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Elgrey
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Expat finance professional living and working in Hong Kong.
  • El Nino Early Impact

    There is much talk about El Nino lately and its dismal impact on commodities. In this post I will show the impact of El Nino on major commodities during early periods of El Nino (May, June, July, and August) during 1982, 1986, 1997, 2009 - years when last El Ninos originated.

    Before we proceed further let us remember of following focal moments:

    1) Only historical data of contracts with expirations around September is considered. So in October situation could change and October is out of scope.

    2) The goal is to check whether early May price was higher or lower than the price at the end of summer or at expiration date whichever came first.

    3) There is always place for expiration bias - last days of any contract could be very volatile.

    4) There is no intention to see how price behaved in between, so allow for price fluctuations up and down along the way.

    5) Sample of 4 is not right in terms of statistics so one can't expect deep and complex answers.

    6) Past performance is not... well, you know the rest.

    OK, let's start with Agriculture:

    Wheat, corn, soyoil declined all four times.

    Soybeans grew only 1 time.

    Soymeal grew 2 times, declined 1, 1 time price was neutral (meaning that price difference was truly negligible)

    This is a surprising result. It could be caused by overall fear and over exaggeration. It should be also noted that soybeans and soymeal are very closely correlated (soyoil is not) therefore the picture is rather murky for them. Possibly, there is not much of a negative trend as we can see with other Ags but trend is rather neutral.

    Moving to Softs:

    Cocoa and orange juice declined only one time each.

    Coffee - one time it grew, one time it declined, 2 times prices were neutral.

    Cotton - here case is trickier - closest contract is for October delivery and it is not an active contract, so I looked at December one. Overall prices were bearish.

    Let's look at Energy group:

    Crude oil grew 3 times, no data for 1982.

    Heating oil grew 3 times and declined once.

    Gasoline - I only have data for 2009 and there was growth.

    NatGas was even, 1 growth and 1 decline.

    Last group is Metals:

    Gold and silver were even. And I do not think they give a fly about El Nino.

    Copper grew only one time out of 4.

    Conclusion time:

    A clear winner is petroleum group but I think it is more due to seasonal tendency to appreciate in the end of summer after prices decline during May and bottom in June-July and then grow in August when smart buyers buy stocks for winter season.

    Next, winners are cocoa and orange juice and no wonder as Florida and Ivory Coast are among the first who take hit from El Nino. Also, it is seasonal time for cocoa to appreciate in August-September when stocks are smallest before Ivorian harvest begins.

    So, probably the best conclusion is to trim purchases now for most of agricultural commodities and wait. On contrary - go short if you see El Nino price hysteria even before El Nino actually started.

    May 09 2:44 AM | Link | Comment!
  • My May-14 (And A Bit Further) Strategy

    There was no article on April for one reason - I reviewed my approach towards investing business and left shorter-term trading in favor of longer-term strategies. My trades were seldom longer than a month before. Now I take positions for 2-3 months. Therefore writing an article every month is not relevant anymore. Instead I will be doing that on uneven periods basis.

    Soybeans - at the moment I hold short position consisting of OTM August calls. I still expect soybeans to fall bearing in mind (a) extreme crop in South America, (b) imported beans coming to the US, (c) extremely long position of speculators, (d) looming El Nino which brings wetter conditions to the US in summer. On the resistance side there is shortage of beans in the US warehouses but this is no longer news and was factored into the price already.

    Cotton - I held strangle position but I do not rule out to close it as CT market keeps on crawling up. But this market is unpredictable and is highly dependent on several large players who can turn it upside down within hours.

    Coffee - fears of loss of crop weakened after Brazil received needed precipitation. I am under impression that the price gone up too much and increased my short position waiting for the pullback to 170-180.

    Cocoa - I re-instated strangle position soon after major grind reports were issued. Quarter-on-quarter grind data has weakened a bit in EU and Asia but added in the US. Same period last year grinds are stronger all over the World. Midcrop is promising but El Nino is a potential threat for Ivory Coast. Technically, bulls are very weak. Bottomline - market is under pressure of different factors and I want to hold a non-directional position until early July when new grind reports come live.

    Heating Oil - there is not much to heat in summer and I short HO.

    Gasoline - I was long RBOB back in March. I transformed my position into a non-directional strangle in April. In May I am shorting RBOB. These are seasonal trends and technical factors that influence my decision.

    Natural Gas - I was shorting it but I was caught unprepared in mid-April when prices spiked after pitiful weekly injections. Now situation calmed and I hope that injections will normalize and we see NG slowly giving up its positions. I am shorting NG.

    I suggest to stay away from Wheat and Corn as these two are at gambling state at the moment - July will tells us if corn pollination went well and at that time we will have more info about wheat crop. Plus, important factor is situation in Ukraine. If fascist from Kremlin continues to escalate the conflict then there could be less supply of wheat and corn, especially wheat. I am interested in buying copper but I do not want to buy futures and unfortunately options market is very thin for this commodity so I am still thinking.

    May 05 11:48 PM | Link | Comment!
  • My March-14 Strategy Review

    Time to review March predictions.

    Cocoa - as predicted it stuck in a range. My options strangle expires tomorrow and I am glad to collect premium in full. Furthermore I will wait for grind reports in the middle of April and re-evaluate situation.

    Cotton - cotton showed a bit of advance but generally speaking it is in the same shoes as cocoa. So I was correct here too.

    Soybeans - soybeans did not fall, unfortunately. However I still believe that price softening is only a matter of time and patience.

    Gasoline was at around 2.90 levels during the months. Actually I expected it to be a bit higher but RBOB is tightly linked with WTI and there was not much growth potential for WTI in March.

    Coffee - my bet to short coffee was correct. Prices pulled back by nearly 15% from maximums.

    Natural Gas - well… I was right but I am not pleased here. I have my shorts but I continue to hesitate. Last couple of weeks rig count fell drastically, there are new export licenses issued plus you have unrest in Ukraine. It is too far to affect prices in the US but my senses keep telling me that NG market status quo is about to change.

    It was rather calm month for me in terms of trading. As I gain new investment experience with every trade, my approach to investing also changes. I notice that I move away from trading futures to writing options. This is way safer and less time-consuming business that lets you sleep at night and make money. Lately, I read a beautiful book on options selling called The Complete Guide To Options Selling by James Cordier & Michael Gross and I highly recommend it to everyone involved in commodity investment and speculation. This book together with Hot Commodities by Jim Rogers and Secrets of the COT Report by Larry Williams must be a part of Investment Hall of Fame if one will exist one day.

    Alright, March is over, moving into April.

    Apr 02 10:57 PM | Link | Comment!
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