Commodities Outlook: Don’t Overthink Investment Decisions

At this point I’m not sure whether the global recovery has begun or this is just a head fake, who will win the tug of war between inflation and deflation, if Treasuries are the next bubble, if the buying from China is sustainable or when interest rates will be increased. All good questions and heated debates but what really matters is what is working, being agile and spotting opportunities where the risk/reward dynamic makes sense both long & short in commodities is what seems to be working.

Energies

The DOE reported crude oil supplies were down 3.8 million barrels last week, supplies of gasoline were up 3.9 million barrels while heating oil supplies were down 100,000 barrels. August crude oil finished lower by $1.04 last week. On the weekly chart a bearish engulfing candle formed, if confirmed expect more downside. Continue to use a trade above $72 or below $67 to determine the next leg. Our clients will most likely be buyers between $62 and $65. August RBOB was lower by just over 4 ½ cents as prices are 22 cents off their highs from just 2 weeks ago. Use 1.8150/1.8300 as support with resistance coming in between 1.92/1.9350. If crude falters expect a trade down to 1.70/1.75; the 50 day moving average comes in at 1.7585. August heating oil retreated just over 4 ½ cents as well. Resistance is seen at 1.85 support at 1.75, the 50 day moving average in heating oil is at 1.6470. Crude and both product were down the last 2 weeks, what will this week bring?

The DOE reported underground supplies of natural gas were up 94 billion cubic feet last week to 2.020 trillion cubic feet. Supplies are now up 31% from a year ago. August natural gas was down 8 cents but did manage to close just over the 50 day moving average. Support is seen at 3.85 with resistance at 4.15 followed by the 100 day moving average at 4.27. We continue to accumulate October $5/6 call spreads for clients.

Livestock

August live cattle traded higher by 10 ticks last week making their way to positive ground now three weeks running. We maintain that an interim bottom was made three weeks ago and since prices have moved 4% off their lows. We are still holding the long August live cattle/short October live cattle spread for clients expecting the spread to come in. Support at 81.60/81.80 with resistance at 82.90 followed by 83.50. August feeder cattle were higher by 72 ticks last week and in three weeks we’ve gone from oversold to overbought. Resistance is seen at 99.90 with support between 97.80/98.00.

The USDA reported there were 66.08 million hogs and pigs in the US on June 1st, down 2.0% from a year ago, roughly as expected. 5.97 million lean hogs were kept for breeding, down 2.7% from a year ago and less than expected. August lean hogs fell 3.80 last week or 6% to a new contract low. Currently some clients are short August futures and long (2) August 62 calls. There is little to no support on the daily chart, resistance comes in at 59.50.

Softs

October sugar ended up 127 ticks or 8% higher on the week, trading to a new contract high; the highest levels since July 06’. Very few commodity traders or investors for that matter follow sugar, but meanwhile prices in the last 3 months have quietly gained 35%. Resistance is seen at last week’s high at 17.75 with support at 16.90 where the breakout occurred. We liquidated all client longs last week taking money off the table and will be adding fresh longs in March 10’ on a setback.

September cocoa was higher by $43 last week but it was a wild week with a trading range of $168 H/L. Read our blogs from last week to see a futures trade that netted clients $600/per overnight. Until a decision on direction is made in the US dollar expect volatility. Resistance comes in at 2570 followed by 2630 with support at 2470. Cocoa may be a good back spread candidate as we may look to sell October and buy December for clients.

October cotton was higher by 59 ticks last week and after three failed attempts to get through the 100 day moving average on the downside prices may well rally. A smaller crop is a foregone conclusion, but regardless confirmation from the USDA Tuesday may be a market mover. Support comes in at the 100 day moving average at 53.15 with resistance at the 50 day moving average at 57.45. The daily chart is starting to look better but the weekly chart is still ugly. We have no exposure with clients currently.

September orange juice was lower by 3.90 cents back to levels not seen since mid-March. Prices are awfully oversold as they have moved lower 19 out of the last 21 sessions. Although it has been a one way trade we are still advising clients to buy November $1 calls. We initially paid $540 per, as of Fridays close their value was $322.50 each, buy more.

September coffee gave up 50 ticks last week closing lower for the last four weeks taking price 18% off their recent highs. Support comes in at last week’s low at 117.55 with resistance at 121.50 followed by the 100 day moving average at 123.10. The December 130/150 call spreads are on our radar but we’ve yet to commit any client funds, Friday settlement was approximately $1450/per.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions.

Comments

[Henry Buttal:]

Great assessment, Matt. I like almost all the analysis you have done.

My one disagreement is on Nat Gas. While I think your calls are in the realm of possibility, my belief is that the macro NG and LNG factors will continue to overwhelm demand.

With new gas coming on line near feeders on a quarterly basis, and Exxon threatening to bring in Middle East LNG, I think we haven't yet seen the lows.

Jun 29 09:27 PM