Monday, December 13, 2010

Energies Review: strength in this market will continue

The Energies Review

For the week of December 13th, 2010
By Daniel Cronin

OPEC has kept inventories levels unchanged this weekend as prices stayed relatively unchanged last week with a range of $90.70 to $87.50 a barrel on the NYMEX. “OPEC has maintained a production target of 24.845 million barrels a day since December 2008, the longest period that quotas have stayed unchanged since they were first used in 1982. The 11 members with quotas pumped 26.7 million barrels a day last month, 1.9 million more than targeted.” (1) The news of the unchanged supply increase will lead to higher future prices this week as the only change members were considering was to tick up inventories as the price of Oil has gained nicely for the Saudis. Equities have been making new yearly highs with the DOW now over 11,400 and climbing. This, with the OPEC news, will likely send prices over $90 this week as the strength in this market will continue. WTI spreads have stayed relatively steady after the dip last week as f/g trades -54 and g/ trades -48. These have actually been on a bit of a decline coming down from -35 but still hanging around the -50 area in the front. Dec11/Dec12 found support at +52 and has bounced back up to +81. January Arb still very weak as brent continues to be the leader with Jan wti vs brent trading right at the support of -3.00. I might look to be a buyer of some OTM calls or try and get in on flatprice below $88 because $90 will be coming up again very soon in my opinion.

Natural Gas making the charge up again after last week’s decline on weakening inventory levels as this market closed above $4.40. Natty was having a great ride to above $4.60 levels but plummeted -20 cents on a bad inventory number on Thursday. This market quickly got its legs underneath it and now looks to be headed back up to $4.50.

The Softs Review

For the week of December 13th, 2010

By Jurgens H. Bauer

A shortage can be driven by demand, or supply, or both. I think demand for commodities is on the rise as they grow in favor among investors. This growing demand leaves open the opposite end, the supply of willing sellers. As prices rise the market ought to see the additional supply of sellers grow, right? Or maybe not so much so, since the trend upward attracts fresh buying from specs and in some cases upside call protection from trade participants protecting financing. Under such a situation you then need to view the fundamentals of the underlying instrument to ascertain how soon additional supply will become available to meet the increase in demand. If there is obvious demand for cotton you can expect plantings to increase. If there is increased demand for coffee you can expect plantings to increase. To mature and be available for use cotton crops take a season, coffee plants take several. Sugar crops take a season, cocoa several, same too with oranges. Among the soft complex, I like the prospect for higher prices stemming from increased demand for ownership of commodities, but feel cocoa and coffee offer better long term opportunities than cotton and sugar. The jury is still out on FCOJ. I can see some of this reflected in the spreads between the front and back months.

Last week I saw gains in cotton and coffee. Sugar moved sideways, Cocoa, which initially surged, dropped sharply, closing lower for the week. FCOJ settled up on the week, but like cocoa, had surged early on. The one constant was the sizable price moves seen in the entire complex. This has become the new norm, large swings happen with greater frequency.

Volatility, perhaps the single most influential component of any pricing model based primarily upon Black Scholes has increased and rightly so. I suspect that the past performance of historical low levels of volatility is not to be seen again anytime soon. The pattern of price movement is regularly larger in today's market place and stems from a few factors, including the adaptation of electronic trading. Fund participation, which is at record levels is another, especially when large orders flow into or out of the marketplace. Above I mentioned a third the use of options. My point is that I think option volatility will remain high relative to historical levels among the soft markets.

Between now and year's end expect volatile markets focused on the world economy. I favor longs in cocoa, (thinking it cheap relative to other commodities), and like coffee on the long side. Skeptical towards sugar and cotton, but feel they too may strengthen.

OJ prices rally big possibly on weather fears. USDA OJ crop report:


***chart courtesy Gecko Software’s Track n’ Trade Pro
Past performance is not necessarily indicative of future results.

The Metals Review

For the week of December 13th, 2010
By Daniel Cronin

Precious metals took a dive last week as profit taking occurred after Gold rallied up to new heights at $1,430 and Silver traded up to $3.70. The good news for Gold bugs and longs out there is that the yellow metal has now been consolidating at the $1,385-$1,390 level waiting for its next move higher above the $1,400 mark. Silver looks poised to get back to that $30 level again as well. It is very tough to buy into a falling market for the fear of trying to catch a falling knife, but I think this is when the best value prices are available. If one looked at the last leg down prices fell all the way to support at $1,320. The market has rebounded +$80 since then. In this market there is always some value buying going on in my opinion. I try to use technical analysis to look for support to come up with a strategy on value buying on the dips and try to be in the right position for when futures prices rally. I think Gold will look to eclipse the $1,400 mark again this week.

Copper has had a great run here as futures prices rallied to new heights above $4.10 last week as the equity markets continues to rise. One reason Copper prices are rallying is that China refrains from raising their interest rate. "The People’s Bank of China, which on Dec. 10 raised reserve-requirement ratios for banks by half a percentage point, didn't increase interest rates at the weekend even as consumer prices jumped 5.1 percent in November. Copper and lead output in China, the largest consumer of both metals, advanced to records in November as producers increased production following price gains." (1) With China not raising their rate, the Copper market has risen to new heights this year, and $4.25 looks to be in the near future.

The Grains Review

For the week of December 13th, 2010
By Matthew Pierce

Friday saw a lower session following a choppy low volume trade. The reaction to the WASDE report was muted with no real information offered to the trade. The only real surprise was the by class wheat breakdown with more HRW seen than expected. This is mitigated by dramatically poor weather all over the domestic HRW region. Row crops saw a minimal impact with only spreading seen late as a reason for the drop in beans. There was good buying in bean oil with this followed up by a strong session in both Malaysian palm and Chinese bean oil markets overnight. This will continue through the day session today. The macro side of the market was muted on Friday and should be quiet today ahead of the mass of financial information due out early this week. The FOMC will set the tone for financials heading into year end. Other than macros, the fundamental side of the market remained quiet heading into the weekend with only talk of Chinese bean interest faltering due to immediate oversupply. This is a minor issue in the big picture which allowed for all market to climb overnight led by Chinese markets. The day session looks to open in line or stronger than the overnight with growing support from crude oil is helping the whole commodity basket. A weekend freeze in central FL offers upside to softs with both sugar and OJ moving dramatically higher.

Beans are called 10-12 Higher taking back Friday’s late losses with a move back to the middle of the range seen. Indicators are weakening at the upper end of the range. Corn is called 3-5 higher staying well above the 50-day MA sitting at 565.50 with no immediate resistance seen. Indicators remain positive nearing the upper end of the range. Wheat is called 4-6 Higher remaining in a tight chop range between 766.25-811. Indicators remain positive but look weak at the upper end of the range. Meal is called 1-2 dollars Higher after touching the 50-day MA on Friday at 337.70. Indicators are in a negative choppy stance in the middle of the range. Bean oil is called 70-90 Higher looking to move against the range high at 55.43 this week. Indicators remain positive at the upper end of the range.

Looking to weather, Brazil saw heavy rains over the weekend with normal to above normal temps through this week. A pretty nice start to the season. Argentina saw weekend rains but this is not enough to counter early dryness if coupled with a below average precip forecast through the end of the year. Western Kansas saw minimal rain and snowfall over the previous 48 hours with the Northern and eastern regions getting a scattered .50” with the southern and western regions receiving less than a .25” inch spattering. This is nowhere near enough to counter early season dryness even for wheat. There is no moisture in the forecast for Hays KS and west for the next 8-days with only a mild chance on Dec 22nd. The SRW remains in good shape with a solid moisture base and a temperature break later this week. Australia remains a bog in the SE with crop quality continuing to deteriorate. This will only get worse before it gets better with above average precip expected in the region all week.

All in all the market seems content with price levels but realizes that the risk is to the upside, not downside. The biggest upside potential right now is wheat due to world weather but with the new calendar year on our doorstep we have to look at row crop potential. The trade is set for a volatility led inflation backed rally in the new year so get ready to dive in head first in Jan.

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