Wednesday's Commodity News To Trade On

Includes: CCJ, EOG, LNG, URG, URZ
by: Matthew Smith

Markets in the United States rallied to close yesterday, usually a bullish indicator on a down day, however, the rally had more to do with Europe and less to do with fundamentals. And there is that dreaded topic (Europe) which keeps coming up, even when you think that the issue has been solved it miraculously hasn't. It is what we feared at the start of the week and what we shall continue to fear going forward, that is, until the rest of the EU hands over the cash to Greece to make their debt payments.

Europeans love to talk, like to make deals which benefit others less and absolutely abhor taking a stand and doing what is right economically. In case you did not hear, the Europeans canceled an important meeting yesterday making this a situation that all investors will have to pay careful attention to.

Asian shares rallied midway through trading as China said it will support Europe by investing in their bailout funds, not new news but reiterating past statements. The Nikkei 225 was up 2.3%, the Hang Seng up 2.14% and Shanghai Composite up 0.94%. New Zealand was actually down and Australia marginally up.


Oil prices rose in response to fears regarding the Middle East. It appears Iran is going to continue with their terrorism outside their borders as there were more car bombings yesterday. Israel has publicly denounced these acts, as have other nations. It is clear Iran is backing itself into a corner and this cannot be good for either world peace (due to a higher probability of war) or the world's economies as higher energy prices will crimp economic growth.

If oil is going to rise on Middle East concerns, we have previously stated we want to own Bakken producers, one name to throw out there is EOG Resources (NYSE:EOG), due to the fact that Bakken area producers as a whole should see margins increase faster and far more meaningful than others due to the current low prices from pipeline constraints. The fact that the oil is here on American soil would be an added plus.

Natural Gas

The natural gas glut in the United States continues to grow, with the United State Department of Energy announcing their inventory numbers yesterday and reporting stockpiles are 30%+ higher than historical levels for this point of the year. Part of this can be blamed on warmer weather, another part on the weak economy which has allowed more gas to pile up with manufacturing capacity down for some time now and lastly, and most importantly, is the fact that more natural gas is being produced via the shale plays.

For the time being prices are holding in there, but evidence is mounting that prices will move down further before they move up in any significant way. Until a major catalyst for the commodity surfaces companies with significant exposure to natural gas will most likely languish. Investors can take solace in the fact that with the arbitrage potential of buying natural gas in the North American market and selling it in either the Japanese or European markets so high, higher gas prices in the future are not that far off. Keep in mind that oil was at approximately $10/barrel at the turn of the century before storming to $150/barrel.

Cheniere Energy, Inc. (NYSEMKT:LNG) has been one way investors have been getting exposure to this potential arbitrage play, and yesterday it sold off towards the close to miss a new 52-week high. The stock has been strong since their deal with BG Group to deliver gas to the UK once their terminal is complete.


The uranium spot price was unchanged last week according to UXC, one of the two leading sources for this type of information. Investors should watch the spot price as the NRC has indicated that the 'Nuclear Renaissance' will grace the shores of the US. The best leverage to this play for US investors is Uranerz Energy (NYSEMKT:URZ), Ur-Energy (NYSEMKT:URG) and for more conservative investors there is Cameco (NYSE:CCJ).

We like the first two due to their ramping up production just as the Russians will be yanking production from market and Cameco because it is the top uranium company around. Do be careful though, because Cameco will be losing the right to buy discounted uranium from the Russians which they then resell at much higher prices after down-blending it once the HEU agreement ends. Hopefully, Cigar Lake can come online without a hitch, but last time that was not the case.

Precious Metals

Gold is up $4/ounce from where it closed in New York trading yesterday with silver up $0.04. It has been a popular trade, but with the US markets getting stronger and growth stocks leading the way, we see the momentum traders moving out of precious metals and into stocks such as Apple (NASDAQ:AAPL), Chipotle (NYSE:CMG) and some of the other big caps making fresh highs lately.

Precious metals markets need either economic calamity or inflationary pressures to rise right now and with all the bad news out of Europe and good news from the rest of the world it seems a wash right now. Next move here is to own silver as it is an industrial metal and thus will benefit from the rest of the world's growth and to own gold in Euro terms.

Cattle Prices

Bloomberg has an article out today discussing cattle futures trading at 3 week highs. It appears that Wal-Mart's (NYSE:WMT) entry to the higher quality beef categories, which initially pushed up beef prices to highs at the end of last year, has kept demand strong. Having to fill the supply chain and shelves has helped, but one has to imagine that currently Wal-Mart is not stealing customers from grocery stores, but rather selling better meat to consumers who usually bought whatever was on the shelves already. This should be interesting to watch over the following months to see what trend develops.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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