Surprise! Surprise! US economic quarterly growth slowed to 2.4%. If that news was not bad enough the US government also released three year economic data yesterday showing the recession was much worse than previously reported. Not the kind of input that would inspire energy bulls, yet the market took the news in stride with all components of the energy complex closing higher.
Equity investors also paid little attention to the rearward looking data. July turned out to be the be best month of the year for equity investors.
Bond traders, however, are a bit more hesitant to jump on the better future ahead band wagon. Bonds are still ridiculously expensive, with the 2 year hitting historically low percentage yields.
So who is the smart guy in the room? Perhaps they all are. Short term bond yields have an anchor courtesy of the Fed's low to no interest rate target. Still deftly afraid of deflating hard assets and poor job creation.
Equity traders get the fact that the US consumer are currently retrenched, but are looking ahead to continued world wide growth driving large cap stocks, which will eventually lead to these companies hiring more to meet growing product demand.
Energy traders are seeing increased crude imports and higher refinery run rates in China, giving them confidence demand will continue to eat away at record supply levels. US gas demand has risen to pre-recession levels, also contributing to bullish bets on refined product futures.
We are living in a unique era that has little precedence to base historical trading pattern ideas. Each sector is trading on its own fundamentals. Being a smart trader mean focusing on your sector and not trying to correlate trading positions with other sector traders.
Saturday, July 31, 2010
Saturday, July 24, 2010
Potential Gulf Port Shipping Lane Delays
So far the Gulf oil spill has not had a major effect on Gulf port shipping lanes. A complete closure of the shipping lanes is unlikely, but would be disastrous for the price of all commodities being shipped into the United States.
Any ships encountering crude on their hulls will need to be delayed as the hulls are power washed to eliminate oil entering the Mississippi River. The more ships that encounter oil flows will make the delays longer.
The Gulf states were fortunate that tropical storm Bonnie was unable to generate hurricane strength winds. However, the winds are still strong enough to direct remnants of the spill into the shipping channels.
Traders should tune to Coast Guard reports for any indication that shipping delays are occurring due to crude entering navigation channels.
Any ships encountering crude on their hulls will need to be delayed as the hulls are power washed to eliminate oil entering the Mississippi River. The more ships that encounter oil flows will make the delays longer.
The Gulf states were fortunate that tropical storm Bonnie was unable to generate hurricane strength winds. However, the winds are still strong enough to direct remnants of the spill into the shipping channels.
Traders should tune to Coast Guard reports for any indication that shipping delays are occurring due to crude entering navigation channels.
Saturday, July 17, 2010
Technical Selling Keeping Crude Below $80
May crude futures looked to be on a relentless climb to $90. A few of the large trading houses were setting sites on $100 crude. It peaked, however, at $84 in May and has not seen the $80 handle at all in June or July. Technical traders enjoy these trading resistance levels as it makes it easy to place trading on auto-pilot, allowing computer programmed algorithms to dictate buy and sell decisions.
The same technically driven trading strategies were a big reason for yesterday's large sell off in US equities. The DOW industrial average could not penetrate 10,400 resistance, triggering automatic sell signals driving stocks down over 250 points.
Traders will continue repeating the same strategy of selling resistance levels and buying support until some major fundamental event creates incentive to push through monthly trading ranges.
A few of the fundamental events to keep and eye on that would have the power to drive crude back onto the $80 handle are: a major hurricane striking off shore Gulf oil rigs, much better than expected quarterly earnings from large US corporations with strong forward earning guidance, the euro climbing above major resistance at 1.32, or the Baltic Dry Index climbing above 3,300.
The same technically driven trading strategies were a big reason for yesterday's large sell off in US equities. The DOW industrial average could not penetrate 10,400 resistance, triggering automatic sell signals driving stocks down over 250 points.
Traders will continue repeating the same strategy of selling resistance levels and buying support until some major fundamental event creates incentive to push through monthly trading ranges.
A few of the fundamental events to keep and eye on that would have the power to drive crude back onto the $80 handle are: a major hurricane striking off shore Gulf oil rigs, much better than expected quarterly earnings from large US corporations with strong forward earning guidance, the euro climbing above major resistance at 1.32, or the Baltic Dry Index climbing above 3,300.
Saturday, July 10, 2010
Sittin' on the Dock of the Bay Watching a Baltic Supra Panamax Roll Away
An excellent gauge of the strength of the world economy is the amount of iron ore being consumed. The reason is simple. Iron ore is a key ingredient in steel production. The amount of steel being produced is directly correlated to long term capital expenditures, which drives economic growth.
Tracking iron ore consumption has been a passion for several commodities traders for many years, as a sure fire tell-tale of world economic strength. It is most easily done by following a bulk goods shipping lease freight rate indicator, the Baltic Dry Index (BDI).
The main product of bulk dry good shipping is iron ore. When economies are expanding iron ore shipments will be on the increase as steel production rises. When economies are slowing down demand for steel slows and consequently demand for its main ingredient, iron ore, will slow down as well.
Traders keying off the BDI were able to exit long energy futures trades profitably at the end of 2007 and beginning of 2008, as the BDI peaked and began falling. The BDI then gave the OK signal to go long in March and April of 2008 as the BDI support levels held and began rising in the midst of the global recession.
In the past month the BDI has fallen 4,000 points. Energy traders observing this, sold out of long positions fearing growth in China was slowing dramatically. On Friday the BDI closed at 1,940. Well below its 200 day moving average of 3,125.
One factor weighing on recently depressed shipping rates is the number of new Supra Panamex ships entering the dry goods fleet. Traders, however, will be even more confident of the BDI's ability to gauge whether world economies are improving or stagnating. The added fleet supply will give resistance to the BDI's ability to rise above its 200 day moving average. Should it climb back above 3,125, be careful not to be sitting on short strategy crude, heating oil or gas futures.
Tracking iron ore consumption has been a passion for several commodities traders for many years, as a sure fire tell-tale of world economic strength. It is most easily done by following a bulk goods shipping lease freight rate indicator, the Baltic Dry Index (BDI).
The main product of bulk dry good shipping is iron ore. When economies are expanding iron ore shipments will be on the increase as steel production rises. When economies are slowing down demand for steel slows and consequently demand for its main ingredient, iron ore, will slow down as well.
Traders keying off the BDI were able to exit long energy futures trades profitably at the end of 2007 and beginning of 2008, as the BDI peaked and began falling. The BDI then gave the OK signal to go long in March and April of 2008 as the BDI support levels held and began rising in the midst of the global recession.
In the past month the BDI has fallen 4,000 points. Energy traders observing this, sold out of long positions fearing growth in China was slowing dramatically. On Friday the BDI closed at 1,940. Well below its 200 day moving average of 3,125.
One factor weighing on recently depressed shipping rates is the number of new Supra Panamex ships entering the dry goods fleet. Traders, however, will be even more confident of the BDI's ability to gauge whether world economies are improving or stagnating. The added fleet supply will give resistance to the BDI's ability to rise above its 200 day moving average. Should it climb back above 3,125, be careful not to be sitting on short strategy crude, heating oil or gas futures.
Saturday, June 26, 2010
Get Ready 'Cause Here They Come
Forecasts for this hurricane season to be one of the busiest ever are showing early signs of accuracy. Tropical storm Alex became our first North Atlantic basin storm yesterday and is rapidly heading for the Yucatan. Several other tropical disturbances are forming off the coast of Africa and Eastern Caribbean. Is it too late to be prepared for potential price spikes on gas and diesel?
Fuel buyers are often hesitant to raise their immediate fuel costs by enacting a futures or derivatives hedging strategy. What needs to be understood is that these minor costs are lowering the risk of major losses should severe supply disruptions occur during the hurricane season.
On Friday RBOB and distillate futures jumped .055 and .075 on short sellers buying back their positions, not willing to risk major losses should Alex become a major hurricane and steering a path North. Back month contracts were also moving higher on hedgers buying futures and options contracts enabling them to add to profit margins should the products continue moving higher.
A solid hedging strategy in preparation of hurricane induced higher gas and diesel prices is to simply by fixed forward contracts and minimizing the price fluctuation risk by buying put option contracts. Of course timing is everything. Fixed forward contracts need to be locked in when prices are falling and put options need to be purchased when premiums are least expensive which occurs when futures are rising.
The difficulty in enacting the above hedging strategy is that it is against human nature to lock in a fixed price when prices appear to want to keep going lower. Using technical analysis to determine monthly support and resistance levels helps overcome the natural resistance to lock in on a down trend, giving the fuel buyer confidence the right decision is being made. Just as difficult is not paying too much for option premiums and waiting for an uptrend to begin before purchasing the put options.
Many fuel buyers and even some producers of refined products, steer away from any hedging strategy thinking it is too costly and administratively difficult to monitor. The extra time, effort, and expense actually gives great price and supply risk protection enabling a distributor to continue operating cost effectively during supply disruptions, when competitors are selling at a loss.
Fuel buyers are often hesitant to raise their immediate fuel costs by enacting a futures or derivatives hedging strategy. What needs to be understood is that these minor costs are lowering the risk of major losses should severe supply disruptions occur during the hurricane season.
On Friday RBOB and distillate futures jumped .055 and .075 on short sellers buying back their positions, not willing to risk major losses should Alex become a major hurricane and steering a path North. Back month contracts were also moving higher on hedgers buying futures and options contracts enabling them to add to profit margins should the products continue moving higher.
A solid hedging strategy in preparation of hurricane induced higher gas and diesel prices is to simply by fixed forward contracts and minimizing the price fluctuation risk by buying put option contracts. Of course timing is everything. Fixed forward contracts need to be locked in when prices are falling and put options need to be purchased when premiums are least expensive which occurs when futures are rising.
The difficulty in enacting the above hedging strategy is that it is against human nature to lock in a fixed price when prices appear to want to keep going lower. Using technical analysis to determine monthly support and resistance levels helps overcome the natural resistance to lock in on a down trend, giving the fuel buyer confidence the right decision is being made. Just as difficult is not paying too much for option premiums and waiting for an uptrend to begin before purchasing the put options.
Many fuel buyers and even some producers of refined products, steer away from any hedging strategy thinking it is too costly and administratively difficult to monitor. The extra time, effort, and expense actually gives great price and supply risk protection enabling a distributor to continue operating cost effectively during supply disruptions, when competitors are selling at a loss.
Saturday, June 19, 2010
Natural Gas Traders Flirt With "Widow Maker"
Traders who thrive on ferocious price movements crave the high octane volatility of the natural gas futures market. Few other commodities display the whipsaw action that makes nat gas one of the most difficult yet potentially rewarding commodities for speculative traders. Last August it lost 40% before jumping 93% in September. Having an effective hedge to offset potential instant portfolio destruction is essential.
Nat gas spec traders favor fundamental seasonal trends. The problem is that they trade the seasonal trends using logarithmic driven technical analysis. Since many hedge funds are playing the same strategy, money flows in and out like ocean tides. Getting caught out in high tide when the money flows have shifted to low tide has sunk several big name funds.
One of the most dramatic nat gas trading shipwrecks occurred in 2006 when Amaranth Advisors went all in on the seasonal trade of inventory builds from winter to spring known by market participants as "the widow maker trade". Fundamentally demand falls from winter heating season to spring. The problem with this trade is everyone knows about it and is playing it short, if they all head for the exits on any unexpected increase in demand for nat gas, the shorts have to buy their way out of the trade pushing the futures higher and creating more losses for anyone remaining short.
It is always best to enter these futures positions by adding insurance to the trading strategy with, in the case of a short nat gas futures position, nat gas call options. These options can be bought inexpensively at the end of winter, when call premiums are falling. Futures traders often prefer not to eat in to potential trading profits by purchasing options. The peace of mind the hedge brings, however, is well worth the cost.
Nat gas spec traders favor fundamental seasonal trends. The problem is that they trade the seasonal trends using logarithmic driven technical analysis. Since many hedge funds are playing the same strategy, money flows in and out like ocean tides. Getting caught out in high tide when the money flows have shifted to low tide has sunk several big name funds.
One of the most dramatic nat gas trading shipwrecks occurred in 2006 when Amaranth Advisors went all in on the seasonal trade of inventory builds from winter to spring known by market participants as "the widow maker trade". Fundamentally demand falls from winter heating season to spring. The problem with this trade is everyone knows about it and is playing it short, if they all head for the exits on any unexpected increase in demand for nat gas, the shorts have to buy their way out of the trade pushing the futures higher and creating more losses for anyone remaining short.
It is always best to enter these futures positions by adding insurance to the trading strategy with, in the case of a short nat gas futures position, nat gas call options. These options can be bought inexpensively at the end of winter, when call premiums are falling. Futures traders often prefer not to eat in to potential trading profits by purchasing options. The peace of mind the hedge brings, however, is well worth the cost.
Saturday, June 12, 2010
Crude Futures Giving a Good Rocky Balboa Impression
Having received a knock out punch from its yearly high of $88, crude futures managed to pick itself up off the mat at an intraday low a few weeks ago of $64 and fought its way back to a close on Friday of $74. Congratulations to everyone, Dennis Gartman, in particular, who foresaw the collapsing euro and positioned short on crude accordingly. Will the downward trend continue, or has crude carved out the proverbial bottom?
The energy complex futures are a play on world economic growth. Crude made its precipitous fall when hedge funds began worrying that debt problems in Europe would derail world growth and subsequently world demand for energy. Hedge funds began moving as a herd in early May, selling out of long ETFs and futures positions and either going short or playing it safe with their capital by sitting on the sidelines.
With strong economic data coming out of China this week, capital flowed back into energy, as traders saw value in cheaply priced crude, distillate and gas futures. Even the euro began responding last week to positive to successful European bond sales. US equities also showed positive signs that it too has created a technical bottoming formation. These are all evidence that the crisis is over and demand will begin eating away at record energy supply levels.
Traders are likely to be cautious this week and prefer waiting for crude futures to dip back to the lower end of the near term $69 to $75 trading range before adding to long positions. However, volume will increase on the lower end helping to ensure that a bottom is in place and allowing more aggressive traders to load up on any pull backs this week.
The energy complex futures are a play on world economic growth. Crude made its precipitous fall when hedge funds began worrying that debt problems in Europe would derail world growth and subsequently world demand for energy. Hedge funds began moving as a herd in early May, selling out of long ETFs and futures positions and either going short or playing it safe with their capital by sitting on the sidelines.
With strong economic data coming out of China this week, capital flowed back into energy, as traders saw value in cheaply priced crude, distillate and gas futures. Even the euro began responding last week to positive to successful European bond sales. US equities also showed positive signs that it too has created a technical bottoming formation. These are all evidence that the crisis is over and demand will begin eating away at record energy supply levels.
Traders are likely to be cautious this week and prefer waiting for crude futures to dip back to the lower end of the near term $69 to $75 trading range before adding to long positions. However, volume will increase on the lower end helping to ensure that a bottom is in place and allowing more aggressive traders to load up on any pull backs this week.
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