Tag Archives: gasoline

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.

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Planning Ahead Trading Futures

They say that the most important read for a comedian is timing. The comedy in trading is that the market typically delivers its own punch line at the expense of the trader’s timing. Twenty years of trading has proven one thing right over and over again; traders aren’t meant to get it right. The markets constantly change and a pattern that has been developing for months may be no good on the day the trader pulls the trigger. When the trader is right, they’re lucky to price either the entry or the exit well. Typically, there’s meat left on both sides of that bone. Therefore, the psychological positive reinforcement must come from the bottom line, rather than the lines on the charts. With this in mind, let’s look at some trading opportunities on the horizon and how to prepare for them.

Starting with a seasonal top, unleaded gas should be rapidly approaching its seasonal high. The build in prices tends to peak just past Memorial Day. Whether this is a gasoline producer conspiracy or, purely supply and demand, there’s no argument about when it hurts the most. The unleaded gasoline market has put in a very tradeable top in eight out of the last 10 years during the Memorial Day – June 15 window of opportunity.

Moving to agricultural commodities takes us to the typical weather patterns and their effects on crops. It’s important to understand that the historical seasonal patterns are based on the most probable outcome of a full data set. Therefore, extreme weather events like drought and flood will only register as one year’s data. Thus the historic spikes we’ve seen don’t have nearly the impact when compared to 10 or 20 year’s worth of data. This is why sample size is so important when providing the general guidelines for what’s expected to happen.

Once we get past Memorial Day, we’ll begin looking for a bottom in the live cattle market before June 10th. Fundamentally, the cattle market should be well supported. There simply aren’t many cattle out there. The breeding herd has been on a gradual decline for years. This year is no exception with the 2013 herd coming at the lowest level in 61 years. The tiny herd size provides the market with two different ways to rally. First of all, if corn prices remain low, we’ll see cattle affordably held back for breeding. Secondly, if corn prices rise, we’ll see the herd size continue to dwindle. Either scenario takes steaks off the summer grill.

Fortunately, you’ll be able to finance that new grill using the falling interest rates that typically begin between Memorial Day and the third week of June. Even though some of the newer interest rate contracts may not have the history of cattle, corn or, gold at least interest rate futures all tend to trend in the same direction. The typical pattern is for interest rates peak in the early summer and decline through the rest of the year and into lay-away season.

The final classic summer seasonal trade is to sell soybeans once the planting fears have begun to pass. The soybean market always has support through the planting season. In fact it’s not uncommon for soybean futures to set their high price for the year in May or June. Once the crop is safely in the ground, the market breathes a collective sigh of relief. Given normal growing conditions, the decline in prices really picks up after pollination in July.

The summer markets appear to have gotten off to predictable starts. I think the one, notable exception is the strength in the stock market, which we believe has about run its course. In fact the Russell 2000 – S&P 500 spread trade we mentioned last week appears to have finally turned in our expected direction. The most important concept in these trades is being aware of the seasonal tendencies of different markets as they approach. Mark them down on your calendar. It will take half an hour to do the entire year’s worth for the markets you actually trade. This way you’ll always know if you’re near a market’s inflection point and in trading, predicting inflection points is how we measure our timing.

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.

Effects of Deflating the Yen

The Japanese economy has been on life support since their stock market peaked in late 1989. This is also when they began to lose their productivity gains in manufacturing and technology against their neighbors. Their immigration policy and small family sizes have shrunken the labor pool to a point that even with consistent per capita GDP growth, they continue to fall behind fiscally. Their new Prime Minister, Shinzo Abe is attacking deflation in Japan in a way that makes Ben Bernanke look like a spendthrift. The obvious objective of deflating the currency is to make Japanese exports cheaper on the open market. This will grow GDP and spur new hiring thus, improving the domestic Japanese economy. The big questions are, how long can currency depreciation boost their economy, what are the side effects and lastly, will it work?

Japan is an interesting country in that they are a manufacturing country with very little in the way of raw materials or commodities to use in the production process. Therefore, Japan must import virtually, all of the raw materials they use. They’re becoming a high tech assembly country as opposed to their classic vertical production model. Their days of making the steel that goes into the car is over and so are many of the old jobs. It has become cheaper to import Chinese steel than to make it their selves. Currency depreciation will provide an initial rise in Japanese exports, as the inventory that has already been produced will be cheaper on the open market. However, these gains will be offset by newly purchased production inputs paid for in depreciated Yen.

The export market has been the key to Japan’s post WW2 growth. In fact, Japan’s balance of trade (exports-imports) had been mostly positive for 25 years before the tsunami hit in March of 2011. Prior to the Tsunami, Japan generated about 30% of its energy from nuclear power. They are currently running only 3 nuclear reactors out of 54. Manufacturing countries require large energy inputs and Japan uses more than 25% of their gross revenues to import energy and they are third in global crude oil consumption and imports. Depreciating the Yen will severely impact their energy costs. For example, the Yen has declined by 30% since November. That would be the equivalent of paying around $5.00 per gallon of gasoline, right now. This is what Japan will be paying to fuel their manufacturing centers.

This leads us to the effects of a depreciating currency on the local population. The Japanese private citizens are the ones bearing the brunt of this policy in two ways. First of all, Japanese citizens will be forced to pay more for everything that isn’t locally sourced and produced. This will trim their discretionary spending and put a crimp in local small businesses and service providers. Getting less for your money is never enjoyable. Secondly, the individual Japanese citizens are paying for the currency depreciation because the there is no international market for Japanese bonds selling at artificially low rates. The Japanese government is forcing their citizens with historically high savings to use it to buy underpriced Japanese Government Bonds. This transfers the debt from the government to the taxpayer.

I have no idea why the Japanese people haven’t revolted. I’m sure much of it has to do with culture. We tend to speak out in protest while they tend to tow the party line. It will be very interesting to see how this turns out as pensions go unfunded and taxes rise to pay for the massive social programs Prime Minister Abe has in store. Japan’s total debt (public + private) is now more than 500% of GDP according to The Economist (9/19/2012). The U.S. total debt to GDP ratio ranks 7th in the world at just under 300%.

The massive devaluation that is taking place will allow Japan to gain market share in the short term, especially against high quality German manufacturers. Continuation of this policy will put the European Union in a very uncomfortable spot. Germany is their economic leader and the country that would be hurt most in a competitive devaluation campaign. This may finally force the European Union to ease further in an attempt to remain competitive outside the Euro Zone. Easing euro Zone monetary policy may be the next link in the chain as the race to the currency bottom heats up. Finally, the pundits have coined a new phrase to help the guy on the street differentiate currency wars from fiscal policy. Welcome to, “coordinated global easing.”

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.

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.

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
bushels.

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.

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.

Oil Addiction

The United States’ energy dependence has followed the same path as a junkie. We have become addicted to cheap oil over the last forty years. In fact, our entire economy was built on cheap oil. Just like any good junky, we weathered the initial supply crisis in the 1970’s and, having seen the error of our ways, vowed to set ourselves straight. Fortunately, it was just a temporary shock and we didn’t really mean it. Besides, remember how bad it was? It was horrible for domestic employment and inflation was everywhere. We were invaded by foreign automobiles. We were forced to listen to crackpot after crackpot on the evening news telling us that we should be using alternative energy sources available right here in the U.S.  Thank goodness that didn’t last.

 

Fast- forward to 1990 and a tiny little country in the Golden Crescent was having its, “freedom” threatened. Amazingly, one little country, smaller than New Jersey and with fewer people than the city of Houston, was able to mobilize the mightiest fighting force in the world. A desperate addict needing a fix will do almost anything to ensure their supply keeps flowing. The subsequent rally in oil prices was hardly noticed due the prosperous economic times of the period. We got to watch the war on TV with Wolf Blitzer calling the commentary from the video feed on the nose of precisely guided weapons. The technology boom got underway, the war was a huge success and we reveled in national pride.

 

Here we are in 2010 and we’ve gotten used to paying a higher premium for petroleum products and we’ve successfully defended our suppliers. My issue is this; the United States must develop a consistent and focused energy plan if we are ever going to become self -sustaining. We have the resources. The U.S. has greater natural gas reserves than the Saudi’s have oil. This past week I’ve read two alarming pieces targeting the future of the United States’ energy consumption. After doing some research on my own, it has become clear that there is a major disconnect between where we are being told we are headed versus where we actually are headed.

 

The government stimulus packages and vehicle emission standards have pushed for electric cars as the primary source of green energy. It’s made for great press as our ailing auto manufacturers have produced catchy, warm and fuzzy commercials and brainwashed the general public into believing we are on the road to self-sufficiency, leading us away from foreign oil dependency and the wars it has brought with it.

 

However, if look behind the Wizard’s curtain, we reveal some startling facts.

The U.S. currently imports 67% of its oil.

The cessation of Gulf oil production will increase this to 75% by 2012. This will put oil at $125 per barrel and gas at $4-$5 by 2012.

Half of our top ten oil importers are countries that are unsafe to visit according to our State Department. Their official language reads, “Travel Warnings are issued when long-term, protracted conditions that make a country dangerous or unstable lead the State Department to recommend that Americans avoid or consider the risk of travel to that country.” This includes countries like, Iraq, Nigeria, Saudi Arabia, etc.

According to T. Boone Pickens, our current energy policy prices in oil at $300 per barrel by 2020. Oil is currently just over $80 per barrel.

 

I wrote about the spread between natural gas and crude oil a few weeks ago stating that it was near an all time high. The spread between any two markets is based on using a standard measure for both to determine absolute value. Energy markets are measured in British Thermal Units, BTU’s. This defines how much work or, power, is generated by the combustion of a given quantity of substance. The current relationship between crude oil and natural gas is that it takes $14.07 worth of crude oil to do the same work as $3.80 worth of natural gas. This means we pay about 3.7 times as much for crude oil to do the same amount of work as we would for natural gas. The five- year average for this ratio, including today’s inflated price is, 1.7.

 

Natural gas has always sold at a discount to crude oil and until the last 10 years, the relatively low price of crude oil has dictated business as usual. In the wake of 9/11 and the global recession, the government has spent hundreds of billions of dollars aimed at stimulating the economy, nurturing energy independence, cleaning up the environment and improving the infra structure of the country. Unfortunately, the money from that pie, our tax dollars, have been sliced so thinly that the result is virtually, nil. Our dollars’ have been spent on a Jack-of-all trades and master of none. This is most clearly evident in the outside investment and performance of alternative energy source companies specializing in wind, geothermal, solar and fuel cells, which have all lost at least 30% over the last year. Clearly, the investment community has little faith in the current administration’s ability to coordinate a sustainable alternative energy plan.

 

Finally, the push towards electric automobiles is simply a public relations gimmick. According to the U.S. Energy Information Administration, highway diesel usage trumps residential gasoline consumption by more than an 8 to 1 margin. Does it really make sense that the government enacted emission restrictions on passenger vehicles prior to commercial vehicles? Electric, residential automobiles with two seats and a 100 mile range are not going to effectively address the problem of energy independence.

 

The primary focus of our energy policy should be natural gas. It burns 30% cleaner than crude oil and nearly twice as clean as coal, which it’s also currently cheaper than. Finally, in energy equivalents, apples to apples, we have three times more energy reserves than Saudi Arabia. We should regain our dignity by developing the infrastructure, creating fueling stations and putting our people to work through the use of new technologies with an extended shelf life. This is a fundamentally sound path towards a cleaner, more productive and independent country.

 

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.