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Commodity Update: Open Interest Analysis for May 14th, 2013

By Open Interest Analyst | Wed, 15 May 2013 19:11 | 0

On May 15, the dollar index has broken out to new highs, which is the highest level since July 2012. This is affecting the performance of physical commodities, especially the precious metals. For more information, see commentary on the euro.

Soybeans:

July soybeans lost 4.50 cents on volume of 128,548 contracts. Open interest increased by 8,089 contracts, which relative to volume is approximately 145% above average, meaning that new shorts were entering the market aggressively and driving soybeans lower, although the decline was a minor. The May contract accounted for loss of 1,329 of open interest. We would have much preferred for open interest to decline, especially since open interest increased during three days when the market rallied. As we stated in the May 13 report, soybeans should move higher, but unless a weather event changes the essential supply dynamic, we expect the rally to the fairly modest. Soybeans have a seasonal tendency to top out in May, June, or July with June being the month when most highs are made. Soybeans remain on a short-term buy signal, but an intermediate term sell signal.

Soybean meal:

July soybean meal lost $3.30 on volume of 49,412 contracts. Open interest increased by 800 contracts, which relative to volume is approximately 35% less than average. Soybean meal remain on a short-term buy signal, but an intermediate term sell signal. We  expect the market to rally, but like soybeans, it may be modest unless a weather event occurs.

Corn:

July corn lost 3 cents on volume of 151,403 contracts. Open interest declined by 4,342 contracts, which relative to volume is average. On May 3, July corn generated a short-term buy signal, and unless a weather event occurs, we expect rallies to be modest. Corn stocks are tight, but the expected rise in global supply is a countervailing force along with the dismal export picture.

Wheat:

July wheat gained 1 cent on volume of 67,160 contracts. Open interest increased by 503 contracts, which relative to volume is approximately 50% below average. Although, July wheat generated a short-term buy signal on May 2, its performance since then has been dismal to say the least.

Coffee:

July coffee lost 1.75 cents on volume of 19,494 contracts. Open interest increased by 385 contracts, which relative to volume is approximately 20% below average. On May 8, July coffee generated a short-term buy signal, and ever since, the market has been trading in a consolidation pattern until May 15. As this report is being compiled, July coffee has pulled back 3.20 cents and has made a new low for the move at 1.4005, which is at its 50 day moving average of 1.4020. The pullback is healthy and coffee remains on a short-term buy signal, but an intermediate term sell signal. We recommend the use of call options to initiate bullish positions, which allows speculators to adjust their risk based upon the option's strike price.

From the May 12 Weekend Wrap:

The harvest is beginning in Brazil, however coffee is entering its most vulnerable period with the potential for frost damage during the next month or two. The coldest months in Brazil are June and July and August and the last frost occurred on July 17, 2000 With managed money net short, the market remains susceptible to further upside action. However, if there is a cold snap, or worst yet, frost, then we could see the market advance significantly. The effective way to trade this market is to buy call options for the month of September. We may be seeing psychology changing in a number of commodity markets, but with the likelihood of a dollar advance, bullish enthusiasm could wane.

Crude oil:

June WTI crude oil lost 96 cents on volume of 611,054 contracts. Open interest declined 4,007 contracts, which relative to volume is 65% less than average. In yesterday's report, we stated that crude oil was in a trading range bounded by $97.00 on the high side and 92.71 on the low. As this report is being compiled on May 15, crude oil traded below our projected low and has made a new low at $92.13. It is currently trading unchanged on the day. Until Brent crude and gasoline generate a short-term buy signals, we would advise a stand aside position. The Energy Information Administration stated that stocks of crude oil fell 624,000 barrels against expectations of an unchanged number. However, stocks remain at a stratospheric 394.9 million barrels, which is just shy of their highest level going back to April 1981.

Brent crude oil:

June Brent crude oil lost 4 cents on volume of 699,373 contracts. Open interest declined by 43,762 contracts, which relative to volume is approximately 145% above average. The reason for the massive decline in open interest is that the June contract will soon expire. Brent remains on a short and intermediate term sell signal. Stand aside.

Heating oil:

June heating oil lost 1.80 cents on light volume of 99,078 contracts. Open interest increased on the decline by 1,579 contracts, which relative to volume is approximately 35% less than average. On May 7, June heating oil generated a short-term buy signal, but remains on an intermediate term sell signal. The 50 day moving average for the June chart is $2.93, and the market is going to have to trade above 2.95 for the rally to have legs. We recommend a stand aside position in heating oil. On May 15, the market was unable to hold support at 2.8535, which was the low for May 10. The latest report from the Energy Information Agency showed that distillate inventories, including diesel and heating oil increased by 2.3 million barrels last week, which is above year ago levels. This is a turn around from the year earlier when supplies were 11% below the previous year's level.

 Gasoline:

June gasoline gained 1.66 cents on volume of 101,931 contracts. Open interest increased by 1,008 contracts, which relative to volume is approximately 50% less than average. On May 14 and 15, gasoline has shown greater relative strength against heating oil. Perhaps this is indicative of a future pickup in gasoline consumption, which would be bullish for gasoline prices. According to the latest data released by the Energy Information Administration, Gasoline stocks rose a surprising 2.6 million barrels last week as refinery output increased more than demand by nearly 750,000 barrels per day. Gasoline stocks are up 6.5% from a year earlier, which is the biggest y-o-y surplus in the past 2 1/2  years. As this report is being compiled on May 15, gasoline is trading 1.20 cents higher. Gasoline remains on a short and intermediate term sell signal. Stand aside.

Natural gas:

June natural gas gained 9.9 cents on volume of 263,057 contracts. Open interest declined by 5,978 contracts, which relative to volume is approximately 5% below average. Natural gas continues to be in a corrective mode, however we like the way the market has pulled back and has at the same time shed a significant amount of open interest in the process. We expect the market to correct down to $3.80-3.83. Natural gas remains on a short-term sell signal, but an intermediate term buy signal. Continue to stand aside.

Australian dollar:

The Australian dollar lost 77 points on volume of 138,102 contracts. Open interest increased by 6,726 contracts, which relative to volume is approximately 75% above average, meaning that new shorts were entering the market aggressively and driving prices lower. For the past 7 sessions beginning on May 6, the price of the June Australian dollar has declined and open interest has declined each day. On April 23, OIA announced that the June Australian dollar generated a short and intermediate term sell signal. Furthermore, we recommended that clients short out of the money calls on April 29 and 30. This trade has been working well and the position should continue to be held.

Euro:

The June euro lost 34 points on volume of 204,651 contracts. Open interest increased by 50 173 contracts, which relative to volume is approximately 25% below average. It is a certainty that the euro will generate a short-term sell signal on May 15, which will reverse the short-term buy signal generated on May 1. The euro remains on an intermediate term sell signal. In the paragraph below, we have reprinted our commentary on the dollar index, in which the euro is weighted approximately 58%.

From the May 12 Weekend Wrap:

It is interesting to compare the action on May 9 to April 17, 2013. On April 17, June dollar index rallied 96.8 points on heavy volume of 52,420 contracts, while open interest declined 4,805 contracts. What makes this action notable is that the long to short ratio was 1.08:1 when of the COT report was tabulated on April 16. The current ratio shows that leveraged funds are considerably short by 1.20:1, which means that short covering should be more robust. If open interest for Friday does not show a significant decline, the dollar index could be in for a sharp rally in a compressed timeframe.

The rally in the dollar index to new highs confirms the weakness in the euro, Canadian dollar, Swiss franc, British pound, and Japanese yen. It also has major negative implications for multinational corporations, many of whom derive a hefty percentage of income from their overseas operations.

S&P 500 E mini:

The S&P 500 E mini gained 17.25 points on volume of 2,031,653 contracts. Open interest increased by 58,455 contracts, which relative to volume is average, but this is a hefty number as it is rare to see open interest increase/decrease by an average amount. It appears that the E mini is moving parabolically, which is usually a harbinger of an equal and opposite reaction on the downside. The market will have a correction, the only question is when and by how much. Maintain long put protection, especially by those clients holding long equity positions.

By. Gary Stern

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