Tag Archives: gas prices

Unleaded Gas Reversal at Seasonal Peak

Our Commitments of Traders research is based on trading reversals. Today, we’ll look at the weekly unleaded gasoline chart as commercial traders force its turn lower inline with its standard seasonal peak. This is nearly an identical situation to last year. While last year’s rally held out a couple of weeks longer, it’s skid lower lasted through the rest of the year. We’ll identify the setup that created a mechanical Cot Sell signal for Sunday night as well as examining where to take profits on a discretionary basis.

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Global Impact of Cheap Oil

The crude oil market has declined by approximately 45% since this summer. The massive decline has surpassed most analysts’ expectations including those who advise sovereign nations on international foreign trade issues. The biggest problem most of us face is determining the difference between falling oil prices and gasoline being a good thing at the personal, micro level compared to the damage that falling oil prices have had on equity and currency markets at a macro level. Unfortunately, the answer lies on a continuum rather than an easy black and white answer or a single numerical value. This week, we’ll look at differences in the economic makeup of the major players and determine where they stand in terms of currency and budgetary risks due to oil’s precipitous decline.

Continue reading Global Impact of Cheap Oil

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.


Higher Cattle Prices in 2013

The outlook for cattle prices in 2013 appears to be even higher than 2012 due to declining herd sizes and an increasingly favorable export climate. The US cattle herd has been in decline over the last few years. The drought of 2012 has led to the culling of more animals including non-productive dairy cows and heavier steers that have managed to avoid the feedlots. The addition of these animals into the production mix did three things. First, it increased the average weight of cattle coming to market. Secondly, the increasingly tight supplies already pushed the April live cattle futures contract above the 2012 highs. Finally, it has led to the smallest U.S. starting herd since 1952.

The USDA’s January cattle inventory report shows a total U.S. cattle herd of 89.3 million head. This is the smallest calf crop since 1949 and is the 18th consecutively smaller calf crop. Producers and finishers appear to be coming to the consensus that it’s better to have fewer animals at heavier weights than more animals at lighter weights. The University of Missouri points out that steer weights are up over 34lbs from last year and December marked the 49th consecutive week of heavier steers on a year over year basis. There is an argument within the industry as to the real reason behind the growing weights between those who say weights are increasing due to better animals being culled versus the addition of the beta-agonist, ractopamine.

Politically, 2013 will see a good boost in demand due to Japan’s relaxation of the ban on U.S. beef following the mad cow episode of late 2003. This year, Japan will allow U.S. imports of cattle up to 30 months old. This relaxes the 20-month age limit rule that effectively crushed U.S. exports to Japan. Prior to mad cow, Japan was the number one destination for U.S. beef exports. In fact, Japan imported more than 500,000 tons of American beef as recently as 2000 in contrast to 2012’s total imports estimate of just over 200,000 tons. Many agribusiness insiders see the relaxation of the age limit as Japan’s recognition of globally tight supplies for the foreseeable future.

We’ve addressed the certainty of a declining cattle supply in 2013 as well as sourcing added demand in this marketing year due to freer trade, that leads us to the primary variable of input costs. This brings us to the feed vs. ethanol battle over the 2013 corn crop. Some of the blend tax incentives for ethanol producers were allowed to expire in 2012. Ethanol producers are still bound to the Renewable Fuels Standards mandate that shows 2013 as the first time that the mandate’s target is set beyond the blend wall. This year, 13.8 billion gallons of our fuel supply is supposed to come from ethanol. However due to our primary blend of 10% ethanol, we are unlikely to produce the 13.8 billion gallons to meet the mandate target.

The Renewable Fuels Standards face an application dilemma that must be sorted out by the bureaucrats to put the fundamental factors of the ethanol market back into equilibrium. Currently, unblended ethanol is trading around $2.37 per gallon while wholesale gas prices are about $2.65. The disequilibrium comes into focus when we realize that ethanol is about 25% less efficient than gasoline and should therefore, trade at a corresponding discount. Using the example above, ethanol should be trading at $1.99 per gallon. Ethanol blenders will have to push for either reenacting the expired ethanol blending subsidies or, governmental clarification of E85 liability and warranty issues that will allow the expansion of the E85 delivery infrastructure.

Finally, the cattle market will keep its eyes focused clearly on the skies. The drought of 2012 was genuinely historic with many ranchers still feeling the pinch through the high price of hay this winter. The run-up in grain prices was brutal to cattle ranchers, as crop insurance provides no relief for livestock ranchers. Therefore, this may be the most important weather year that I’ve been witness to as a steady and useful supply of rain will be necessary for both grazing and growing feed crops. The National Oceanic and Atmospheric Administration (NOAA) expects 2013 to be a normal year however, several universities’ grain forecasting models are leaving room for exceptional volatility with average December corn (2013 crop) prices expected to finish around $5.75 per bushel but, quickly tailing out to more than $6.50 per bushel without factoring in the rising tide of any additional volatility.

Cattle farmers appear to be taking proactive steps to managing their businesses in 2013. The Commitment of Traders Report clearly shows commercial buying both in the grain markets and the cattle futures market itself. Commercial traders have bought more than 11,000 contracts of corn below the $6.50 per bushel level in the December contract. This is evidence of cattle producers attempting to lock in their feed costs for the coming year at anything near normal feed prices. We’ve also seen commercial traders nearly double their long position in the cattle futures as they guarantee their ability to make future delivery. U.S. Cattle ranchers locking forward production costs at these levels shows that they’re projecting their profit margins based on growing global demand rather than declining input costs. Given the miniscule herd numbers, we could see prices really skyrocket in 2013 if the weather is decent and ranchers can hold back animals to re-grow the herd size on forage, rather than feed.

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.

Global Glut Going Nowhere

The drop in gas prices over the last month has been a relief to us all. The economic sanctions placed by the European Union, Canada and the U.S. on Iran has simply shifted the flow of Iranian crude oil from west to east. The net result has been more oil on the global market with China, India and Russia picking up cheaper oil from Iran due to the lack of competition from western buyers. One would think that cheaper oil to the BRIC countries would be just the catalyst needed to help them develop their own internal demand for goods and services through the creation and evolution of their own middle class. Unfortunately, we are in an economic phase of global deleveraging and even the stimulus of low fuel prices will not keep their engines turning fast enough to save us from a second half slowdown here in the U.S.

The thesis of those who run our economy has been: If we can just provide enough economic grease to keep our own wheels turning the development of BRIC economies will, eventually, create demand for our goods and services. This is still probably true in the long run and the forward demand projection can be used to our advantage through tracking commercial trader purchases via the commitment of traders report. What a different world it has become when our economic horse has become hitched to someone else’s wagon.

China has been trying to engineer a soft landing for their economy through government expenditures on infrastructure and the attraction of foreign direct investment. The struggle can be seen in their manufacturing output, which has declined for seven straight months. They’ve also lowered their lending reserve requirement to stimulate financing which has dropped by 19% year over year and is at its slowest pace since Q1 of 2007. This may simply add further capacity to an already slack market in the wake of China’s 15-year building boom. This is also a futile attempt to increase home ownership, as home ownership is one of the few ways Chinese people have been allowed to invest their newfound prosperity and therefore, already represents an outsized portion of their personal portfolios. The Chinese result will sacrifice its citizens as the high water mark buyers and lead to further class separation between the builders who profited and the people who got stuck with the bill. This will leave them with little disposable income to buy our Apple computers and Fords.

The Chinese situation looks hopeful compared to India. The trouble in India is as much political as it is structural. Indian politics are confusing even to the Indian newspapers. It’s easy to go from the Times of India to India Press or any one of their nearly 2,000 daily publications and find contradictory information. Foreign businesses find it nearly impossible to find the right agencies for the right permits. Even if one does, it is quite possible that the rules will not only change but, be made retroactive thus, invalidating the entire business plan of the entity that just put the whole package together. This is exactly what happened to Wal-Mart between December of 2011 and February of this year. Permits were voided and taxes created by the new policy were made retroactive. Foreign direct investment is drying up rather than fighting its way through the bureaucratic red tape.

This still leaves Brazil and Russia to save us. Brazil just passed England to become the sixth largest global economy. However, Brazil’s balance of trade slipped into negative territory early this year for the first time since the economic crisis and once again ten years prior to that. Furthermore, their latest GDP readings were just positive enough, 0.34% to escape the technicality of recession. They are battling the decline by cutting interest rates for the seventh time in a row. This easing cycle has seen their rates decline by more than 400 basis points, including May’s cut.

Finally, Russia’s economy is shepherded by the fluctuations of natural resource prices on one hand and Vladimir Putin’s political inclinations on the other. The Russian shadow economy remains one of the largest physical cash exchanges in the world. The government recently limited official cash transactions to approximately $20,000 U.S.  Dollars. The political confusion has led to a flight of foreign capital out of the country. Putin’s sincerest desire seems to be the development of a quasi socialist Russia in which the natural resources are shipped abroad by governmentally monitored, semi state controlled companies. Putin then wants access to these revenues to fund his own programs and basically, become the Arab peninsula of natural resources while triangulating politically with Iran and China.

It doesn’t matter whose horse we hitch our wagons to if we’re all headed down the same path. The global balance sheet expansion experiment that hasn’t worked worth a darn in Japan is now being replicated in Europe just as it has been put to work here in the U.S. The world will pull through it and those countries that have been willing to make the tough choices, either through an enlightened electorate body or, the tight fisted hand of an autocratic leader will be the first ones to rebound. Our future, I’m afraid, looks more like the path of Japan’s lost generation than ever.

Crack Spread and High Gas Prices

The price of gasoline is holding above $3.00 per gallon and bouncing its way higher. This is happening even though the price of crude oil remains fairly well capped technically at $90 per barrel in spite of the Egyptian conflict and concern over control of the Suez canal. The price of crude oil is also showing fundamental weakness at these levels. The weekly commitment of traders report shows a record net short position by commercial traders who are expecting the market to decline from these prices. Furthermore, the gap in prices between current crude oil and crude for future delivery continues to widen. This is called, “contango.” The wider the spread becomes, the more economic incentive there is to sit on and store the oil. In the face of bearish fundamentals, why is the price of gasoline so stubbornly high?

I believe that gasoline demand as a finished product will outpace demand for raw crude over the coming months. A barrel of crude oil equals 42 U.S. gallons.  The refined barrel produces 2/3 gasoline and 1/3 heating oil depending on the quality of the crude oil input. The difference in price between the combined value of the heating oil and unleaded gasoline produced versus the crude oil input is called the, “crack spread.”

The first part of the answer to our question lies in the global dynamics of this spread. Refineries are currently making about $17.20 per barrel that they refine. This is significantly higher than the $6.50 or, so they averaged throughout 2010.  This added profit margin should incentivize greater refinery capacity utilization. This is where the first disconnect becomes clear. Refineries in the U.S. are only operating at 85% of capacity. Our main foreign suppliers are operating at lower levels than that. China, however, ran at record levels of refinery operation throughout 2010.

The Chinese position demands recognition. China sold approximately 18 million cars in 2010 while the U.S. sold just over 12 million. More importantly, the China Association of Auto Manufacturers claims that 2010’s sales pushed Chinese vehicle ownership up to about 6% of the total Chinese population. By contrast there are approximately 80 cars for every 100 Americans. China’s crude oil imports for January have increased by 33% over last year’s and their 2011 projection is for 5.27 million barrels per day. The Chinese are building a wealth of strategic reserves. It won’t take long for them to compete head to head on the open market for the 8.9 million barrels per day the United States currently consumes.

The second primary contributor to stubbornly high domestic gas prices is the mandatory edition of ethanol to the fuel we use. The government mandate is to increase the ethanol per gallon of fuel to 11% from 8.5% for 2011. U.S. ethanol production is uncompetitive because it is based on corn. Sugar based ethanol, like Brazil’s is more efficiently produced. The government’s energy plan currently imposes a $.54 per gallon tariff on imports while subsidizing the creation of ethanol plants and the corn that goes into them. Gas prices topped $4 per gallon in 2008 and  corn is 20% higher now than it was at this time in 2008.

Asian refineries continue to soak up the global supply of crude oil while our refineries enjoy the profits of the crack spread foreign demand is generating. We are sitting near the seasonal lows in petroleum products and the corn market has yet to build in weather related planting premium. Our low operating capacity combined with higher ethanol content and the rising price of corn could create quite a domestic price shock.

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.

Long Only is Not Diversification

The cycle of bubbles will continue. Assets will always chase higher returns. The markets in the United States that are available for the general public to allocate funds to are mostly, “long only.” The general investing public is provided with a number of choices as to what they can buy to invest in. We’ve seen the cycle rotate from sector to sector within the stock market or, between stocks and bonds. Arts, antiques, cars and real estate have all had their periods when ownership was lucrative. Fortunately, being able to short sell commodities with a phone call or a mouse click is much easier than selling a car or a house when the market turns.

Lately, commodities have taken center stage as the thing to own. We’ve seen it in gold and oil and more recently in grains, agricultural commodities and stock index futures. Thirteen commodity futures markets set new records for commodity index funds’ open interest in 2010. Over the last few weeks, we’ve seen commodity positions being transferred from the index funds to the small speculators. This transfer of positions from index and commercial traders to small speculators typically occurs near the end of a protracted move.

Bubbles are created through the over popularity of an asset class. The speed of the bubble cycle increases when leverage is involved. We’ve seen this in the stock market crashes of 1929 and 1987 and as recently as May of 2010 in the, “Flash Crash.” The world is still unwinding the over leveraged global mortgage debacle. The new vogue in leveraged assets has been the creation of commodity funds. Commodity funds have provided a long only investment entry into the futures markets for the novice investor. These funds have gone from non-existent to more than $370 billion in equity at the top of the first commodity bubble in 2008. We have since surpassed that total.

The commodity index fund market is no different than the mortgage backed security market was when it was marketed to the public as a way to, “ratchet up returns while providing diversification.” Investment office salespeople need products to sell. These products are usually a good idea at the beginning but, become overpopulated and over valued as a result of a good idea turning into the next big thing and eventually falling of their own weight.

I’ve suggested that the global economy is due to slowdown. Furthermore, the governmental response to the economic crisis has done little to right the long-term path of our economy. Over the last three years, the stock market is higher, reported unemployment is below 10% and gas prices have stabilized. However, it has taken a Herculean effort by the government, which has dropped the Federal Funds rate from 4.5% to 0, expanded the Treasury’s balance sheet by $1.5 trillion and printed $1 trillion on top of that just to bring GDP and our population’s complacency back to where it was at the end of 2007. This is the Government’s form of a leveraged asset, which is also becoming overvalued and overpopulated and is in peril of falling of its own weight.

Diversification among long only assets will not provide the type protection people expect when these markets begin to falter. Over the last five years, there have been 13 weeks when the S&P 500 closed more than 5% lower from week to week. Conversely, there has only been one week in the last 5 years when bonds have closed that much higher. That was the flight to quality run of November 21, 2008. That was the height of the panic of the meltdown. The truth is, when liquidation hits the market, it tends to cross all classes. These are the days when the commentators lead in with, “There’s a lot of red on the board today.” Gold, copper, oil, grains, cattle, etc. have all averaged at least as many large losses as the stock market. Forty percent of these losses coincided with large stock market declines. In this day of instant everything, instant liquidation to cash is only a few mouse clicks away in the futures markets rather than end of day fund settlements.

The futures markets were meant to be traded from the long AND the short side. Commercial traders use this feature to manage their own production and consumption concerns. Individual traders can also have this direct link to the commodity markets. The liquid flexibility of the futures markets allows individual traders to hedge their holdings through the direct use of short selling just as it allows leveraging of outright exposure on the way up.  The right brokerage relationship can make them the perfect tool in the hands of the individual managing their own portfolio as opposed to the long only fund salesman seeking out the next tool in the general public.

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.