Tag Archives: energy markets

COT Sell Signal in Unleaded Futures

We discussed the growing imbalance in the unleaded gasoline market last week here at Equities.com. Our primary focus was based on two points. First, the fundamentals in the petroleum  sector are bearish. Secondly, the commercial traders as a group have now turned negative on their own product at these prices. These two factors have grown in strength over the last week and Monday’s weakness finally triggered an official COT Sell signal.

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Picking a Bottom in Natural Gas

The natural gas futures market was trading above $5 per mm/btu one year ago. This was boosted in large part by one of the coldest winters on record. Frankly, the news in natural gas since then has been nothing but bad as a mild summer limited cooling demands and the still temperate winter has brought more of the same. Furthermore, the sharp drop in oil prices along with a growing supply glut have also combined to send prices to multi-year lows. Several bearish factors have beaten the market down 50% from last year’s high. In fact, the gravity of the market has finally forced it to fall below the technical support on the chart below that had built up since the market last bottomed in 2012. However, all is not lost.

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Weekly Commodity Strategy Review 12/05/2014

This week started off with our Chicago wheat futures analysis for TraderPlanet in which we discussed looking for a selling opportunity near the 50% retracement level at $6.05 just through the resistance at $5.80. Tuesday, the market traded to $6.10 before selling off down to $5.70. Tuesday’s reversal also triggered the entry for our COT Signals Mechanical system.

Trading Opportunity in Wheat

The wheat trade came straight from our nightly discretionary COT Signals which has a 30-Day Free Trial.

Tuesday we discussed the growing glut in the crude oil futures market because we noticed how actively commercial long hedgers are locking in future supplies. We still see this as a trading opportunity.

Read – Momentary Crude Oil bottom Formed.

Finally, our main piece focused on the Diminishing Effects of Global Quantitative Easing. This is where we left off in Hand Quantitative Easing to Germany. We did not expect Japan and now, China to come in and throw gasoline on the fire the way they have but the fact is, we now have three major regions kicking in QE programs since late September compared to the US enacting three programs over the course of four years.

Commercial Traders Pressure RBOB Unleaded Futures

rbob unleaded gas commercial trader sell signal
COT Signals commercial trader sell signal for RBOB unleaded gasoline.

We published this short sale in RBOB unleaded gasoline Monday night for COT Signals subscribers and followed it up with commentary for Equities.com on Tuesday morning. You can read, “Are Rising Gas Prices a Trading Opportunity?” at Equities.com. You can see the effects of commercial traders buying and selling RBOB unleaded gas and the summertime peak gas price on the chart we posted at COT Signals.

This trading setup is a classic Commitment of Traders Sell signal and shows why we use the CFTC Commitment of Trader reports as the primary basis for screening our trading opportunities. Follow the links to see how we do it or better yet, call us and ask us how.


Overheated Heating Oil Market

I was fortunate enough to be interviewed for a Wall Street Journal heating oil story last week. The primary question was, “How high can prices soar?”  Supplies have tightened up considerably during Mother Nature’s onslaught and another bout of cold weather is hitting us, pushing prices higher yet again. Short-term demand related issues like the ones we’re experiencing now due to the weather are never a reason to jump into a market. My less than sensational outlook on current prices pushed me to the closing section of the article. This week, I’ll expand on the topic by looking at the diesel and heating oil markets and formulating a trading plan for the current setup.

Continue reading Overheated Heating Oil Market

Energy in the U.S. and China

The global energy market recently passed two milestones. First, China passed the US as the number one importer of crude oil in the world in September. Second, the US passed Saudi Arabia as the largest fossil fuel producer in the world last week. Neither of these incidents came as a surprise. Both trends have been progressing roughly as expected. However, now that we’ve reached critical mass in forcing the evolution of the global energy markets, it’s time to take a look at some of the longer-term changes that will arise as a result of these events.

China was destined to become the number one energy importer due to its population growth, economic growth and geography. While we are concerned about whether the effects of the government shutdown may trim two percentage points off of our third quarter GDP of less than 2%, the Chinese have been chugging along at GDP near 8% and haven’t seen their Gross Domestic Product drop below 6% since 1991. The economic boom in China is still in full swing. Speculative phases like warehouse space or production facilities may have been overbuilt just like their housing markets but the infrastructure buildup remains in full force. The governmentally sponsored projects continue to redefine the Chinese way of life through the addition of roads, bridges, trains and power plants.

The growth in China comes as we isolate ourselves here in North America. China is still our second largest trade partner. Most of our trade with them is at the cheap manufacturing level. Meanwhile our number one trade partner has become Canada. Our trade with Canada is much nearer to equal than our Chinese trading relationship. According to the July, 2013 US Census, our trade with Canada occurs at a 7% deficit while we import 280% more goods from China than we export to them. Our growing isolationism can be confirmed since Mexico is our third largest trade partner.

This brings us back to Saudi Arabia and energy production. There are two main reasons for our declining ties to Saudi oil. First of all, American vehicles have become more fuel-efficient. The University of Michigan tracks average fuel efficiency of all new cars sold on a monthly basis. There has been a 20% increase in the fuel efficiency since 2007. Furthermore, the, “Cash for Clunkers” program took approximately 700,000 inefficient vehicles off the market further adding to the overall efficiency of our current fleet. Secondly, fracking and tar sands production have vaulted the US into the leading petro-chemical producer in the world. Saudi Arabia and Russia still produce more oil but our total distillate output has surpassed them.

These major trends will continue for many years into the future. The US is expected to become fully energy independent by 2020. Meanwhile, China will become increasingly dependent on world supplies. We used the following example in describing the growth of the Chinese hog market a few years ago and the comparison still fits. The Chinese story is all about developing a new middle class and putting newly disposable income into new hands. The first new expenses are better food, clothing and shelter. Moving up the ladder, the new middle class expands into luxury goods like cars and vacation travel. The average Chinese person uses about 3 barrels of crude oil per year. The average US citizen use more than 21 barrels per year. Clearly, this gap has room to close as the new Chinese middle class continues to westernize.

The growing demands of the Chinese middle class will change the way China conducts itself in global politics. Energy analysts at Wood McKenzie expect China to claim as much as 70% of the global oil imports by 2020. Therefore, at the same time the US becomes energy self-sufficient, China will become even more energy dependent. This will place them in a different role regarding global peace, especially in the Middle East, as unrest there will affect their country more than anyone else. This should cause China to continue to grow their military, especially their naval power and should have the unintended benefit of allowing us to scale back our military investments. Hopefully, the politicians here won’t spin this into another cold war as an excuse to renew domestic military investment

China’s growing need to purchase oil on the global market will force their hand in freeing up their currency to float.  Trade partners will not do business in a currency that can be manipulated at the drop of a hat. Opening their markets and allowing their currency to float will encourage investment flows in both directions. Big picture analysis suggests that this could be the catalyst towards pushing China into the dominant super power role. They have the demographics and capital necessary to generate the need for currency reserves and open markets. The last thing to develop will be the political ties towards the Middle East oil producers and finally, armed services to guarantee their trade routes remain open.

Sugar Based Ethanol Boost

Many markets, both commodities and equities declined substantially during the month of May. Two weeks ago, we mentioned that we were nearing fundamental value areas in certain markets. This week, we’ll make the case for a bottoming sugar market as well as its effect on the coming corn crop’s prices.

First, lets review the global ethanol market. The ethanol here in the U.S. is made from corn and the finished product is, “anhydrous ethanol.” Anhydrous ethanol is blended with gasoline. The end result is E85 at the pump. E85 is the maximum ethanol blend allowed. It consists of 85% ethanol and 15% gasoline. The typical ethanol blend here in the U.S. is up to 10% ethanol and 90% standard gasoline. The mixture of E15, which will boost ethanol content to 15% was just approved in 2010 for car models 2007 and newer.

The primary source of ethanol on the open market is made from sugar cane. Brazil is the world’s largest sugar producer and is responsible for about one third of global production. Brazil’s sugar cane derived ethanol is a much more efficient process both in terms of the finished ethanol and product cycle regeneration. Brazilian ethanol production also produces, “hydrous” ethanol. Hydrous ethanol is used in 100% ethanol fueled vehicles, which we see as E100 as well as any Flex-Fueled vehicle.

Ethanol production from sugar cane is much more efficient than production from corn. Ethanol production from sugar produces about 5,166 liters per acre while production from an acre of corn yields only 1,894 liters. The self-sufficient energy mandate that has been the guiding force here in the U.S. for the last 10 years or so has allocated nearly 35% of this year’s corn crop to the production of ethanol. So, why are we basing our future on such an unfeasible model? The answer lies in the government subsidies going to the farm and energy industries. This year marks the end of the $.45 per gallon ethanol subsidy as well as the end of the $.54 tariff we impose on ethanol imports. This combination fostered the proliferation of business entities whose primary profit center was the exploitation of a protected and subsidized market to the tune of $.99 per gallon.

Both of these policies expired at the end of 2012. The price swing of nearly $1 per gallon made U.S. subsidized ethanol inventories a bargain on the open market. Ironically, this led to Brazil being the number one importer of corn based, U.S. ethanol on the global market. Our subsidized production paid for by the taxpayers was sold at the discounted price to Brazil by the blending stations earning the tax credits.  It is important to note that further corn subsidies also exist here to the tune of $3.5 billion to corn farmers in the U.S. and $0 subsidies to U.S. sugar cane growers.

The loss of the ethanol subsidy combined with the remaining direct government subsidies for growing corn should shift total global production of ethanol from corn to sugar. The interesting point will be how many corn based ethanol plants here in the U.S. go the way of Solyndra as the poster children of a misdirected governmentally mandated and subsidized pipe dream. Meanwhile, excess sugar production over the current growing season should be digested, as it is shipped world wide for foodstuffs while Brazil works through their own domestic surplus. This shift will allow the largest corn crop ever planted to be diverted to traditional uses. Furthermore, we can track the huge imbalance in the sugar market between commercial trader and the small speculators through the Commitment of Traders Report. The net effect will be falling corn prices, perhaps under $5 per bushel and a sugar price base around $.185 per pound.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Corn to Rally using Crude Oil as Analog

The corn futures market was facing unprecedented demand heading into this year’s planting season. The tightest supplies since 1937 and the governmentally mandated ethanol program’s consumption of 40% of this year’s crop put extra pressure on Mother Nature to produce a record crop. We all know that this spring broke the 100-year-old record for rainfall. When we combined this with cold temperatures, flooding along the Mississippi and a southwestern drought, it became obvious that corn acreage would suffer as farmers would be forced to wait for the fields to dry and planted more beans and less corn.

Last week, the USDA issued its acreage report and the markets fell out of bed. Corn acreage planted was reported up 5% from last year at 92.3 million acres. This is the largest planted area since 1944 and second only to 2007. The market sold off nearly 12% in the next two trading sessions as traders, farmers and end line users scratched corn their heads in wonder. Message boards were lit up as people wondered how there could possibly be an increase in acreage when the main question was, “How many acres have been lost due to flood damage and the wettest spring on record?”

The USDA’s accounting methods and history of revision has been brought to the forefront of this discussion. Is the USDA turning into the Federal Reserve System and constructing its data to fit its needs? The report did create a flush in the market and ease food and ethanol prices instantaneously. The flush also washed out most trading and hedge funds on the long side of the market.

The reported acreage versus the expected acreage was one of the biggest surprises on record. One industry analyst, Rich Feltes actually found these numbers to closely match his own forecasts while Carl Zulauf from Ohio State questioned the validity of the USDA’s estimates and points to next week’s USDA Supply and Demand Report for more accurate data. Finally, some of the largest Ohio farmers don’t see any way that the acreage reports can’t be revised sharply lower.

The real issue here is, how do we trade it. The analog I’d like to pass on is crude oil’s decline to $90 per barrel on the news of Saudi Arabia’s production increase combined with waning demand in the face of a recessionary Europe. Crude oil sold off hard on a news event down to what was previously a resistance level for that market – $90 per barrel. Corn sold off on a news event down to a level that was once also considered resistance – $5.50 to $6.00 per bushel. The dynamic in crude oil has changed so that what was once resistance – $90 per barrel, is now support. I believe the same is true in the corn market. I expect the market to bounce around here as traders square their positions but ultimately, I believe the acreage numbers will decline and the acreage that has been planted will not provide the 155 bushel per acre yield expected due to delayed planting.

Ultimately, the tight corn stocks coming into this year combined with the ethanol market and growing global demand will place added stress on this year’s crop, which I believe will be smaller than the most recent USDA predictions. Therefore, this sell off in the corn market should be bought in anticipation of higher prices at harvest.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Food or, Fuel?

Corn is facing unprecedented demand on all fronts. The USDA
reported that prospective corn planting for 2011 is expected to be 5% higher
than last year. That would make this the second largest crop planted since
1944. The 92.5 million acres is second only to 2007’s record of 93.5 million
acres. In spite of the growing acreage in corn and higher yields driven by
greater technology, corn stocks are still down 10% from this time last year. In
fact, the corn on hand versus this year’s expected demand, (stocks to usage
ratio), stands at 5%. This is the lowest number since 1937. There are currently
6.5 billion bushels of corn in storage versus global demand of 123.5 billion

The government’s push towards ethanol was actually initiated
by Carter during the oil crisis of the 70’s. It was left dormant until the post
9/11 energy independence push. Corn was trading at $2.25 per bushel in 2001.
Cheap, clean burning corn made it a political win/win for energy independence
and the global warming, green energy crowd. This led to government mandates and
subsidies to increase ethanol production every year through 2015. This year, up
to 40% of the corn crop, at a price above $6.50 per bushel, will be allocated
to ethanol production. If we multiply the intended planting acreage times an
average yield of 155 bushels per acre, we can see that the cost of the corn
input of ethanol production will be more than $37 billion dollars.

The U.S. also exports more than 60% of the corn we produce. Our
exports have continued to climb even as the price of corn has nearly doubled in
the last year alone. Meat consumption has just begun to grow in Asian countries
as they’ve begun to prosper and develop their own middle class. This will not
only continue, it will accelerate. Global meat consumption is still only 20% of
the U.S. average. The demand for feed grains continues to outpace production by
1-4% per year. China is determined to have a self -sustaining hog industry by
2013. These factors help explain the continual decline in ending stocks in the
face of growing harvests.

The demands on the corn market from ethanol and food
production leave absolutely no room for weather related issues. This year’s
crop is crucial to restoring our reserves. Based on the current ethanol
policies, it would have to rally another $.50 cents per gallon just to catch up
with the current price of gasoline. Corn would have to reach $8.82 per bushel
for gas and ethanol to reach equilibrium at $3.15 per gallon. Ethanol/ gasoline
blenders also receive a federal credit of $1.30 per bushel. This pushes the break-even
corn price to $10.12 per bushel for ethanol producers.

The price of corn hit an all time high of $7.79 in June of
2008. Remember, this followed the largest crop ever harvested in 2007. We
already know that global gasoline demand will increase, as fuel must be
exported to Japan. We also know that Japan’s imports of all foods will be
higher than ever. China is doing everything they can to put the brakes on their
economy but it won’t derail the growing appetites of their people. Finally, the
continued decline of the U.S. Dollar will serve as double coupon day for global
shoppers as we remain the world’s supermarket.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Setting of the Rising Sun

Japan’s economic crisis has been slowly trudging down a dead end road since their economy collapsed in the early 90’s. Their insistence on maintaining public programs as status quo has been financed by selling government debt to domestic corporations and private citizens. This has cannibalized both private citizen and corporate savings. This tacit deal has allowed Japan to artificially keep interest rates low based on their captive pool of treasury purchasers. This process of spending more than the government is collecting on an annual basis, combined with sales of treasuries to finance the difference has left them ill prepared to handle this disaster at a time of global economic uncertainty.

While some economists are taking the stance that Japan’s rebuilding is just what they need to get their economy back on the right track, I think it’s quite possible that their economy may be too far gone to save. Furthermore, the scale of their disaster will place a huge burden on developed nations who will be called upon to assist them in the process. Many of these nations, including the United States, have no room for error in their own economic policies. The end result could be a localized natural disaster that triggers a global recession.

Professor Ken Rogoff of Harvard School of Public Policy Research wrote a book in 2009 describing the historical relationship between banking crises and sovereign default. His research states that the average historical tipping point is approximately 4.2 times debt to revenue. Once a country is spending 4.2 times more than it is collecting, default is on its way. John Hayman and Lawrence McDonald, cite individually, that Japan’s expenses outpace revenues by more than 20 times annually. Their debt to GDP ratio, their total assets and earnings minus total debts and liabilities, is around 200%. The third largest economy in the world spends 20 times more per year than it earns and owes twice as much as it’s worth. One note of caution, the United States ranks third in the debt to revenue ratio, behind Japan and Ireland and we owe as much as we’re worth. We will be double negative in 2011 if we don’t change substantially.

Debt will surely rise even further as Japan borrows to rebuild. Standard and Poor’s downgraded Japan’s credit rating to AA in January, prior to the disaster. Japan will have to move to the open market to finance their reconstruction. Their domestic lenders will be busy financing their own rebuilding processes. This will force Japan to pay open market rates for most of their new debt. Open market rates will be AT LEAST 100 basis points and most likely, closer to 200 basis points higher.  The interest payments would total more than 25% of the country’s revenue. Japanese credit default swaps will sky rocket.

The strain of rebuilding Japan will affect us whether we lend financial assistance or not (which we will). The demand of replacing 30% of Japan’s energy source will show up in the price of fossil fuels. Japan currently consumes 5.2% of the world’s oil supply. Replacement of lost energy will add another 1.3 million barrels per day plus the added oil necessary for the reconstruction. Their added demands equal Italy’s total consumption. Add this to the global uncertainty of North African fuel supplies and the added fuel that goes into fighting a third global conflict and we have questionable supplies coupled with increasing demand.

Rising oil prices couldn’t come at a worse time for our economy, which had been gaining some traction. GaveKal research published a chart in which rapidly rising oil prices are overlaid with economies growing more than 2% above their leading indicators, which we are. This has happened 5 times in the last 70 years. Four of the five led directly to recession. The fifth was in 2005 and was ameliorated by the credit and housing booms, which may have delayed the recession until 2007. Rising fuel costs act as a tax on the economy.  The latest housing numbers, the worst ever, blame much of it on high gas prices. Furthermore, while the unemployment rate is stabilizing, the length of time people are unemployed is at an all time high of 37 weeks. Finally, the stock market has returned to its upper 10%, in normalized valuations. Japan’s natural disaster could very well mean this is the zenith of our economic recovery.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.