Weekly Commodities Outlook: August 4th – August 8th

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Includes: DBC, GSG, OIL, RJA, USO, XLE
by: Matthew Bradbard

Commodity investors were probably just as happy to see July end as equity investors were to see the end of June. During the month, the CRB Commodities Index recorded a decline of 10.0%, which is the worst monthly decline since March 1980 (10.5%) and the second worst ever. The commodity markets have produced some sharp sell offs, and given all the attention that commodities have drawn over the last several months, it is not surprising to see a steep correction. Traders that have been riding the bull for the last 8 years may have given back some profits, but recent late comers to the commodity bull run may have gotten stung the worst. Anyone new to commodities needs to be prepared for the large swings, we would advise using a broker for help with entry and exit and to advise on risk management. Because of the leverage, large monetary swings can happen in a relatively short time frame. This does not mean the move higher is over for good, it simply means this correction can be quite deep before the trend reverses back higher once again.

Energies

After 2 weeks of oil moving lower, we managed to stay positive last week with September gaining $1.69 closing above the 100 day moving average. For now prices should be supported between $120/122 with the stochastic and MACD indicating an oversold condition, the downward momentum appears to be exhausted. It appears the psychology has shifted and instead of dips being bought rallies are being sold. Needless to say, on a bounce higher resistance comes in at $128.75 followed by $131.75. Prices may continue to move lower but not at such a feverish pace; a sharp decline in demand, growing gasoline stocks, rising inflation in Asia, and easing worries about Iran have all contributed. The immediate direction could be determined by what comes out of Iran and the status of their nuclear program. 

September heating oil shed nearly 12 cents last week as prices were down for the third week in a row.  We see no significant support until $3.32 and with the day to day swings we see no reason to trade short or long, 4 out of 5 days last week had greater than a 10 cent range. If there was any glimmer of hope last week in the energy complex, September RBOB was up 6 cents on the week to finish at $3.1044 just below the 100 day moving average. If last week’s low of $2.9833 holds up we may get a bounce of 10-20 cents. It appears for now the $3.00 level, albeit an emotional level, may act as good support. We continue to tell speculators and hedgers to monitor crude to help determine direction with the distillates.

After 3 weeks of vicious selling we may be forming an interim low in natural gas as September was able to trade positively last week, even if only increasing a modest 13 cents. We are advising clients to get long November futures with stops below last week’s low. In addition, the October 9.50/10.00 call spread looks attractive if bought between $1600-1700, Friday’s settlement was $1920. On a dollar advance in the futures within the next 2 weeks you should be able to liquidate for upwards of $3500. If trading the futures look to add to the position on the way up as well as trail a stop loss order.

Softs

An analyst at the Macquarie Bank, based in Sydney, Australia, said that he expects world cocoa demand to outpace production for two more years before the market finds a balance sometime in 2010. September cocoa shot up $183 to $2,996, the highest close in two weeks. On the high we ran into resistance at the 50% Fibonacci retracement level. If that gives way next resistance is at 3078 with support at 2946. Look for cocoa to trade off the dollar and with 3 central bank meetings expect a volatile week.

October sugar closed up 175 ticks at 14.13, the highest close in over four months, continuing to benefit from strong ethanol demand. Fund buying has been the major reason why this market has bounced in the last week. In addition, the market has found support from the supply and demand outlook for the 2008-2009 and 2009-2010 marketing years. There are expectations for a production deficit in the next couple of years, while the demand for sugar based ethanol is expected to remain strong. As we have continued to recommend for a longer term play sugar may be our favorite trade. We advise using the most recent spike to get out of October 08’ contracts and roll out to longer dated contracts. We currently are buying clients March 09’ futures and options.

November orange juice fell just over 9 cents to a new contract low of $1.0765, a victim of good growing conditions and a lack of hurricane problems in Florida. We think that eventually this will turn and move higher and these low prices may justify some funds to get positioned long, but until that happens the path of least resistance is down and it would be like catching a falling knife trying to pick a bottom. On even the hint of a hurricane, look for a bottom to be made. We are in constant contact with the floor on option strategies and will be looking for a long option play soon.

December cotton was sideways for most part of the week until sellers took over on Friday, as prices closed down 282 ticks lower on the week at 71.89. For the last month we have been basing out trading between 71 and 75 cents with traders battling for direction. We are currently positioned long with clients via futures and 10 cent call spreads in December. In the longer term the market depends entirely on the how the supply/demand situation takes shape, but unless we see bigger than expected yields or there is more demand destruction than anticipated, the current fundamentals seem to be supportive of higher prices.

September coffee was up 244 ticks on the week closing just above the 100 day moving average. If you took our long recommendation from last week continue to trail your stop and look for $1.42/1.44 this week. Even in the face of commodity liquidation and weakness in other sectors, coffee and the other softs with the exception of FCOJ look favorable. Support comes in this week at 137.00 on September.

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. Calculations of profit and loss have not factored in commissions and fees