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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 May 21st, 2013

Crude oil:

July WTI crude oil lost 75 cents on very light volume of 485,704 contracts. Volume was the lightest since April 29 when 466,236 contracts were traded and July crude oil closed at $94.72. On May 21, open interest declined by 1,957 contracts, which relative to volume is approximately 75% less than average. The June contract accounted for loss of 18,019 of open interest. We been cautioning clients about the long side of crude oil recently, despite it generating a short and intermediate term buy signal on May 6. Crude oil stocks are at record-breaking levels, and we think there is more risk to the downside, especially with the equity markets being frothy. Although, the Energy Information Administration stocks report released on May 22 showed that inventories declined 300,000 barrels, it is not helping crude on May 22 due to an expected decline of at least 600,000 barrels. Crude is trading $1.39 lower. Stand aside.

Brent crude:

July Brent crude oil lost 89 cents on very light volume of 414,377 contracts. Volume was the lowest since May 6 when 388,255 contracts were traded. On May 21, open interest declined by 6,370 contracts, which relative to volume is approximately 40% less than average. Although WTI, gasoline and heating oil all generated a short-term buy signals, Brent has failed to do so. We have expressed our concern about the ramifications of this on a number of occasions. Stand aside

Heating oil:

July heating oil lost 2.18 cents on volume of 109,956 contracts. Open interest declined by 5,352 contracts, which relative to volume is approximately 85% above average, meaning that liquidation was massive on the decline. The June contract accounted for loss of 8,674 of open interest. The Energy Information Administration's report showed that stocks of distillate fuel declined 1.1 million barrels. Heating oil remains on a short-term buy signal, but an intermediate term sell signal. We continue to advise clients to stand aside.

Gasoline:

July gasoline lost 5.45 cents on volume of 182,585 contracts. Volume was the highest since May 15 when 185,659 contracts were traded and July gasoline advanced 2.94 cents while open interest increased by 3,654 contracts. Although we have seen positive open interest action relative to price advances and declines, the market does not have the fundamentals to take it higher. Today's report released by the Energy Information Administration show that US gasoline stockpiles rose by 3 million barrels when a 100,000 barrel decline was forecasted. At this time of year, stocks usually decline and demand begins to rise. As this report is being compiled on May 22, July gasoline is trading 2.32 cents lower. Stand aside.

Natural gas:

June natural gas gained 10.2 cents on volume of 294,087 contracts. Open interest increased by 3,210 contracts, which relative to volume is approximately 50% less than average. The total open interest increase was modest, but considering that the June contract lost 15,527 of open interest, the increase is respectable. Compare WTI, heating oil and gasoline to natural gas and the impact of open interest declines in the June contract. Although natural gas has not generated a short-term buy signal, which would reverse the short-term sell signal generated on May 3, it is getting close. The report on natural gas stocks will be released on May 23, and this will likely determine whether natural gas generates a short-term buy signal tomorrow. Our view is that natural gas is in a secular bull market, and its performance during the past couple of days indicates that the downside has been played out. As a consequence, we think it is best to trade natural gas from the long side.

Soybeans:

On May 21, July soybeans generated an intermediate term buy signal. The short-term buy signal was generated on May 9.

July soybeans gained 13.75 cents on volume of 213,329 contracts. Volume increased approximately 35,000 contracts from May 20 when soybeans advanced 16 cents and open interest declined by 966 contracts. Additionally, volume was the highest since April 23 when 242,237 contracts were traded and July soybeans closed at $13.58 1/2. On May 21, total open interest increased by 2,898 contracts, which relative to volume is approximately 40% less than average. The July contract accounted for a gain of 2,655 of open interest. For the past 3 trading sessions beginning on May 17, soybeans have advanced 50.75 cents while open interest has increased only 4,472 contracts. As we stated in yesterday's report, the tepid increase of open interest indicates that speculators are not buying into the soybean rally. Although the market is massively overbought, and due for correction, it appears that ultimately the market is headed higher than we originally thought. For example, since May 7, July soybeans has rallied from a low of $13.67 1/2 to 14.88 3/4 as of May 22 without a correction. Usually, after the generation of a buy signal, a pullback lasting 1-2 and possibly 3 days occurs. Do not initiate new long positions at current levels.

Soybean meal:

On May 21, July soybean meal generated an intermediate term buy signal. Meal generated a short-term buy signal on May 9.

July soybean meal gained $3.40 on volume of 79,684 contracts. Open interest increased by 960 contracts, which relative to volume is approximately 45% less than average. The July contract accounted for a gain of 75 of open interest. Like soybeans, but to a lesser extent, the open interest increase has been unimpressive during the past 3 trading sessions beginning on May 17. From May 17 through May 21, July soybean meal has advanced $23.80 while open interest has advanced 4,535 contracts. Usually, after the generation of a buy signal, a pullback of 1-2 and possibly 3 days occurs. Do not initiate new long positions at current levels.

Corn:

July corn lost 9.50 cents on volume of 262,379 contracts. Volume was the highest since May 13 when 307,826 contracts were traded and July corn closed at $6.55 1/2. On May 21, open interest increased by 6,384 contracts, which relative to volume is average. The July contract accounted for loss of 1,414 of open interest. As this report is being compiled, corn has rallied 14.75 cents. We suggest that rallies be used to write out of the money calls in the July option.

Wheat:

July wheat lost 4.75 cents on volume of 60,555 contracts. Open interest increased by 445 contracts, which relative to volume is approximately 60% less than average. The July contract accounted for loss of 1,432 of open interest. As this report is being compiled, July wheat has rallied 10.50 cents. We recommend that rallies be used to write out of the money calls in the July option.

Cotton:

July cotton lost 1.92 cents on volume of 29,710 contracts. Volume was the highest since May 1 when 29,890 contracts were traded. On May 21, open interest increased by a massive 2,230 contracts, which relative to volume is approximately 200% above average. This is the 2nd day in a row that cotton prices have declined, which have been accompanied by massive increases of open interest. We have been bearish cotton, and have recommended that bearish positions be implemented at higher levels. Please see the May 19 Weekend Wrap. If bearish positions have been initiated, continue to hold these positions. Our downside target is 81.50 basis July.
Copper: On May 21, July copper generated a short-term buy signal, but remains on an intermediate term sell signal.

July copper lost 1.65 on volume of 63,393 contracts. Open interest declined by just 12 contracts. Below, is some of our commentary on copper from the May 12 report. Although at that time we didn't think copper had the power to move significantly higher, we did think it was possible to see copper rally to $3.44. As this report is being compiled on May 22, copper is trading 3.65 cents higher and has made a new high for the move at $3.4180. Although copper has generated a short-term buy signal, we think a pullback could be shallow. However, we caution clients on initiating long positions in copper because we think it's essentially a bear market rally. Additionally, the options market is illiquid and therefore futures traders subject themselves to enormous volatility, whichever side of the market is being traded. We recommend a stand aside posture.

From the May 12 Weekend Wrap:

"The market has rallied to the precise area where normally we would favor bearish positions. However, with the number of managed money shorts holding 43,731 contracts and managed money longs holding 26,935 contracts, it is certainly possible to see a further advance in order to shake out holders of short positions. We would be far more bearish had we seen massive liquidation on the 26 cent rally. The upside target for July copper is $3.44, but we are not convinced the market has the momentum to move significantly higher from here. A move sharply lower in the stock indices would likely drag copper down with them."

By Garry Stern




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