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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 5th, 2013

On June 6, the major currencies that comprise the dollar index are trading sharply higher, and this is creating exaggerated moves throughout the commodity complex.

Crude oil:

July WTI crude oil advanced 39 cents on volume of 586,263 contracts. Volume was the lowest since May 30 when 586,332 contracts were traded and July crude oil advanced 48 cents while open interest declined 10,373 contracts. On June 5, open interest increased by 10,883 contracts, which relative to volume is approximately 20% less than average. However, the July contract lost 9,653 of open interest, which makes the total open interest increased much more impressive. As this report is being compiled on June 6, July crude is trading $1.29 higher, and we suspect that much of this has to do with the extreme move to the downside in the dollar index. We remain bearish crude oil despite it being on a short and intermediate term buy signal. However, we do not think it is wise to initiate long positions at current levels. It is possible that the current rally could take crude to the $97.00 area. We think the downtrend in equities has just begun, and believe this will ultimately take down crude oil prices as more people realize the economy in the United States is slowing down. As we mentioned in yesterday's report, the 50 day moving average in the July contract is about to move below the 200 day moving average.

Brent crude:

July Brent crude oil lost 20 cents on low volume of 583,102 contracts. Open interest increased by 1,413 contracts, which relative to volume is approximately 85% below average. On June 3 and 4, price and open interest have increased, which is unusual for Brent during the past couple of months. It is on the cusp of generating a short-term buy signal, but Brent has been close to doing this on a number of occasions. Although, on a short-term basis we could see a rally, we lean toward the bearish side in both WTI and Brent. Aside from the slowing global economy, the global equity markets are in a corrective mode, which we think will weigh on oil prices.

Heating oil:

July heating oil lost .0095 on volume of 122,556 contracts. Open interest increased by a massive 6,805 contracts, which relative to volume is approximately 120% above average meaning that both longs and shorts were entering the market aggressively, but were unable to move heating oil prices significantly. Heating oil remains on a short and intermediate term sell signal.

Gasoline:

July gasoline gained .0048 on volume of 111,522 contracts. Open interest increased by a massive 7,121 contracts, which relative to volume is approximately 150% above average, meaning that large numbers of new shorts and longs were entering the market, but were unable to move prices significantly. For June 3 and 4, gasoline rallied 6.33 cents while open interest advanced only 1,427 contracts, which relative to 2 day's volume is approximately 70% below average. Even though gasoline is in its strong seasonal period, there is little enthusiasm for it on the long side. Additionally, July gasoline's 50 day moving average of $2.83 has crossed below its 200 day moving average of 2.86. Though gasoline remains on a short-term buy signal and an intermediate term sell signal, we cannot recommend long positions.

Natural gas:

July natural gas closed unchanged on very light volume of 195,452 contracts. Total open interest declined by 6,532 contracts, which relative to volume is approximately 25% above average. As this report is being compiled on June 6, natural gas is trading 15.2 cents lower on the Energy Information Administration report that showed an injection of 111 bcf against expectations of 95 bcf. The five-year average for this week is an injection of 92 bcf. We expect the market will find support at the $3.80 level. On May 31, OIA announced that natural gas had generated a short-term sell signal, but remained on an intermediate term buy signal.

From the June 4 report:

"Natural gas is vulnerable to more downside action, especially if the equity market correction turns into something ugly. We are friendly to the market, but it appears that natural gas has more work to do at the lower end of its trading range, before it can mount a sustainable rally."

Soybeans:

July soybeans gained 3.25 cents on volume of 205,585 contracts. Open interest increased by 2,509 contracts, which relative to volume is approximately 50% below average. The July contract accounted for loss of 7,995 of open interest, which makes the total open interest increase that much more impressive. On June 5, soybeans made a new high for the move at $15.49, but pulled back to close only fractionally higher. The USDA released its export sales report, and although exports were nothing to talk about, the fact is the USDA has projected total sales at 1.350 billion bushels and total commitments as of the current report is 1.3456 billion bushels. The marketing year ends on August 31, which means it is going to be very difficult for processors to obtain soybeans to crush for meal. This is a potentially explosive situation. As this report is being compiled on June 6, July soybeans are trading 1.50 cents higher and have made a low of $15 19 1/4.  We think it is highly likely that managed money will move to the long side of soybeans, but this will most likely signal that a top has been made. Do not short this market. Soybeans should only be traded from the long side.

Soybean meal:

July soybean meal gained $3.40 on heavy volume of 89,168 contracts. Volume increased approximately 23,000 contracts from June 3 when soybean meal advanced $7.20 and total open interest increased by 1,202 contracts. On June 5, total open interest increased by a massive 6,499 contracts, which relative to volume is approximately 185% above average meaning that new longs were entering the market at an extraordinary rate and pushing soybean meal prices higher. The July contract accounted for a gain of 320 of open interest. On June 5, July soybean meal made a high of $462.00, which is the highest price since December 17, 2012. Our view is that soybean meal has yet to see its highs, and the current export sales report, which has been released on June 6 supports this. For example, the USDA has projected total export sales at 8,981 thousand tons, but the current report shows that commitments total 9,199.72 thousand tons, or 102% of total projected sales. With soybeans in a very tight situation for the next couple of months, combined with explosive demand for soybean meal, we expect to see a significant move higher. The pace of export sales is the highest of the past several years. Do not short this market.

Corn:

July corn gained 0.25 cents on volume of 248,763 contracts. However, the new crop December contract lost 10.75 cents. Open interest increased by 4,159 contracts, which relative to volume is approximately 30% less than average. The July contract accounted for loss of 12,463 of open interest. The export sales report was unimpressive, but despite this we think corn prices will move higher and take out the $6.69 high, which is acting as resistance. Undoubtedly, there are large numbers of buy stops in place by shorts looking to liquidate and momentum traders looking to catch a sharp move higher. Do not short corn.

Wheat:

July wheat lost 7.50 cents on volume of 90,525 contracts. Open interest declined by 3,620 contracts, which relative to volume is approximately 55% above average, meaning that liquidation was heavy on the decline. The July contract accounted for loss of 7,976 of open interest. Although wheat's performance has been unimpressive thus far, we continue to think it will move higher, especially since it appears that corn will advance in the weeks ahead.

Cotton:

July cotton lost 1.04 cents on volume of 26,765 contracts. Open interest declined by a massive 1,518 contracts, which relative to volume is approximately 120% above average meaning that liquidation was heavy on the decline. At this juncture, it appears that both longs and shorts have taken their share of pain, but the downtrend is in place. Those that took our recommendation per the May 19 report and initiated bearish positions should continue to hold these.

By. Garry Stern




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