Risk Aversion by Commodity Speculators

Speculators may be running for the exit doors on talks of more government involvement in the futures market, but I feel their exit may be premature seeing that the government is just talking at this point. Since the government has not screwed things up enough they are now discussing more stringent controls in the commodities markets. I welcome regulation when it works and the theory of instituting position limits sounds good, however the likelihood of volatility decreasing on that action is debatable. Contrary to popular opinion it is the speculator that plays a vital role in providing liquidity in the marketplace and without their involvement price distortions may in fact increase. Is it completely impracticable to think that changes in supply & demand could have a more significant impact on pricing? Perhaps the fact that commodities are becoming a more mainstream asset class, recent estimates show that $25 billion has poured into commodities in the first half of 09′.


Energies
The DOE reported crude oil supplies were down 2.9 million barrels, supplies of gasoline were up 1.9 million barrels and heating oil supplies were up 2.0 million barrels. August oil traded lower by $5.65 losing ground 7 out of the last 8 sessions, the longest losing streak since December. Support comes in at the 100 day moving average at 58.82 followed by 56.00. Resistance is at 62.00 followed by the 50 day moving average at 65.15. Currently we have no exposure with clients. August RBOB was lower by 10.25 cents. A potential triple bottom has formed between 1.6250 and 1.63 but stronger support is seen at 1.55/1.56. Being prices are extremely oversold we may see a bounce, resistance is first seen at 1.72 followed by 1.77. August heating oil lost 16.94 trading lower the last 8 consecutive sessions. Prices at the end of the week started to show some resolve closing almost 4 cents off their lows. Support at 1.50 resistance at 1.60.
The DOE reported underground supplies of natural gas were up 75 billion cubic feet last week to 2.796 trillion cubic feet. Supplies are now up 27% from a year ago. August natural gas was down 24 cents to a new contract low. We’ve been buying clients October $1 call spreads now for the last 3 to 4 weeks and are down but not out. If we do not see a reversal within the next 7/10 days we may start buying November instead of October. Last week’s low at 3.34 should support with resistance at 3.60 followed by 3.80.
Grains
The USDA’s 09-10 US ending stocks estimate for corn was increased from 1.09 to 1.55 billion bushels. September corn lost 13 ¾ cents last week as selling continued. Signs of life were exhibited Friday even after a new low was made, prices rallied to close nearly 10 cents of their intra-day lows. We are suggesting clients to buy December $4 calls, paying 10-12 cents last week anticipating a double in premium in the coming weeks. The risk/reward dynamic is favorable being all the news that has taken prices to recent depths is factored in, so any positive news and we could see a noteworthy rally. Support comes in at last week’s low in September at 3.18 ½ with resistance at 355/360.
The USDA’s 09-10 US ending stocks estimate for soybeans was increased from 210 to 250 million bushels. August soybeans were lower by just shy of $1.00; representing a $5,000 move per contract. One must have intestinal fortitude to trade beans in this environment being the weekly trading range represents almost $7,500 per contract. Support comes in between 10.15/10.20 with resistance at 10.60 followed by 10.80. Those wanting to get long should look to November. A client pointed out that the fundamentals are more favorable to beans than corn which is accurate, but I prefer the chart in corn. Traders could gain long exposure by purchasing $11 calls for $1,250 or the $10/12 call spread for $1,500.
The USDA’s 09-10 US ending stocks estimate for wheat was increased from 647 to 706 million bushels. September CBOT lost 10 ½ last week. Last week’s low at 5.12 ¼ should support with resistance seen at 5.30 followed by 5.40. The current chart is reminiscent of the orange juice chart weeks ago before the recent moved ensued. We expect a short covering bounce at minimum. September KCBOT lost 16 ½ cents last week though we did have 2 consecutive positive days which had not happened since late May. Support is seen between 5.40/5.43 with resistance at 5.62/5.65.
Softs
September cocoa traded higher by $175 last week filling a gap from 6/16. Resistance comes in at 2700, support at 2590. Trade idea: sell (2) September 2800 calls collecting approx. $1,250 while simultaneously buying (2) December 2800 calls for approx. $3,800. The cost on the trade would be roughly $2,500. On a move higher from here expect to make 30% of the futures move. On a sideways market or down market the September will go worthless and you will trade at a later date out of the December.
The USDA’s 09-10 US ending stocks estimate for sugar was reduced from 459,000 to 359,000 tons. October sugar lost 19 ticks last week and though prices have backed off we do not think prices have come off enough to justify re-establishing longs for clients. Resistance is seen at the 9 day moving average at 17.45, support comes in at 16.90 followed by 16.50. We are looking to buy March 10′ calls but premiums are a bit rich now.
The USDA’s 09-10 US ending stocks estimate for cotton was kept unchanged at 5.60 million bales. October cotton was higher by 1.30 cents gaining for the third week in a row trading to a 5 week high. Resistance comes in at 61.25/61.75, support at 57.00. We suggest buying on a break. If the global recovery comes into question prices could back off sharply so no rush.
September orange juice closed up 14.15 cents up 18% on the week to the highest level in over a month. We suggested clients to take 75% of their November $1 calls off at a double so they will have none of their money exposed and to gamble with the markets money. If prices continue to rise and approach $1 we will take off the remainder. Support is at 89.00 followed by 84.00 with resistance at 96.50.
According to Dow Jones, rain and colder temperatures are expected in Brazil’s coffee regions, possibly disrupting the harvest. Last week September coffee ended lower by 3.50 cents to the lowest level in 4 months. We still do expect a move higher and will stay the course with clients holding December 15 cent call spreads. Support comes in at 112/112.50, resistance at the 9 day moving average at 117.45.
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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.

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