Bermuda High, Big Heat And Floods: More Fireworks For Some Commodities?

Includes: CORN, GLD, UNG
by: James Roemer

U.S. Weather Extremes Short-Lived, while Most Global Weather patterns suggest good news for Crops

Floods in the east, wildfires of historical proportion in Arizona, record heat in California. So, is the world's weather going haywire again? For the most part, other than some scattered areas of dryness in Russia's wheat regions, most of the world's weather will be beneficial for crops and potentially bearish at least several agricultural commodities.

Wheat traders may begin to watch the weather in the Volga Valley area of Russia more closely, where 30% of the winter and 60% of the spring wheat crops could be threatened.

The big news currently is of course in the crude oil market, having broken through resistance above $99 on worries over the Egypt situation. While some big eastern U.S. heat has helped natural gas rally a bit, I do not see extreme July heat lasting for Midwest grain areas, nor most natural gas regions. Corn, which has taken it on the chin given the bearish USDA report and our forecast months ago of drought easing Midwest rains and a normal to cool summer, still has another 10% down in coming weeks. We remain bearish the ETF (NYSEARCA:CORN).

In gold, I am very happy with the sell-off in prices in recent months, and for the most part (NYSEARCA:GLD) has reached my objective. While I cannot say global fundamentals are bullish gold longer term, given the technical picture, slow down in the China economy and many other reasons I discussed for more than a year, the odds of a major long term rally in prices, is probably unlikely.

How about natural gas? Will this big Bermuda High pressure system last in the east? Probably not.

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While eastern heat may poke its head in the east off and on this summer, most key natural gas regions will not see heat last. While power demand has been running 2 BCF/better than most estimates by firms, we are slowly eating away at the year on year deficit in natural gas stocks, brought on by the cold late winter and early spring. This is not really a medium term bullish aspect to (NYSEARCA:UNG) natural gas prices.

It is possible today's EIA may not be as bearish as the recent ones, as lower nuclear and hydro output out west (record heat) and some recent short term eastern heat keep natural gas prices from falling too far.

However, any sustained, long summer rally on U.S. heat, is probably not in the cards. Hence, having short call option spreads, or long put option spreads in natural gas futures, is a smart play on any short term rally in prices.

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SOURCE OF MAPS ONLY -- CWG (ahead of today's EIA)

The maps below suggest to me a normal to cool mid-July outlook, especially for the Midwest. This will keep natural gas prices from rallying very far. While a real cooler than normal forecast is not in the cards for the eastern U.S., once the Bermuda High moves west and weakens later next week, flooding issues will begin to abate, hopefully for the second half of July.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.