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Open Interest Analyst

Open Interest Analyst

Garry SternGarry is the founder of openinterestanalyst.com (OIA), a website dedicated to analysing the interaction between price, volume, and open interest (P-V-OI). After consistently applying…

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Commodity Update: Open Interest Analysis for June 25th, 2013

The USDA will release its acreage and grain stocks report on June 28. Do not enter new positions prior to the report. Unless there are substantial profits, we recommend liquidating all positions.

Live cattle is on the verge of generating a short-term buy signal, and therefore we will commence coverage in this report.

Crude oil:

August WTI crude oil advanced 14 cents on heavy volume of 791,066 contracts. Total open interest declined by 26,483 contracts, which relative to volume is approximately 30% above average meaning that liquidation was fairly heavy as prices advanced. Open interest declines were in the August 2013 through January 2014 contracts. July 25 was the first day since June 3 that open interest declined while prices advanced. On that day, crude oil advanced $1.48 while open interest declined by 8,348 contracts on volume of 642,594 contracts. Aside from the open interest decline on June 25, open interest action relative to price has acted in a bullish congruent pattern for a couple of weeks. Additionally, the market seems to have a buoyancy, despite negative fundamentals and the increasingly bleak economic outlook for global markets.

The latest crude oil stocks report released by the Energy Information Administration show that crude oil stocks were unchanged for the most recent reporting week, which was a disappointment because there was an expectation that stocks would decline by well over 1 million barrels. As we said in yesterday's report, despite crude oil holding its own in the face of negative economic news out of China and the emerging markets, the question is how much upside remains. We don't think the risk on the long side is worth it, especially since, a broad market meltdown is not out of the question. Additionally, the terrible performance of copper and the precious metals leads us to believe  there is significantly more downside than upside in most commodities. The market is moving in a sideways pattern, and we see no reason to be involved on the bullish side, although there are option strategies that could be employed in the current environment. Crude oil remains on a short and intermediate term buy signal.

Brent crude oil:

August Brent crude oil gained 10 cents on light volume of 480,075 contracts. Volume was the lowest since June 19 when 470,309 contracts were traded. On June 25, open interest increased by 10,180 contracts, which relative to volume is approximately 20% less than average. On June 24, August Brent generated a short-term sell signal and remains on an intermediate term sell signal. Wait for a rally before considering the initiation of bearish positions.

Heating oil:

August heating oil gained .0055 on heavy volume of 167,612 contracts. Volume increased 915 contracts from June 24 when heating oil gained .0096 and open interest declined by 6,090 contracts. On June 25, open interest declined by a minute 333 contracts, which is dramatically below average. The July contract accounted for loss of 8,219 of open interest. The Energy Information Administration reported that supplies of distillate oil products increased by 1.6 million barrels. As of yet, heating oil has not generated a short-term sell signal, but we think this is imminent.

Gasoline:

August gasoline lost .0023 on volume of 123,681 contracts. Volume declined approximately 35,000 contracts from June 24 when gasoline lost 1.96 cents and open interest declined by 5,897 contracts. On June 25, total open interest declined by 5,639 contracts, which relative to volume is approximately 75% above average meaning that liquidation was extremely heavy. The July contract, which is about to expire lost 9,436 of open interest.The Energy Information Administration reported that stocks of gasoline increased by 3.7 million barrels. On June 24, August gasoline generated a short-term sell signal and had already been on an intermediate term sell signal. As this report is being compiled on June 26, August gasoline is trading 1.77 cents lower and has made a new low for the move at $2.6764.

Natural gas:

August natural gas lost 9 cents on volume of 321,644 contracts. Total open interest declined by 7,881 contracts, which relative to volume is average. The July contract accounted for loss of 15,082 of open interest. Natural gas is now on a short and intermediate term sell signal, however, we do not feel comfortable being on the short side of this market at current levels. Stand aside.

Soybeans:

August soybeans gained 8 cents on volume of 159,768 contracts. Volume fell by approximately 18,000 contracts from June 24 when August soybeans advanced 7.50 cents and open interest declined 13,202 contracts. On June 25, total open interest declined by 11,972 contracts, which relative to volume is approximately 190% above average, meaning that liquidation was extremely heavy. The July contract accounted for loss of 16,912 of open interest. The market is likely to trade in a sideways pattern until the release of the USDA report on June 28. The deteriorating economic situation in China will likely take its toll on the grain markets, however, it is anticipated that China will look to stockpile grains at lower prices.

Soybean meal:

August soybean meal gained $5.50 on heavy volume of 93,023 contracts. Volume was slightly higher than June 24 when 93,109 contracts were traded and open interest increased by 3,891 contracts while August soybean meal advanced $3.00. On June 25, total open interest declined by 498 contracts, which relative to volume is approximately 75% less than average, meaning that overall liquidation was light. Making the minor open interest decline more impressive was the fact that the July contract lost 7,126 of open interest, indicating that there was sufficient new positions taken to offset the loss of July open interest. This is very positive. We  would prefer to see a test of the low made on June 24 of $415.40, which was the lowest price for August soybean meal since May 29 when it reached 414.60. We are partial to soybean meal, and expect that new highs will be made, probably in the August contract. Soybean meal will likely trade in a sideways pattern until the release of the USDA report on Friday. August soybean meal remains on a short and intermediate term buy signal.

Corn:

September corn lost 2.50 cents on volume of 225,372 contracts. Total open interest declined by 30,054 contracts, which relative to volume is approximately 320% above average. The July contract accounted for loss of 27,921 of open interest. Corn will likely trade in a sideways pattern until the release of the June 28 USDA report. Corn remains on a short-term buy signal, but an intermediate term sell signal.

Wheat:

September wheat lost 2.75 cents on volume of 91,011 contracts. Total open interest declined by 4,546 contracts, which relative to volume is approximately 100% above average. The July contract accounted for loss of 7,980 of open interest. September wheat is likely to trade in a sideways to lower pattern until the release of the USDA report.

Cotton:

December cotton gained 1.77 cents on light volume of 17,204 contracts. Volume was 82 contracts below that of June 24 when cotton declined 1.46 cents and total open interest declined 1,553 contracts. Additionally, volume was the lowest since May 17 when 16,670 contracts were traded. On June 25, total open interest declined by a massive 3,482 contracts, which relative to volume is approximately is an astounding 550% above average. The July contract lost 1,047 of open interest and December lost 2,627. On June 24, December cotton generated a short-term sell signal, and as we said in the report dated June 24, the market typically rallies 1-2 and possibly 3 days. Thus far we have seen a one-day rally and as this report is being compiled on June 26, December cotton is trading 73 points lower and the high for June 26 is 84.99, which is one tick shy of the high made on June 25. The direction of cotton prices will be guided by the June 28 USDA report and economic conditions out of China. In the report dated June 23, we warned clients that more liquidation was ahead for December cotton and that the bull move was over at this juncture.

From the June 23 Weekend Wrap:

"the 2.14 cent advance generated an open interest increase of 36,309 contracts while the 1.97 cent decline generated a 59 contract loss of open interest. This tells us that longs are digging in. Although cotton has not yet reversed its short-term buy signal, this could occur on Monday. In any event, we think the bull move is over for now, and that more liquidation is ahead for December cotton."

Live cattle:

August live cattle declined 0.05 cents on volume of 35,185 contracts. To put this volume in perspective consider that average daily volume in May was 54,079 contracts, April average daily volume was 44,450 and year to date average daily volume is 57,409. On June 25, total open interest declined by 2,799 contracts, which relative to volume is approximately 210% above average, meaning that liquidation was extraordinarily heavy. The June contract lost 976 of open interest and August lost 2,859. On June 25, live cattle made a new high for the move at 1.22175 cents per pound, which was the highest price for cattle since May 6. As this report is being compiled on June 26, August cattle has taken out yesterday's high, and is trading 1.025 cents higher on the day.

The bull move began on June 17 and through June 25, total open interest has declined 24,513 contracts. This is bearish open interest action relative to the price increase. We dug into the open interest stats and found that on June 14 there were 12,867 contracts outstanding in the June contract and 148,131 contracts outstanding in the August contract. On June 25, there were 3,355 contracts outstanding in the June contract and 130,015 contracts outstanding in the August contract. In short, the August contract, which comprises approximately 50% of total open interest for live cattle declined by approximately 12% from June 14 through June 25. Again, this is bearish. We have no way of knowing whether the decline of open interest is commercial or speculative in nature. However, there is no question that price action has been terrific, especially since the bearish Cattle On Feed report was released Friday after the close.

Subsequently, there has been a bit of consolidation, and on June 26 the market has rallied into new high territory. On June 21, prior to the COF report, August live cattle rallied 1.60 cents on heavy volume of 60,057 contracts, but total open interest declined by 5311, which is approximately 250% above average, meaning that liquidation was extraordinarily heavy on the advance. Again, this is bearish open interest action relative to the price advance. Conceivably, the imminent short-term buy signal, may be false, and this occurred  after cattle generated a short term buy signal on May 2. It will be important for cattle to close near or at the highs if there is going to be a sustained move to the upside. We will alert clients when if we think it is an opportune time to enter long positions.

Euro:

The September euro lost 34 points on volume of 246,433 contracts. Total open interest declined by only 63 contracts. In yesterday's report, we said it was difficult to determine whether the dollar stays strong against the euro, or reverses. On June 26, the answer appears to be that the euro is weakening against the dollar, and that conceivably the euro will generate a short and intermediate term sell signal on June 27. Correspondingly, the dollar index appears to be on the verge of generating a short-term buy signal.

S&P 500 E mini:

The S&P 500 E mini gained 15.25 points on volume of 2,028,539 contracts. Open interest declined by 19,605 contracts, which relative to volume is approximately 50% less than average. Although the open interest decline was rather minor, the fact that it declined at  all indicates that longs and shorts were liquidating on the move higher. As this report is being compiled on June 26, the E mini has rallied 15.25 points and has made a high for the move at 1598.75. June 26 is the second rally day and conceivably there could be a 3rd third according to our protocol. The third rally day rally could occurr during the evening session of June 26, but we think the market has very little momentum on the upside. We recommend the initiation of long put positions in the E mini for those not already in the market.

On June 21, the September S&P 500 E mini generated a short-term sell signal for the first time during 2013,

From the June 21 report:

 "The market has had a couple of days of downside action and we expect a rally, which would enable clients to initiate new bearish positions, or add to existing positions. Prior to the selloff, we encouraged clients to initiate bearish positions. A rally is overdue and after a short-term sell signal is generated, a countertrend rally lasting 1-2 and possibly 3 days usually occurs. This would be a prime opportunity to initiate new bearish positions for a sustained move lower. We think the treasury note market can rally at any time due to its massively oversold condition, which could spark the rally in the E mini."

By. Garry Stern




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