The commodities tracked by Bloomberg Commodity index (BCOM:IND) rallied 1.1% on mixed to worsening fundamentals and weaker dollar. Speculators cut a significant part of their short positions up to Tuesday but commodity prices surged especially the last day of the week as traders were adjusting positions to the holiday liquidity.
Crude Oil
Oil had a pretty good week. According to EIA weekly Petroleum Status Report, crude oil inventories fell by 7.6M barrels while motor gasoline stocks decreased by 1.6M barrels however both staying in the upper half of the average range for this time of the year.
On the other hand the US production after being flat for a few weeks it jumped 59K bpd last week, which could be simply the result of improved weather conditions in the Gulf of Mexico. However the drop of average number of weekly opened oilrigs from 10.5 in the Q1 to only 7 in Q2 signals it could be a challenge to reach 10M bpd US production around the year turn.
The IEA in his monthly report stated that the compliance of OPEC members with the production cut also decreased to 78% while the non-OPEC countries increased to 82%. In June OPEC output rose by 340K bpd after Saudi Arabia, Libya and Nigeria increased flows. There was not much reaction from the market after these figures maybe because according to the same report, the world crude oil demand growth accelerated to 1.5M bpd in Q2 after a “lacklustre” 1M bpd increase in Q1.
Technically the medium term picture is still rather bullish to me although crude established a clear downtrend channel. In my view what we see is a countertrend to the main trend forming bullish flag pattern. The upper channel line will be however critical as there is also a very strong resistance zone at $50-52. I expect the prices to test $50 next week. This could be a nice entry for a quick short with a target at $47-45 ahead of the breakout from the channel.
Corn
In the grain markets now clearly the weather is in the drivers’ seat. After 2 weeks of rally the corn bulls gave up their fight. The US Department of Agriculture in the latest Wasde report stuck to the strong corn yields estimates above 170 bushels per acre. This triggered fresh selling right after that money managers went net long in corn. The official estimates were well in contrast with the market expectations (btw 165-168 bushels per acre) and caught traders off-guard.The US Corn belt weather forecast showing above average temperature for the next week pushed back the bulls in the game. The reason is that the coming week will be crucial for the yields as the corn plants are in the important pollination period and hot and dry weather could be very harmful. The revival of grains was strengthened by the weakening dollar following the soft inflation data on Friday.
The technical picture is rather mixed, still in uptrend but ... the bulls didn’t manage to close above the earlier uptrend line which was followed by a huge red canlde (engulfing pattern). Traders are apparently chasing the news which creates very tough trading conditions with mixed signals. Currently it looks more to the downside but the Friday buying could mean a change in the sentiment...again. In my opinion there is still a good chance for a rally if price of the closest expiry stay above 360cents per bushel. Here the weather is a key factor of uncertainty and traders are getting more and more nervous which is visible from the long green and red candles following each other.
Sugar
Stronger brazil real (or weaker dollar) and the increased fuel prices in Brazil were the two main drivers of sugar prices which surged last week despite an increase import duty on sugar in India from 40% to 50%. Also worth to mention that Petrobras can from July adjust gasoline prices daily which could eventually mean smaller but more frequent changes and less volatile impact on sugar.The speculative net short little changed until last Tuesday however I expect some more significant short covering took place towards the end of the week. We will know more next Thursday when new COT data will be released. Although the market may seem to be oversold but there are reasons to be pessimistic. In India the raw sugar production is expected rise by 25% and the refined sugar production from Europe around 20% in 2017-18. This will mean a significant boost to supply and support for bears.
Technically sugar bounced back from 12.50 support and on the daily chart now created an inverse head and shoulder formation. After the outside week (also huge engulfing pattern) 2 weeks ago it seem that a correction move ahead will be confirmed if the inverse HS pattern will be completed. Price targets could be 15.50 (Fibo) 16.50-17.00 (HS depth) however one should be very careful with position sizing as fundamentals strongly support bears in medium term, and with a long position you would trade against the trend...
Good Luck and remember to watch your risk and be consistent
Mr. Tech Man
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