in Crude Oil prices, along with a weaker US Dollar, are expected to help earnings growth. Earnings are not expected to skyrocket, but may increase to respectable levels, which may be enough fuel to keep the stock market rally going. As the expectations of further rate increases from the Fed have fallen, so have the Dollar Index and bond yields. Decreased bond yields make stocks look comparatively attractive as an investment vehicle.

Technical Notes


Turning to the chart, we see the September E-mini S&P reaching new highs. Since the market is in unchartered territory, one can only speculate where the market may encounter resistance. The market may find some resistance around the 2150 and 2200 levels. The recently rally in stocks has driven the RSI higher, but the indicator remains below overbought levels. If the market does become overbought, prices could come down to test previous resistance around the 2118.00 level.

Rob Kurzatkowski, Senior Commodity Analyst

July 14, 2016

Commercial's "Bale" as Cotton Prices Rally

Thursday, July 14, 2016

In addition to estimates that Cotton demand is rising, traders are looking at weather forecasts that are calling for well above normal temperatures as we head towards the end of July. The National Weather Service in its 6- to 10-day outlook has the western and southern portions of the U.S. experiencing above to well above normal temperatures, with normal to below normal participation expected. This includes the key Cotton growing areas of Texas and the Mississippi Delta region. This forecast may be influencing a bit of a "weather premium" on futures prices in addition to the rather bullish demand forecast.

Fundamentals

The rather sleepy Cotton futures market awoke with a vengeance this week, as a government report forecasted higher than expected demand. On Tuesday, the USDA released its monthly crop production and supply/demand report which had surprises for traders in both grains and softs. For Cotton, the USDA forecasted U.S. Cotton production at 15.8 million bales for the upcoming 2016/17 season, while this estimate was slightly above traders' estimates, it was the data in the supply/demand report that really caught the market off guard. The USDA raised U.S. Cotton exports to 11.5 million bales and lowered ending stocks to 4.6 million bales from 4.8 million bales last month. Globally, world Cotton ending stocks were lowered to 91.29 million bales from 94.73 million the previous month. While both U.S. and global Cotton inventories are still relatively ample, the overall trend appears to be leaning towards increased global demand, which is catching commercial traders, who are overall net-short Cotton, on the wrong side of the near-term price trend. New-crop December Cotton closed the session Tuesday up the 300-point limit, and even briefly rose the expanded 400-point limit during the early morning hours.

Technical Notes


Looking at the daily chart for December Cotton, we notice prices started to display some bullish tendencies late last week, just prior to the release of the July USDA report. Momentum-based trading systems would have received a bullish signal once the 2016 high of 66.64 was taken out to the upside. The 14-day RSI has soared well into overbought territory, with a current reading of 79.34. The aforementioned recent high at 66.64 now appears to be support for the December futures, with resistance seen at the psychologically important 75.00 price level.

Mike Zarembski, Senior Commodity Analyst

July 15, 2016

Grain Rally Melts Despite Upcoming Heatwave

Friday, July 15, 2016

Soybeans saw large speculators leave the market in droves just prior to the 4th of July holiday weekend, as long liquidation selling dominated the trade. The most recent Commitment of Trader's report shows non-commercial traders reducing their net-long position by just over 28,000 contracts during the week ending July 5. Commercials were mainly on the other side of the large speculative trade, covering almost 35,000 of their net-short positions during the reporting period. Only the small specs added to existing short positions during the sell-off.

Fundamentals

Some of the hottest temperatures so far this summer are expected over the Midwest starting next week, as a hot and dry pattern is heading its way east. The National Weather Service in its 6 to 10 and 8 to 14 day forecast is calling for well above normal temperatures and below normal precipitation in the main Corn and Soybean growing regions of the U.S. The timing of this heat spell has traders and producers nervous that what was generally ideal growing conditions so far this summer will evaporate along with soil moisture at a critical time for Corn, as pollination is occurring, and for Soybeans if the heat remains as we move into August. These weather concerns have caused some volatile trading activity, especially for Soybeans, as prices rallied nearly $1 from recent lows on the heat forecasts, only to see the market reverse on Thursday, as market participants are starting to believe much of Iowa and Illinois will still end up with good yields due to the excellent conditions of the crop currently. Summer grain markets can be quite volatile, as changing weather forecasts and large participation by large commodity funds can lead to large price moves in a relatively short period of time. Traders should be prepared to adjust position sizes and strategies to account for any potential changes in market volatility.

Technical Notes


Looking at the daily chart for November Soybeans, we notice that despite the rather wide price swings seen since the beginning of June, it appears that the market has the appearance of downtrend following the move to contract highs on June 13. Since that time, we have seen prices make lower intermediate highs and lower intermediate lows, with Thursday's price "reversal" wiping out nearly ½ the price gains seen this week. Momentum as measured by the 14-day RSI has started to weaken, with a current reading of 43.46. Remember the RSI was above 80 just about 1 month ago. Thursday's high of 1123.00 now looks to be resistance for the November futures, with chart support seen at the July 8 low of 1021.00.

Michael Zarembski, Senior Commodity Analyst


July 20, 2016

Real Rebound Perks-up Arabica Coffee Prices

Wednesday, July 20, 2016

The recent recovery in the value of the Brazilian Real vs. the U.S. Dollar has sparked some renewed interest in spread trading between Arabica and Robusta Coffee futures. While fundamentals including dry conditions in Robusta growing regions of Brazil and Vietnam would seem to favor this variety over Arabica Coffee, which is seeing ample production being reported from Brazil this season, the Arabica futures have actually outpaced Robusta futures, as traders believe that Arabica producers will be less inclined to sell Coffee into the export market while the Real is rising. In addition, producers may want to increase inventories of Arabica Coffee following disappointing production totals the past 2 seasons.

Fundamentals

Arabica Coffee futures have been in an uptrend since early June, as a rather surprising recovery in the value of the Brazilian Currency coupled with some moderate frost damage in the key Coffee growing regions in Brazil could curtail production next season. Since the start of June, the lead month September futures have rallied over 30 cents per pound, trading as high as 154.80 prior to a modest price correction. We have to go back to early 2015 to see the lead-month futures trade at these price levels, with market technicians starting to see signs that the overall bearish trend that began in late 2014 may be nearing an end. Outside of Brazil, a strike by truckers in Columbia has curtailed Coffee shipments into the export market. While many analysts believe the strike will not be a long-lasting event, the temporary halt to Coffee shipments from this important producer has added some support to the market. Both large and small speculators have embraced the long side of the Coffee futures market, with the most recent Commitment of Trader's report showing non-commercial and non-reportable traders adding a combined 4,446 new net-long positions during the reporting period ending July 12. This was just prior to 17-month highs being made as trend following traders added to existing long positions as new 2016 highs were made. Commercial traders are on the other side of the trade, selling into the rally and adding to existing short positions.

Technical Notes

ing at the daily chart for September Coffee futures, we notice prices continuing to hold above both the 20- and 200-day moving averages, despite correcting nearly 7 cents from the recent high. Trading volume has been trending lower the past few weeks, following the rollover from the July into the September contract. The 14-day RSI has started to trend lower following a bearish divergence, as this momentum indicator failed to make a new high reading at the 2016 high. The July 15 high of 154.80 remains strong resistance for the September futures, with support seen at the chart "gap" at 144.35 made back on July 8.

Michael Zarembski, Senior Commodity Analyst


July 22, 2016

Strong Dollar Weighing on Commodity Rally

Friday, July 22, 2016

Coming as little surprise to most traders and analysts, the European Central Bank (ECB) did not take any action on interest rates or signal further moves to provide any additional stimulus early this morning, despite concerns of the effects on the overall European economy of the United Kingdom voting to leave the European Union. Since this was the first meeting of ECB officials following the U.K. vote, it appears that ECB Chairman Mario Draghi is taking a page from the Federal Reserve and will focus on upcoming economic data to determine if additional stimulus measures are needed.

Fundamentals

Those traders who have been fortunate to catch the bull market run in several commodities, most notably the precious metals sector, are starting to see some headwinds of late that appear to have stalled any additional upward momentum, at least for the time being. The recent strength in the U.S. Dollar is probably the largest factor in the price correction seen in markets such as Gold, Silver and Crude Oil, as the U.S. Dollar index has rebounded to 4-month highs. So what is behind the revival in the "greenback"? First, it appears that the sharp rebound in jobs that was reported in the June Non-Farm Payrolls Report has once again put the idea of a possible interest rate hike by the Federal Reserve back on traders' minds, although the Fed ultimately may wish to remain very cautious on surprising financial markets with an unexpected rate hike -- especially as we head into the final months prior to the U.S. presidential elections in November -- if at all possible, unless upcoming economic data "forces" their hand on a rate hike. The Fed Funds futures market is currently pricing a 25% chance of a rate hike by the September Federal Open Market Committee Meeting (FOMC) and a nearly 51% chance of a rate hike at the December FOMC meeting which occurs after the U.S. elections. In addition, a move by investors back into so called "risk assets" such as equities following the "Brexit scare" has propelled U.S. equities to all-time highs. Given the uncertainties surrounding how the European Union and the United Kingdom will resolve their separation, it is little surprise that assets may be flowing to the U.S. and moving not only into equities, but U.S. Treasuries as well, as U.S. rates, while historically at very low levels, still look attractive compared to most of Europe and Japan. While the U.S. Bond market currently is in a "correction" mode as well, it would not be a surprise to see both U.S. Equities and Treasuries maintain their gains this year, which could add additional support to the U.S. Dollar as investment funds continue to move to the U.S. as the "best" alternative compared to Europe and Asia.

Technical Notes
Looking at the weekly continuation chart for the U.S. Dollar Index futures, we note that for the past 5 years, the market has moved in ranges from 80.000 to 85.000, and then from about 92.000 to just over 100.00, with relatively little time from 85.000 to 92.000. We are currently in the middle of the 92.000 to 100.000 price band with momentum favoring the bulls, as prices have once again moved above the 20-week moving average. The 14-week RSI has turned upward, with a current reading of 57.21. Chart support is seen at the May 2016 low of 91.88, with resistance seen at the November 2015 high at 100.60.

Michael Zarembski, Senior Commodity Analyst


July 25, 2016

Wait and See Approach from the ECB

Monday, July 25, 2016

The European Central Bank decided to wait for more data to better assess economic conditions after the shock of the United Kingdom voting to leave the European Union. The ECB decided to make no changes to monetary policy at their most recent meeting on July 21. Interest rates remain at 0% while banks are charged a negative interest rate of 0.4% on excess reserves left in the ECB's vaults. Quantitative easing remains at 80 billion Euros per month.

Fundamentals

This was not an unexpected decision from the ECB and is similar to the recent actions of the Monetary Policy Committee of the Bank of England. While the EU referendum was a shock, it will take time to ultimately determine what effect the uncertainty will have on European economies. Recent terrorist events and the attempted coup in Turkey could also influence economic growth in the region. The ECB is targeting inflation at 2%, but inflation for June came in at only 0.1%.

Technical Notes

Turning to the 3 month continuation chart, we see mostly bearish indicators for the Euro. The 20 day Simple Moving Average (SMA) which was previously providing support, is now a resistance level. The 20 day SMA is beneath the 50 day SMA and both are in downward trends. 14 day Relative Strength Index (RSI) is a bearish 38.70

Dale Jennings, Commodity Analyst


July 26, 2016

Risk On Tarnishes Gold's Appeal

Tuesday, July 26, 2016

Gold futures have lost some of their luster over the past several weeks, as some traders have set aside their fears and taken on more risk. The stronger US Dollar has driven commodity prices broadly lower, lessening Gold's appeal. Oil prices are more than $5 off recent highs, which likely has led to some traders limiting their commodity exposure. Gold traders also are concerned that tomorrow's FOMC policy decision could include a statement with a slightly hawkish tilt.

Fundamentals

Traders appear to have put aside concerns over the Brexit for the time being, but the full effects of the UK leaving are not yet known. Some traders believe that the recent decline in the price of Gold may have created a buying opportunity for traders. The uncertainty over the upcoming US Presidential election and the Brexit fallout, along with the rocky geopolitical climate, seem to favor the yellow metal. On the other hand, some traders believe that the recent decline in Gold was largely due to the metal being overinflated and overbought due to the lead-up to the Brexit. The Brexit, when all is said and done, may actually be a negative for the price of Gold due to the expected negative effect on global economic growth. The International Monetary Fund (IMF) trimmed its global growth forecast for 2016 from 3.2% down to 3.1%. Lower growth means lower inflation expectations, which can be seen as bearish for Gold.

Technical Notes

Turning to the chart, we see the August Gold contract reversing course in recent sessions. Prices closed below the 20-day moving average, which suggests that a near-term high may be in place. The next area of support comes in around the 1300 level. If prices are able to hold above 1300, Gold may see a neutral to bullish bias.

Rob Kurzatkowski, Senior Commodity Analyst

July 27, 2016

Porkapalooza

Wednesday, July 27, 2016

Large speculators continued their long liquidation selling in Lean Hog futures last week at the same time both commercial traders and small speculators were covering short positions as prices plunged. The most recent Commitment of Trader's report shows non-commercial traders reduced their net-long position in Lean Hogs by just over 6,900 contracts. This still left these large speculators net-long over 71,400 contracts. On the other side of the trade, commercial and non-reportable traders reduced their net short positions by 4,560 and 2,349 contracts respectively last week.

Fundamentals
It has been a long summer for Hog producers in the U.S. as prices have plunged since highs were made back in Mid-June. The front month August futures have seen prices fall over $15 per hundredweight since the June highs as traders are pricing in a larger than anticipated Hog herd. Lower prices are more prevalent in the fall and winter month futures with the December 2016 contract falling below $60 per hundredweight compared to the CME 2-day Lean Hog index for July 22 which came in at 76.45. Both Pork and Beef inventories continue to increase as producers have been taking advantage of lower feed costs to increase production. The U.S. Hog herd is at record levels for this time of year adding to price pressures as meat packers are becoming less aggressive in bidding for market ready hogs despite good profit margins. More processed pork is ending up in cold storage which will add to what is expected to be already burdening supplies later this year. The latest cold storage report shows pork inventories at 585.9 million pounds which is 3.7% higher than the 5-year average for this time of year. While it is starting to appear that long liquidation selling has finally abated as prices reached extreme oversold levels, and we are still seeing solid Pork imports out of China, sustain price rallies may be hard to come by in the coming weeks as long as the looming large supplies of hogs are on the horizon. This could be a fine opportunity for those die-hard barbecues' to stock up on both beef and pork now as the upcoming Labor Day holiday is a mere 6 weeks away!

Technical Notes

Looking at the daily chart for August Lean Hog futures, we notice prices on a one way downward slide since mid-June when the contract highs were made. Despite the nearly 6-week sell-off, we are just seeing the 20-day moving average (MA) appear ready to cross below the 200-day MA. However, we have recently seen prices attempt to rebound off of 2016 lows and the 14-day RSI remains in oversold territory with a current reading of 26.75. We note that Trading volume has decreased sharply the past several trading sessions as it appears that the long liquidation selling in the August contract has exhausted itself as trading begins to shift into the October futures. With the August futures now trading at a modest discount to the 2-day CME Lean Hog index, any signs of a price recovery in the cash market could see the August futures begin to rebound as we head towards expiration on August 12. The recent low of 73.825 made back on July 22, is now acting as support for the August futures, with chart resistance not seen until the July 13 high of 80.375 is reached.

Mike Zarembski, Senior Commodity Analyst


July 28, 2016

Products Glut Weighs on Oil

Thursday, July 28, 2016

The Crude Oil market seemed to be rising almost unimpeded from mid-February through the early part of June. Since that time, the market has been in a rut. Due to the steep decline in Oil rigs over the last year and a half plus, some traders have been waiting on the big drawdown in stockpiles, which has not come. Economic activity has shown little improvement, and the Brexit and other factors have lowered some traders' expectations for global growth and demand.

Fundamentals

Disruptive events, most notably the wildfires in Canada and the rebel attacks in Nigeria, have caused supply interruptions in the Oil market. However, supplies continue to rebound strongly from these disruptions. This resilience has been somewhat surprising and likely has put pressure on prices. The refined products market is extremely oversupplied and could lead to further declines in demand going forward. Yesterday's EIA report showed an increase in gasoline to the tune of 500,000 barrels for the week. During the summer months, supply drawdowns are the norm. In addition to a weaker economic outlook, the recent strength of the US Dollar has dragged on Oil prices. The Dollar Index chart looks as though it may have confirmed an inverse head and shoulders, which suggests the greenback may continue to strengthen.

Technical Notes

Turning to the chart, we see the September Crude Oil contract faltering after breaking through the 45.00 level on the downside. There have been three successive closes below the 100-day moving average, suggesting prices could be shifting toward a downtrend. The market broke through minor support around the 42.25 level. Prices may find minor support around the 38.25 level and more significant support around 35.00. The September contract also is very close to the 200-day moving average. A close below the average could be seen as moderately bearish for Oil prices.

Rob Kurzatkowski, Senior Commodity Analyst

July 29, 2016

Large Gasoline Supplies Weigh on Energy Futures Prices

Friday, July 29, 2016

The market price volatility in the Brent vs. WTI Crude Oil spread has been relatively muted so far in 2016, especially compared to the wild price swings we have seen the past several years. We are starting to see Brent futures prices slowly increasing their premium to the U.S. "benchmark" WTI contract. The lead month October Brent vs. WTI spread has recently traded near its highest levels since the start of the year, with the Oct Brent now trading at a premium of about $1.43 above the October WTI contract. To put this in some prospective, this spread was trading at over $3 Brent discount in January. Some traders will be keeping a close watch on storage capacity levels in Cushing, Oklahoma, which is the delivery point for the NYMEX WTI contract. Should storage levels at Cushing begin to tighten, we could see the Brent premium continue to widen, as the market needs to "encourage" the drawdown of supplies from Cushing to avoid storage issues as we move into the 4th quarter of the year.

Fundamentals

The U.S. remains well supplied in both Crude Oil and its products, with current inventories running well above the 5-year averages for this time of year. On Wednesday, the Energy Information Administration (EIA) released its weekly update on U.S. petroleum inventories and reported that as of the week ending July 22, U.S. Crude Oil inventories rose by 1.671 million barrels to stand at 521.133 million barrels. This is well above the 5-year average of just over 384 million barrels. While this data has added to the overall bearish tone of the energy markets, it was the data on U.S. Gasoline stocks that really may be setting the negative tone for energy prices. The EIA reported that U.S. Gasoline supplies rose by 452,000 last week, to bring inventories to 241.452 million barrels. This year's totals are well above the 5-year average of just over 216 million barrels. We must remember that we are in the heart of the summer driving season when families take their summer vacations prior to the start of the school year. So the fact that Gasoline inventories continue to increase remains troubling to bullish traders looking for a bounce in prices in a market that on the surface appears to have become oversold. Refiners have been taking advantage of "cheap" Crude Oil to increase refining rates and produce more Gasoline and Distillates such as Diesel fuel. However, while U.S. Gasoline demand is robust, it has not increased enough to overcome the large supplies of Gasoline being produced. so we are seeing lower Gasoline prices this summer. While refinery profit margins have started to contract, one has to wonder whether refineries will curtail Gasoline production enough to help alleviate the current surplus, especially once the peak summer driving season ends as the Labor Day holiday approaches. If not, we could see Gasoline prices once again fall below $2 per gallon when refiners can switch production to the cheaper winter blends of Gasoline in the 4th quarter of this year.

Technical Notes

Looking at the daily chart for the September RBOB Gasoline futures, we notice prices in a sustained downtrend since the middle of June following an unsuccessful attempt to break above resistance at 1.6500. The downtrend gained some technical momentum once the 20-day moving average crossed below the 200-day average. The 14-day RSI is weak but has not yet crossed into oversold territory, with a current reading of 30.79. For those traders who utilize Fibonacci retracement levels as a guide to support and resistance areas, we do note that prices are currently hovering near the 61.8% retracement from the February 2016 low to the June 2016 high. 1.2655 is seen as near-term chart support for the September contract, with resistance found at 1.4484.

Michael Zarembski, Senior Commodity Analyst