July 10, 2017 - Weekly Commodity: Oil and precious metals dropped while crops rallied

Despite the rally in grains the Bloomberg Commodity Index dropped 1.5% last week as oil and precious metals fell. The weakening of the dollar couldn’t give sufficient support to the commodity bulls as fundamentals were lagging.

Oil

As Nigeria and Libya, exempt from the OPEC deal, are increasing production, the cartel fails to cap the production. The US rig count increased again after last weeks’ slight drop but according to news the US production has risen in Q2 only by 139k bpd which shows a falling momentum compared to 439k bpd rise in Q1. This drop was partially caused by the Tropical storm Cindy which resulted in disruptions on offshore oil platforms as well as delayed transportation in the Gulf of Mexico. Most likely this caused also the “surprise” drop in crude and fuel inventories which should really a surprise if one’s watching the news…

Technically there is still a chance the market will turn north to complete the 5^th wave however it looks at the moment more bearish at least short term due to a possible increase in Crude inventories after the recovery of production in the Mexican Gulf. The summer has however just began and demand should increase with the ongoing holiday season on the northern hemisphere. Any military escalation of the Qatar case would add support to the bulls. In this relation don’t forget the Aramco IPO where at the Saudi Arabia has a major interest in increasing oil prices…

Corn

Weather concerns and drop in planted acreage were the main movers of grain prices the last 2 weeks. Corn and wheat were planted in smaller acreage as expected while soybean acreage didn’t rise as much as expected. The biggest problems seems to be developing in the wheat market as according to some analyst only 90-92%% of the high protein hard spring wheat will make it to the harvest due to the extremely dry weather expected in the north wheat belt in the US. This is much lower than the Official USDA estimate of 96%.

The surge in wheat prices helped to push higher the corn and soybean too. The official USDA Crop progress estimate on Monday however showed improved corn conditions with 68% of crop good and excellent vs. expected decline to 65%. Now traders are focusing on the corn yields and the question is how much it will fall from the last years’ records. 165 bushel per acre could be the level to watch as this would bring the ending stocks below the psychological 2bn bushels for the 2017/2018 marketing year. So watch the weather in the Corn Belt, the key will be if the drought will continue through July or will come some rains.

The front end corn contracts managed to close above 390cents and while there was a gap up on Monday and the following days the trading was very hectic (check long shadows on daily candles). Managed money covered its shorts mostly but new longs were not built which shows that there is no real sentiment change rather cautiousness. According to some news during the weeks there was significant commercial selling which can signal there are more hurdles ahead of the bulls.

Sugar

The state owned Brazilian energy giant Petrobras cut gasoline prices again last week again, now by 5.9% which will pressure ethanol prices and ethanol parity, resulting in more profits producing sugar for the Brazilian sugar mills. And the pressure on sugar will increase later this year as in October the EU will end limits on production quotes. According to the producers on the oldest continent this could result in an increase of European sugar production by 20-25% in 2017-2018 season. Adding the expected 25% increase of sugar production in India there seems to be more troubles ahead for the sweetener in the next couple of months unless the weather will not help to lift prices.

Managed money on the other hand reached net short levels close to record highs and in this environment a short covering could trigger a short term volatile rally. The head and shoulder formation reached profit target and some profit taking took place since that but at least according to the COT data from 3^rd July there was no change in net short of money managers positioning.


Good Luck and remember to watch your risk and be consistent

Mr. Tech Man

DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading team’s view of the past and current economic and capital market environment. It is not an investment advice and should not be viewed that way at all, and the creators of this material cannot be held liable for any potential losses resulting from trading, where despite this disclaimer someone would consider this material as an investment advice. All rights reserved ©2016. 

Contact: landoftradingATgmailDOTcom, Blog: landoftrading.blogspot.com

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June,5 2017 - Weekly Commodity: Oil and Sugar under pressure, Grains in a vacuum

Crude oil had a hangover week after OPEC meeting,  and some additional dose of pessimism supported bearsto push prices lower below 48 dollars. Grains were looking for direction from USDA Crop Progress report but there was no uggly suprise. Sugar had a tough week caused by falling fuel prices and early monsoon in India where a 25% higher sugar production is projected for this year.

Crude oil

The US withdrawal from the Paris climate deal was translated by traders into more US oil pumped out of the ground. US oil production is on the rise and we have seen something over 400k bpd added in 6 months (from last September until March). Given this pace, the US will be close to 10 mil bpd production (the levels of Saudi Arabia or Russia) in 1 year time.

The recent weakness was also supported by the spike in Libyan and Nigerian oil production. These countries are exempt from the OPEC cut deal and they are expected to increase the production further in the second half of the year.

So what could support the perspective of higher price? Well short term nothing really and it will probably oscillate between $45-50 unless there is production outage in any of producers or geoplitical tension rises in the middle east. However medium term two important events will take place that can provide support to crude. 

The first is Russian Presidential Elections 18 March 2018 where most probably Putin will win another 6 years term. However to convince voters he may need higher oil prices. The second supportive event is the planned Aramco IPO next year where the exact day is to be announced yet. Here again higher oil prices are needed to set higher price for the initial offering. The US oil production will be influenced by two things: first drilling cost inflation (expected 10-30% next year for shale oil) and second, the Feds interest rate policy (the cheap credit environment could come to an end if Fed continues on current rate hike path).

Grains

The grain market is in a kind of vacuum, hesitation continues as despite the rainy weather in the US, there are no signs of further delays in planting. The USDA Crop Progress report showed corn planting as expected above 90% but a little behind 5 year average, so no big moves… yet. While 73% of planted corn emerged, 72% is in good or excellent condition and in poor or very poor condition only 3%. 

So overall one could say that corn is on track to a good year for farmers. However there are two things we need to keep in mind. This estimate for corn is based on only 18 states producing 92% of 2016 corn acreage. The second thing is that it’s enough to miss the planed corn acreage by few percentage point to get a much lower ending stocks (some estimates talks already about 1.7bil bushels vs. the USDA estimate of 2.1bil bushels) So short term probably range trading btw 355-390 (July contract), but possible rise later the summer / in the fall when the impact of rains on final acreage and yields will be clearer (Sept/Dec contract). Therefore it’s important which contract are you watching.

Sugar 

Sugar futures in New York fell sharply last week in line with our estimation. The lower fuel and ethanol prices pushed the Ethanol parity to 13.50-14.00 which means major support now. Prices dived into this zone on Friday as early Indian monsoon helped the bears to push prices lower. Money managers positioning in the futures market was net short more than 23k contracts based on the data from last Thursday however after the sell off on Friday we can expect in the next COT report a significant change in the positioning. The light at the end of tunnel is that producers are stopping their hedging activity at these price levels, but on the other hand additional pressure from speculators may appear as they are closing their longs. Don’t forget for the bulls these weeks were very painful. 

Good Luck and remember to watch your risk and be consistent!

Mr. Tech Man

DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading team’s view of the past and current economic and capital market environment. It is not an investment advice and should not be viewed that way at all, and the creators of this material cannot be held liable for any potential losses resulting from trading, where despite this disclaimer someone would consider this material as an investment advice. All rights reserved ©2016. 

Contact: landoftradingATgmailDOTcom, Blog: landoftrading.blogspot.com

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May 21, 2017 - Weekly Commodity - Oil traders waiting for Opec, rain challenging US crops , sugar rejected ethanol parity

Last week the US and Brazilian politics were making the main headlines. Continuous weakening of US dollar supported commodities while the depreciation of Real had a negative effect on sugar, coffee and soybeans. The weak Brazilian real caused a liquidation of 5mil. tone of soybean stocks in only one day. Raw sugar got extra support on Friday from the rains forecasted for the cane crushing regions of Brazil. Crude oil prices supported by oil minister statements (Saudi Arabia and Russia) regarding OPEC production cut extension. The US farmers keep fighting their battle with cold weather and high moisture, corn sowing still below average. 

Crude Oil

The oil market is now focusing on the upcoming OPEC meeting (25th May) where countries producing oil and Russia are expected to agree on an extension of the production cut by 6-9 months. The expected positive outcome of a production cut extension and the increasing demand are the 2 main factors that can help to recover the oil prices. The production cut up to now however didn’t decrease supplies as OPEC members  were emptying their oil reserves which are much lower now. This means the extension would bring a real drop in oil supply this time and in combination with the expected increase in demand for 2H this could cause a signficant rise in oil prices. I will publish a deeper, fact digging article later this week ahead of the OPEC meeting.

Technically WTI closed the week above psychological $50 level and if you are not log yet, probably you could still think about going long or start to build a long positions as in case extension the price can easily break out from the flag and reach new highs in the $60/b area. The tricky part here is the impact of US shale producers hedging activity usually pushing prices down. Even this will effect mostly the longer expiries (1+ year from now) I would probably take some profits around January highs ($50/b) if the closest contracts reach it.

Corn

The grain market is focusing on the North American weather still as current moisture is hitting two crops the same time. While the wheat harvest is just starting, the rain and cold weather may cause potentially yield and quality problems as well as spreading crop disease. However it's hard to assess the damage at this phase. Corn sowing is slowed down by moisture and as I mentioned earlier there are fears if the rains will not stop the farmers will eventually switch from corn to soybean which could be planted a little later.  This could result in jump in corn prices and further drop in soybean. Also don't forget the huge corn net short in hedge fund positioning, which could result in a short coverage and jump in prices.

Technically we saw a false break to the downside from the triangle on Corn chart. There is a higher short squeeze potential in the corn makret (MM increase their already huge net short positions more than expected) that could be triggered by further sowing delay and hence farmers shifting potentially to soybeans. This may also trigger a bear run in Soybeans breaking down through the October lows.

Sugar

The last week in the Sugar market was more about Government crisis in Brazil than the fundamentals. Due to the weakening of Brazilian real the Sugar prices slid down toward 15 cents levels. However at the end of the week sugar prices recovered above 16 cents again due to further rain forecasted in the cane growing regions of Brazil. The other supporting case for sugar is that the market reached the 15 cent ethanol parity zone in Brazil below which it’s more economic for mills to produce ethanol instead of sugar.This could eventually result in less sugar production as expected.

Technically there is some upside potential short term to retest the H&S neckline and the last low before the sell-off at 18 cents. There is a high probability of range trading for several weeks between 15-17 cents until the market start to sell again. The Brazilian ethanol parity will provide strong support @15 cents until the cane crush season is over.

Good Luck and remember to watch your risk and be consistent

Mr. Tech Man

DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading team’s view of the past and current economic and capital market environment. It is not an investment advice and should not be viewed that way at all, and the creators of this material cannot be held liable for any potential losses resulting from trading, where despite this disclaimer someone would consider this material as an investment advice. All rights reserved ©2016. 

Contact: landoftradingATgmailDOTcom, Blog: landoftrading.blogspot.com

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May 15, 2017 - Weekly Commodity (crude positions balanced, corn planting delay, sugar at ethanol parity)

Commodity markets were hesitant last week, looking for direction. After Macron’s win in French Elections the hot topic is gone and traders could again focus on the fundamentals of their markets. We had oil reports from API, EIA and IEA all of them supporting the crude oil bulls ahead of OPEC meeting on 25thMay. The WASDE report on the other hand gave some stable picture on the agricultural market, so again the weather become a key factor as stocks change little. And with sugar at ethanol parity sideways trading could be the case for some time. 

Oil traders were looking for any positive news sell off after previous week and awaited OPEC meeting. And the good news came when both API and EIA showed drop in US inventories around 5mil. barrels and minimal change in gasoline inventories. The key question is however how much will the next period of oil production cut (if agreed btw OPEC and non-OPEC producers) will affect supply amid rising US production. One promising sign is that crude oil stocks of OPEC members declined during the last few months (one of the reasons the agreement didn’t have significant impact on supply as members used this period to empty their stocks). However it will be a challenge to offset the rising US production which grew close to 10mil bpd and also Nigeria and Libya are rapidly increasing their production.

For grains there was a big week as the USDA released its crop estimates in WASDE report. While the previous week was more about grain buying, last week was more about consolidation. Wheat traders got a little too optimistic and on the tornado news from US Midwest probably more shorts were also covered than it was justified. The main thing we need to keep in mind that there is a lots of grain stocks and hence any rally without a long term and stable fundamental support will be short-lived. Therefore we are looking for weather shocks (as it was for example the tornados in Kansas) which are technically supported by price action to go for short term profits. Of course each of these rallies can be the start of a new bull market, so you can keep some chips on the table however beware no big trend will not start without fundamental support.

As the wheat sowing conditions improved in the US and the late April cold and snow didn’t cause as much damage as previously feared, the attention turned to corn and also soybeans. The reason is that the weather forecast for the eastern corn-belt turned wetter for the next two weeks and this is raising concerns over corn planting. While this could be viewed as bullish for corn on the other hand it could be bearish for soybean. The reason is that farmers may switch to a crop which can be slightly later planted and hence could result in more soybean seeding. Soybeans are already pressured by big South American harvest and poor US export figures and this would be another hit for the soybean complex (bean, meal, oil).

Prices of raw sugar in New York fell to one year low in May and are close to the level called ethanol parity. This is the price level below which Brazilian sugar mills consider sugar as less lucrative to produce than ethanol. In the recent month there was however an opposite shift, sugar mills turned to more expensive sugar. However as this was in process for some time and it’s unlikely there will be a quick change in production back to ethanol. This can keep sugar prices at depressed levels for extended period of time trading sideways with a floor for NY raw sugar around 15 cents and top around 16.50 cents.

Good Luck and remember to watch your risk and be consistent

Mr. Tech Man

DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading team’s view of the past and current economic and capital market environment. It is not an investment advice and should not be viewed that way at all, and the creators of this material cannot be held liable for any potential losses resulting from trading, where despite this disclaimer someone would consider this material as an investment advice. All rights reserved ©2016. 

Contact: landoftradingATgmailDOTcom, Blog: landoftrading.blogspot.com

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