Crude bulls are having a remarkable run this month despite a seemingly endless stream of poor US economic data, credit tightening in China and increasing European sovereign debt concerns. The near month crude futures contract is up almost 10 %. What are the bulls looking at that the bears do not see?
Using the word bull or bear with large energy futures traders is a bit of a misnomer as hedge funds and some ETFs regularly shift from bulls to bears and bears to bulls generally on monthly or bi-monthly time frames. The reason for this is their favorite technical indicator, Bollinger Bands. Bollinger bands graphically indicate standard deviation from the price mean. Computer trading programs are written to take advantage of crude's propensity to stay within 2% deviation of the mean.
Large traders jumped all over crude April 2010 futures at February's low of $69 when small sized traders were still selling hoping crude would keep sinking. What gave the hedge funds confidence to buy? The $69 figure happened to be the low end of the weekly Bollinger Band chart. Of course they could have been wrong and some unforeseen event could have triggered more selling. However trading is all about probabilities. The rareness of an outlying event occurring was more than offset by the high probability of crude prices returning back to its mean.
Crude April futures are now sitting just under $80. The weekly upper Bollinger Band limit is $84.7. It will be interesting to watch the bears trying to defend their short positions at the $80-$81 levels. They will need a lot of help from a much stronger US $, evidence of much weaker crude demand and a widening of outer month crude futures spreads. Without these events occurring the hedge funds will once again be able to congratulate themselves on ignoring the fundamentals and relying on their trading programs.
Saturday, February 27, 2010
Saturday, February 20, 2010
Are Sovereign Funds Now Regretting Diversifying Away From the US Dollar?
The US Federal Reserve handed energy investors a surprise increase of the discount rate from .5% to .75% late Thursday afternoon. Trader's immediate reaction was to do what they are trained to do when a surprise action by the Fed occurs and that is to close out positions and try to digest the meaning of the move at a later time. Well, it did not take long for traders to discern what to do next. Upon open of the NYMEX pit session traders were immediately hitting the bids pushing gas, distillate and crude futures into positive territory after the first hour of trading. The big question is; will the buying continue in next week's trading sessions?
The key to watch for next week is will sovereign funds, who have been selling the US dollar for the past year and diversifying into euros, gold and who knows what else, begin panicking that the US dollar is going to continue moving higher and convert back the US dollars pushing the US dollar even higher.
China could be the leader in this conversion back to US dollars as they have been buying less US treasuries in favor of commodities and other currencies. If China begins panic buying, other sovereigns will follow. The likely event is the buying will push the Euro versus US Dollar spot price down to $1.30 within a few weeks and eventually to $1.20.
As the US dollar buying continues, commodities will likely sell off. Energy traders will do well to look for shorting opportunities this week as crude pops its head above the $80 level.
The key to watch for next week is will sovereign funds, who have been selling the US dollar for the past year and diversifying into euros, gold and who knows what else, begin panicking that the US dollar is going to continue moving higher and convert back the US dollars pushing the US dollar even higher.
China could be the leader in this conversion back to US dollars as they have been buying less US treasuries in favor of commodities and other currencies. If China begins panic buying, other sovereigns will follow. The likely event is the buying will push the Euro versus US Dollar spot price down to $1.30 within a few weeks and eventually to $1.20.
As the US dollar buying continues, commodities will likely sell off. Energy traders will do well to look for shorting opportunities this week as crude pops its head above the $80 level.
Saturday, February 13, 2010
Economists Olivia Newton John and John Travolta Were Correct: "Grease (Greece) Is the Word"
Investing in commodities should always be a relatively stress free exercise. All one really needs to know is the past, current and predictable future value ratios of supply versus demand. Private and government supplied data makes knowing the past and current variables rather easy. The future value variable is the tricky part and is what makes markets. Throw in some outside governmental and currency risk and our stress free trading environment receives unwanted tension. Energy investors are scrambling to evaluate the future impact the governmental risk of Greece combined with a tumbling euro will have on future demand of crude and refined products.
The European Central Bank (ECB) has temporarily succeeded in calming fears of potential collapse of the European Union by stating Euro member countries will support Greece's government. The problem for the ECB will intensify when Portugal, Ireland, Spain and Italy raise their hands saying we need a bailout too. The amount of borrowing needed to sustain these countries will prevent the ECB from fighting inflation by having to hold down interest rates. The consequence will be a weaker euro.
There is no lack of currency traders currently positioned short on the euro. The oversold scenario could give the euro a bounce higher on any solid financial plan coming from the ECB. However, as crude is priced in US dollars, it will eventually need to adjust its price lower to accommodate a continuing strong US dollar. Future demand for energy will most likely need to be adjusted downward to accommodate the weakening European gross domestic product.
Energy investors will be able sleep better at night by positioning portfolios weighted on the short side on price increases to resistance levels.
The European Central Bank (ECB) has temporarily succeeded in calming fears of potential collapse of the European Union by stating Euro member countries will support Greece's government. The problem for the ECB will intensify when Portugal, Ireland, Spain and Italy raise their hands saying we need a bailout too. The amount of borrowing needed to sustain these countries will prevent the ECB from fighting inflation by having to hold down interest rates. The consequence will be a weaker euro.
There is no lack of currency traders currently positioned short on the euro. The oversold scenario could give the euro a bounce higher on any solid financial plan coming from the ECB. However, as crude is priced in US dollars, it will eventually need to adjust its price lower to accommodate a continuing strong US dollar. Future demand for energy will most likely need to be adjusted downward to accommodate the weakening European gross domestic product.
Energy investors will be able sleep better at night by positioning portfolios weighted on the short side on price increases to resistance levels.
Saturday, February 6, 2010
Have Leading Indicators Quit Leading?
Since energy traders lack the crucial investment advantages of omniscience and foreknowledge, reliance is heavy on leading indicators to discern directional tendencies of energy futures. Lagging indicators, such as employment data, in times past were largely ignored as not providing valuable data as to future market price trends. It seems, "the times they are a changin".
One of the most closely watched leading indicators, The Institute of Supply Management's Manufaturing Report on Business, gives traders a clear understanding of the actual health of the economy. When January's report was released on Tuesday of this week showing six consecutive months of manufacturing growth and the overall economy growing for a ninth consecutive month, energy futures surged higher. Then on Thursday, weekly employment data showed a slight decline in employment, raising fears that Friday's all important monthly jobs report would post worse than expected. Crude and the products quickly sold off. When the actual report was released on Friday crude fell all the way to its major support level of 69.54. The stock market also fell hard on the release of this lagging indicator.
Granted, much of the reason for the sell off was technically driven, with the catalyst of a falling euro. However, the fundamental recovery depicted by the key leading indicators ISM, GDP, and Leading Economic Index, all clearly reveal the future is brighter. Traders need to be careful on placing too much emphasis on weaker than expected employment lagging indicator data.
A few other leading indicators that successful energy traders monitor are pointing to solid economic recovery. The American Trucking Association's Truck Tonnage Index has been on a steady increase and is now at the highs of April 2008. The Baltic Dry Index also has risen from the depths of 645 in April 2008 to its current level of 2,685.
The leading indicators are showing we are in a jobless recovery. Fortunately for traders profitable trades abound whether the market is trending higher or lower. Reading the tea leaves of the leading indicators, contract size should be raised on long positions as the higher probability set up.
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One of the most closely watched leading indicators, The Institute of Supply Management's Manufaturing Report on Business, gives traders a clear understanding of the actual health of the economy. When January's report was released on Tuesday of this week showing six consecutive months of manufacturing growth and the overall economy growing for a ninth consecutive month, energy futures surged higher. Then on Thursday, weekly employment data showed a slight decline in employment, raising fears that Friday's all important monthly jobs report would post worse than expected. Crude and the products quickly sold off. When the actual report was released on Friday crude fell all the way to its major support level of 69.54. The stock market also fell hard on the release of this lagging indicator.
Granted, much of the reason for the sell off was technically driven, with the catalyst of a falling euro. However, the fundamental recovery depicted by the key leading indicators ISM, GDP, and Leading Economic Index, all clearly reveal the future is brighter. Traders need to be careful on placing too much emphasis on weaker than expected employment lagging indicator data.
A few other leading indicators that successful energy traders monitor are pointing to solid economic recovery. The American Trucking Association's Truck Tonnage Index has been on a steady increase and is now at the highs of April 2008. The Baltic Dry Index also has risen from the depths of 645 in April 2008 to its current level of 2,685.
The leading indicators are showing we are in a jobless recovery. Fortunately for traders profitable trades abound whether the market is trending higher or lower. Reading the tea leaves of the leading indicators, contract size should be raised on long positions as the higher probability set up.
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