July WTI crude oil lost $1.88 on volume of 583,810 contracts. Open interest declined by 4,218 contracts, which relative to volume is approximately 65% less than average. From May 20 through May 29, July crude oil has fallen $3.02 while open interest has declined 8,332. This is congruent price and open interest action. However, with the long to short ratio at a very high 7.32:1, it is apparent that managed money has not liquidated their long positions. On May 21, the day that the COT report was tabulated, July crude oil closed at $96.18. In short, managed money is digging in and in our view is a very negative sign for prices going forward.
According to the Energy Information Administration, U.S. crude inventories rose sharply in the week ended May 24,
Crude oil stockpiles increased 3 million barrels to 397.6 million barrels, which was somewhat surprising since the trade expected stocks to drop by 400,000 barrels for the week. Crude stocks stand at the highest level since 1981. The market's reaction to the report was not negative and crude is currently trading 31 cents higher after making a low of $91.65 earlier in the session, before the report was released. Perhaps crude is getting a bounce from the sharply lower dollar index. Although we think crude oil prices are headed lower, we are hesitant to recommend new positions at current levels. Conceivably, the market could rally again by another dollar or two, and this could easily blowout a position that makes directional sense, but is untenable due to the risk potential.
Brent crude oil:
July Brent lost $1.80 on volume of 510,156 contracts. Open interest declined by a substantial 15,156 contracts, which relative to volume is approximately 20% above average. Remarkably, the long to short ratio of managed money in Brent is 3.78:1. This is another indication that prices have farther to fall.
July heating oil lost 3.92 cents on volume of 125,656 contracts. Open interest declined by 603 contracts, which relative to volume is approximately 75% below average. The Energy Information Administration indicated that distillate stocks, rose by 1.9 million barrels, which was much higher than the trade forecast of a 200,000 barrel increase. Since generating a short-term buy signal on May 7, heating oil has essentially been trading in a sideways pattern. Despite the poor performance, heating oil remains on a short-term buy signal, but an intermediate term sell signal. We recommend a stand aside posture.
July gasoline lost 4.74 cents on volume of 147,434 contracts. Open interest declined by 5,516 contracts, which relative to volume is approximately 50% above average. Gasoline stocks declined by 1.5 million barrels according to the Energy Information Administration. The trade was expecting a decline of 200,000 barrels, and the market's reaction to the report is a slightly positive tilt after making a new low for the move of $2.7521. Gasoline remains on a short-term buy signal, but in intermediate term sell signal.
July natural gas lost 4 cents on light volume of 276,353 contracts. Open interest declined by a massive 13,349 contracts, which relative to volume is approximately 75% above average meaning that liquidation was heavy. As this report is being compiled, natural gas is trading 14.6 cents lower and has made a new low for the move at $4.011. The U.S. Energy Information Administration announced that inventories of natural gas rose by 88 bcf,, which was in line with expectations and is a bit shy of the five-year average increase of 92 bcf. In short, the market is declining for reasons other than the EIA report, and it now appears that natural gas will retest the 3.93 lows of mid-May. In our report of May 29, we advised that $4.11 be used as an exit point for long positions. With respect to the May 2014 short put positions, if natural gas continues to decline, the spread between the front month and May 2014 will continue to narrow, which will benefit speculators who write out of the money puts in the May 2014 contract (the May 2014 contract will decline less than the front month). We think the trade makes sense, but would now wait until natural gas tests the $3.93 level.
From the May 28 report:
"Additionally, May 29 is the 3rd day of the pullback, therefore the $4.11 area should remain as solid support. We think that natural gas is a terrific buy at current levels, and as an alternative, which we advised on May 24, speculators should consider writing out of the money puts in the May 2014 contract. Use $4.11 for sell stop placement."
July soybeans lost 7.50 cents on volume of 170,336 contracts. Open interest declined by 708 contracts, which relative to volume is approximately 80% less than average. The July contract accounted for loss of 5,492 of open interest As this report is being compiled May 30, July soybeans are trading 8.75 cents lower. Ever since soybeans made its high of $15.46 3/4, they have been struggling to move higher. For example, after the high of 15.46 3/4, successive highs have been lower. On May 24 the high was 15.05 3/4, May 28 15.28 1/2, May 29 15.19, and thus far in the May 30 session the high had been 15.07 1/2. The rally on May 28 of 33 cents, which was accompanied by a decline of open interest of 7,398 was a very negative development. Soybeans may continue to trade in a sideways pattern and as the July contract nears first notice day, there may be fireworks. Although the uptrend appears to be intact, it is going to be rocky going forward. Soybeans remain on a short and intermediate term buy signal. We recommend a stand aside posture.
July soybean meal gained $2.00 on volume of 81,118 contracts. Open interest increased by 2,874 contracts, which relative to volume is approximately 40% above average, meaning that new longs were entering the market and pushing soybean meal prices higher. The July contract accounted for a gain of 3,085 of open interest. Compare this to an open interest decrease of 5492 in the July soybean contract. In order for soybean meal to continue its advance, it must break above $458.60, which is the May 13 high on the soybean meal continuation chart. The most recent high occurred on May 23 at $451.40. We much prefer the long side of soybean meal to soybeans. Soybean meal remains on a short and intermediate term buy signal.
July corn lost 1.50 cents on volume big volume of 378,106 contracts. Volume was the highest since April 29 when 478,671 contracts were traded and July corn closed at $6.59 3/4. On May 29, open interest increased 3,661 contracts, which relative to volume is approximately 50% less than average. The July contract accounted for loss of 7,296 of open interest. As this report is being compiled on May 30, July corn is trading 12.50 cents lower and the high for the day has been $6.67 1/4. Two days ago, we recommended that short call positions in the July corn option be liquidated due to our concern that corn could rally. July Corn is entering its last 30 days of trading and with corn supplies tight and managed money increasing their short positions, we were concerned about potential risk versus reward. Stand aside.
July wheat gained 9 cents on volume of 94,189 contracts. Open interest declined by 2,574 contracts, which relative to volume is average. The July contract accounted for loss of 2,697 of open interest. The wheat harvest is in progress, and this should put pressure on wheat prices. We continue to advocate writing out of the money calls in the July option.
July cotton lost 72 points on volume of 24,490 contracts. Open interest declined by a massive 2,525 contracts, which relative to volume is approximately 300% above average, meaning that liquidation was extraordinarily heavy. The most recent COT report showed that managed money was long cotton by a ratio of 9.01:1. It will be interesting to see what has happened to the ratio when the COT report is released on Friday. Our downside target has been 80.00 cents, and as this report is being compiled on May 30, cotton is trading 71 points lower and reached our target price. Short calls that we recommended on April 29 and 30 should continue to be held.
By Garry Stern