Below is an excerpt from The Hightower Report’s most recent Newsletter. To receive access to this story, with trade strategies, and our daily coverage of 16 markets, visit futures-research.com for your free 2 week trial!
Going into the end of May, the outlook for many physical commodities was still mostly bearish. However, as recently as May 1 the overall market environment was still nearly a perfect storm for commodities, with positive growth expectations, noted inflationary pressures, and a weaker US Dollar. And there was only a passing concern for the approaching end to the easy money era. On the other hand, with a series of brokerage firms and fund managers predicting a top in certain commodity markets, the Dollar rebounding, and the pace of the US economy faltering, it didn’t take long for severely overbought markets like crude oil, silver, RBOB, copper and cattle to come under aggressive stop loss selling pressures. In looking at a composite non-commercial/nonreportable spec positioning of non-financial commodities, it is evident that the May washout was severe (see chart).
With the copper futures market as of May 10th seeing its non-commercial and nonreportable positioning drifting toward a mostly liquidated status and the US Treasury Bond market seeing its long-held spec short position virtually eliminated, it was clear that some commodity markets had already moved to price-in a large portion of the slowing expectations. In the silver market, where the May 10th COT report showed a non-commercial and nonreportable positioning of only 48,000 contracts and the market subsequently falling an additional $6.18 per ounce, it is possible that a large portion of the weak-handed longs moved to sidelines more quickly than the mainstream press had been expecting. In our opinion, a spec and fund net long of less than 30,000 contracts in silver futures would be a very surprising development, as the threat of severe financial uncertainty and the need for flight to quality instruments has hardly been eliminated.
The hog market is another example of the extreme liquidation of the long interest from the marketplace, as the non-commercial and nonreportable combined spec position fell from a net long 49,731 contracts as recently as April 13 to only 16,055 contracts by May 10. Clearly many markets were overdone and the macroeconomic case had deteriorated, but traders need to be careful assuming a pattern of sustained losses in markets that have retained their bullish fundamental structure.
While by May 1st the energy market was clearly overbought both technically and fundamentally, we maintain that energy prices did not make their climb above the $115 per barrel mark because of the “evil speculator” or because of patently phony fundamentals. In fact, for most of 2011 US WTI crude oil has been consistently priced below Brent crude oil prices. At times Brent crude oil prices were trading at close to $20 per barrel premium to WTI because the world in general was willing to pay more for crude supplies than were US customers and the US was holding a large measure of the world’s excess supply. Therefore, it was no surprise that Brent crude oil’s premium over WTI topped out at a level that could have justified the re-exporting crude from inside the US to the London market. Going forward, we think the remainder of 2011 will see the energy complex begin to take more and more of its direction from the product markets, as relatively low gasoline stocks in the US, Russia and Europe look to put the market on a path to extremely high gasoline and diesel prices later this summer. As the charts show, US and European product stocks are tight and, most importantly, US refinery operating rates have remained low. The supply build into the summer demand window looks to be less than normal or perhaps simply later than normal this year.
In a classic example of government action making the situation worse, we suspect that the US refinery operating rate will get even lower due to recent threats from the US government to investigate the refinery industry. What Washington and the talking-head press fail to realize is that the US refinery setup is flawed to begin with, but it is the only way we have to get product supply to the market. US officials don’t like high gasoline prices, and they think that hammering the refiners with market manipulation charges and investigations will solve the problem. But instead, refiners are likely to take the stance that buying crude and making it into products has to be done under even greater profit margins now because they might be forced to sell their finished goods at narrower margins in the future. Clearly the politicos can claim they dampened energy prices for the consumer, but over the coming months refinery activity is likely to drop to even lower levels due their interference, and the potential for a summer driven energy rally could rise significantly.
Another thing that might prompt a return to bull market status for commodities is the potential for sharp gains in grain prices, which in turn would magnify the inflationary vibe in the marketplace. With the grain markets needing a large jump in overall acreage in 2011 and the weather seriously countervailing that effort, one has to expect a further tightening of ending stocks in corn, perhaps soybeans and maybe even wheat. A serious run-up in corn could support many other physical commodity markets. Traders need to keep a watchful eye on corn and energy over the next six weeks.
Commodity Outlook – 2011.05.20
by Dave Hightower on May 23, 2011
Below is an excerpt from The Hightower Report’s most recent Newsletter. To receive access to this story, with trade strategies, and our daily coverage of 16 markets, visit futures-research.com for your free 2 week trial!
Going into the end of May, the outlook for many physical commodities was still mostly bearish. However, as recently as May 1 the overall market environment was still nearly a perfect storm for commodities, with positive growth expectations, noted inflationary pressures, and a weaker US Dollar. And there was only a passing concern for the approaching end to the easy money era. On the other hand, with a series of brokerage firms and fund managers predicting a top in certain commodity markets, the Dollar rebounding, and the pace of the US economy faltering, it didn’t take long for severely overbought markets like crude oil, silver, RBOB, copper and cattle to come under aggressive stop loss selling pressures. In looking at a composite non-commercial/nonreportable spec positioning of non-financial commodities, it is evident that the May washout was severe (see chart).
With the copper futures market as of May 10th seeing its non-commercial and nonreportable positioning drifting toward a mostly liquidated status and the US Treasury Bond market seeing its long-held spec short position virtually eliminated, it was clear that some commodity markets had already moved to price-in a large portion of the slowing expectations. In the silver market, where the May 10th COT report showed a non-commercial and nonreportable positioning of only 48,000 contracts and the market subsequently falling an additional $6.18 per ounce, it is possible that a large portion of the weak-handed longs moved to sidelines more quickly than the mainstream press had been expecting. In our opinion, a spec and fund net long of less than 30,000 contracts in silver futures would be a very surprising development, as the threat of severe financial uncertainty and the need for flight to quality instruments has hardly been eliminated.
The hog market is another example of the extreme liquidation of the long interest from the marketplace, as the non-commercial and nonreportable combined spec position fell from a net long 49,731 contracts as recently as April 13 to only 16,055 contracts by May 10. Clearly many markets were overdone and the macroeconomic case had deteriorated, but traders need to be careful assuming a pattern of sustained losses in markets that have retained their bullish fundamental structure.
While by May 1st the energy market was clearly overbought both technically and fundamentally, we maintain that energy prices did not make their climb above the $115 per barrel mark because of the “evil speculator” or because of patently phony fundamentals. In fact, for most of 2011 US WTI crude oil has been consistently priced below Brent crude oil prices. At times Brent crude oil prices were trading at close to $20 per barrel premium to WTI because the world in general was willing to pay more for crude supplies than were US customers and the US was holding a large measure of the world’s excess supply. Therefore, it was no surprise that Brent crude oil’s premium over WTI topped out at a level that could have justified the re-exporting crude from inside the US to the London market. Going forward, we think the remainder of 2011 will see the energy complex begin to take more and more of its direction from the product markets, as relatively low gasoline stocks in the US, Russia and Europe look to put the market on a path to extremely high gasoline and diesel prices later this summer. As the charts show, US and European product stocks are tight and, most importantly, US refinery operating rates have remained low. The supply build into the summer demand window looks to be less than normal or perhaps simply later than normal this year.
In a classic example of government action making the situation worse, we suspect that the US refinery operating rate will get even lower due to recent threats from the US government to investigate the refinery industry. What Washington and the talking-head press fail to realize is that the US refinery setup is flawed to begin with, but it is the only way we have to get product supply to the market. US officials don’t like high gasoline prices, and they think that hammering the refiners with market manipulation charges and investigations will solve the problem. But instead, refiners are likely to take the stance that buying crude and making it into products has to be done under even greater profit margins now because they might be forced to sell their finished goods at narrower margins in the future. Clearly the politicos can claim they dampened energy prices for the consumer, but over the coming months refinery activity is likely to drop to even lower levels due their interference, and the potential for a summer driven energy rally could rise significantly.
Another thing that might prompt a return to bull market status for commodities is the potential for sharp gains in grain prices, which in turn would magnify the inflationary vibe in the marketplace. With the grain markets needing a large jump in overall acreage in 2011 and the weather seriously countervailing that effort, one has to expect a further tightening of ending stocks in corn, perhaps soybeans and maybe even wheat. A serious run-up in corn could support many other physical commodity markets. Traders need to keep a watchful eye on corn and energy over the next six weeks.
Tags: Bonds, Corn, Crude, Energy, Featured, Gasoline, Grains, Soybeans
About Dave Hightower