Energy Complex and CRB Index
The energy complex has been in a wild trading affair, with the price of crude oil tanking some $18/barrel over the last 6 weeks. This is due to the idea that OPEC will not cut back on production, but more importantly that the U.S. is now on pace to have the highest stocks for this time of the year since 1930. This is one of few trending commodity markets and the odds of crude prices getting back above $100/barrel anytime soon is unlikely, barring any unforeseen political event.
We have been bearish most commodities for more than a year now, with the CRB collapsing and in contrast to the rising stock market. Our forecast for drought easing rains for the Midwest grain belt last spring, r rebound in South American crops and production a year ago and healthy world crops for sugar and coffee has pressured the CRB. Also, declining crude and gold prices have indeed come to fruition.
Europe is a huge importer of the U.S. heating oil contract, which is really a low sulphur diesel. They rely on this product, not just for home heating oil (they call it gasoil in Europe), but also, a great majority of the cars and trucks in Europe, run off it. It is certainly a lot more environmentally safe than typical U.S. gasoline and coal.
We began being friendly heating oil earlier this week on our ideas of a cold eastern December and perhaps even more so in January. We have begun to see heating oil (UHN) rally, while crude has faltered. The charts below show that heating oil/distillate stocks are tight, but crude production and supplies continue to rise. If we have a cold winter and the east coast gets more frequent snowstorms, expect heating oil to outperform gasoline.
Next week expect to see travel come to a halt the day before Thanksgiving with possibly heavy snow from Ohio to New England and parts of Pennsylvania (close call for New York City and New Jersey) to have some snow falling a cold early rain. Thursday promises to be a cold windy day in the big cities with temps barely out of the 20s in New England and 30s in the big cities.
Heating oil is outperforming crude as crude production continues to increase while heating oil (distillate diesel stocks) are drawn down by strong demand in Europe and no cold U.S. December weather
Source of two Charts above: FC Stone
A Look at the December Weather Pattern/Cycles and Sunspots
Quickly, we still feel that this winter may be one of the top 5 coldest of the last 20 years or so, and a lot will depend on snow cover, which tends to insulate the ground. Stronger radiational cooling (under clear night skies--where snow cover exists) can occur at night which allows the long wave radiation of the sun to back into space. We have had certain parts of the U.S. in a snow drought the last 2 winters and this has never happened before. Two years ago, we saw (for example), Vail Resorts stock (MTN) fall some 10-20%, in part due to the in ample snowfall at almost everyone of their ski resorts. This year, may be quite a contrast with much more improved U.S. ski conditions.
Until late last winter, Chicago, Illinois went something like 20 months or so without a snowfall greater than 6 inches. I cannot recall this ever happening before. I am big believer in "cycles" and history would suggest that snowfall will be above normal in the Midwest this winter.
This solar maximum is one of the weakest since the Maunder Minimum Days in the early 1800's. (. I do not expect the severe "mini ice age" type cold that was observed then, in part due to Global Warming (man's emissions and industrialization over the years). The upcoming solar activity the next few years, will probably not be as weak as back then. Nevertheless, global warming aside, the potential does exist for more frequent colder winters, particularly than the record warm ones, observed in the late 1990's and early 2000's
Weather and Other Commodities
Anyway, I still feel that natural gas and the ETF (UNG) has at least another 10% up this winter, given our colder forecast, while certain sectors of the economy see their sales either hindered or helped by the above normal winter snowfall and colder weather (more on this down the road).
Cocoa finally reached our objective of $2800 on global weather problems in Africa and Indonesia and strong seasonal demand ahead of Christmas and Valentine's Day. The ETF (NIB) is now up more than 20% since we began becoming bullish cocoa on the west African dryness, last summer. However, if we begin to see strong dry winds over Ivory Coast and Ghana later this winter (Harmattan), prices could top $3000 in 2014. This would be an added bonus to a market seeing more stellar demand. Dark chocolate is healthy for the mind, soul and spirit.
OJ prices collapsed this summer and fall on no Florida hurricanes, drought easing rains, and reached our earlier objective. Now the market is building in winter frost premium. Also, the Florida crop is going to be the lowest in the last 20 years, due to "citrus greening", so the market has rallied back smartly. Also, cash Florida OJ prices have been as high as 1.79 lb. So the cash-futures market was too much out of a whack two months ago.
I cannot comment on grains and coffee right now due to contract obligations with clients, but weather will be key in South American in coming weeks and we are watching a developing drought in China for wheat, something that will be more important come spring.