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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 31st, 2013

Crude oil:

July WTI crude oil lost $1.64 on volume of 638,865 contracts. Open interest increased by 12,624 contracts, which relative to volume is approximately 25% less than average. As this report is being compiled on June 2, July crude oil is trading $1.41 higher, and we attribute much of this to the sharply lower dollar, which has made a new low for the move.

From the June 2 Weekend Wrap:

"Now that heating oil is on a short-term sell signal, and gasoline is likely to do so on Monday, or Tuesday at the latest, we think the risk of initiating bearish positions on rallies have diminished considerably. The market has looked top-heavy, but has levitated higher despite the bearish fundamentals. With products weak and natural gas on a short-term sell signal, it is apparent that the entire petroleum complex is headed lower. It appears that equities are rolling over and this will only add to the downside momentum in the complex."

Brent crude oil:

Brent crude oil lost $1.80 on volume of 562,710 contracts. Open interest increased on the decline by 12,605 contracts, which relative to volume is approximately 20% less than average. As this report is being compiled on June 2, July Brent is trading $1.87. Brent remains on a short and intermediate term sell signal.

Heating oil:

On May 31, July heating oil generated a short-term sell signal. It remains on an intermediate term sell signal.

July heating oil lost numerals 6.28 cents on heavy volume of 173,139 contracts. Volume on May 31 exceeded the volume traded on May 23 of 170,535 contracts when July heating oil lost 1.22 cents and open interest declined 6,093 contracts. On May 31, open interest declined by 2,108 contracts, which relative to volume is approximately 45% less than average. With the addition of heating oil on a short-term sell signal, the calculus is changed with respect to the rallying power of Brent and WTI.

Gasoline:

July gasoline lost 5.24 cents on light volume of 115,135 contracts. Volume shrank from May 30 when 178,268 contracts were traded and open interest declined by 7,088 contracts while gasoline advanced a few ticks shy of 1 cent (93). On May 31, open interest declined by 4,561 contracts, which relative to volume is approximately 55% above average. Interestingly, the range on May 30 and May 31 was nearly the same, but volume was dramatically higher on May 30 even though the decline on May 31 was greater by percentage than the increase on May 30. Gasoline remains on a short-term buy signal but an intermediate term sell signal.

Natural gas:

On May 31, July natural gas generated a short-term sell signal. It remains on an intermediate term buy signal.

July natural gas lost 3.9 cents on very light volume of 220,578 contracts. Open interest declined by 3,386 contracts, which relative to volume is approximately 40% less than average. With the market on a short-term sell signal, we will be monitoring natural gas to ascertain where it finds support. We remain bullish on natural gas, but the market does not habve the momentum to take out the high of $4.45 on the continuation chart. Previously, we have advocated writing out of the money puts in the May 2014 contract, and this continues to look like a viable strategy, although the timing of its implementation will need to be fine-tuned. At this time next year, we think natural gas prices will be significantly higher.

The very interesting aspect of grain trading on May 31 was that open interest increased massively in soybeans, soybean meal, corn and wheat along with healthy increases in price. This is an extremely rare event during calendar year 2013. This should give speculators pause regarding the initiation of new shorts in the complex.

Soybeans:

July soybeans gained 14.25 cents on volume of 211,738 contracts. Volume was approximately 79,000 contracts higher than May 30 when 122,277 contracts were traded and soybeans lost 6 cents while open interest declined 1,924 contracts. Additionally, volume was the highest since May 28 when 227,113 contracts were traded and open interest declined by 7,398 contracts while July soybeans advanced 33 cents. On May 31, open interest increased by 12,157 contracts, which relative to volume is approximately 120% above average, meaning that new longs were heavily entering the market and driving prices higher. The July contract lost 1,560 of open interest, which makes the total increase that much more impressive. The open interest increase on May 31 was the largest in at least 2 months.

From the June 2 Weekend Wrap:

"From May 14 through May 28, July soybeans have advanced 94.50 cents, or 6.68%. During this time, the long to short ratio has increased only slightly, which means that managed money is not buying into this rally. We think soybeans are headed significantly higher and will shortly take out the high of $15.46 3/4 made on May 23. For a time, we thought the high made on May 23 was a likely top due to the parabolic nature of the move. However, we have changed our mind. There is money on the sidelines which can easily move into soybeans once they take out the May 23 high. Soybeans have a strong tendency to make their seasonal high in June. On May 9, OIA announced that soybeans generated a short-term buy signal and on May 21 generated an intermediate term buy signal. Do not short this market."

Soybean meal:

July soybean meal gained $6.40 on volume of 78,192 contracts. Open interest increased by a massive 4,824 contracts, which relative to volume is approximately 140% above average meaning that new longs were entering soybean meal at an extremely aggressive pace and driving prices higher. The July contract accounted for a gain of 324 of open interest. As this report is being compiled on June 3, July soybean meal is trading 7.60 higher and has made a new high for the move at 458.20.

From the June 2 Weekend Wrap

"From May 14 through May 28, July soybean meal has advanced $30.50, or 7.41%, and is outperforming beans in this time frame. The long to short ratio has gone up dramatically compared to soybeans. We think meal has much farther to go on the upside and the tightness in beans coupled with significant demand in soybean meal is setting up a potential blow off move. As it stands, July soybean meal is trading at its highest level since September 2012 and the high occurred on September 14 when July meal reached $465.70. On the continuation chart, soybean meal must break above the May 14 high of $460.10, for the move to continue. We expect this to occur shortly."

Corn:

July corn gained 7.75 cents on volume of 272,698 contracts. Open interest increased by a massive 14,901 contracts, which relative to volume is approximately 120% above average meaning that new longs were aggressively entering the market and driving prices higher. The July contract accounted for loss of 4,974 of open interest, which makes the total open interest increase that much more impressive. As this report is being compiled on June 2, corn is trading 7.75 cents lower and has made a high for the day of $6.69. This has been the point of significant resistance, but we think that it is only a matter of time before corn trades above 6.69.

Undoubtedly there are huge numbers of buy stops from shorts and momentum traders looking to catch the move higher. On the May 28, we suggested that the short call position in the July corn option be liquidated because of our concern for near term tightness.

Wheat:

July wheat gained 6.75 cents on heavy volume of 109,777 contracts. Volume was the highest since May 23 when wheat advanced 14.75 cents on volume of 115,144 contracts and open interest increased by 853 contracts. On May 31, open interest increased by a hefty 4,108 contracts, which relative to volume is approximately 50% above average meaning that longs were very aggressive in implementing new long positions and driving prices higher. May 31 was the first time since May 23 that open interest increased along with price.

From the June 2 Weekend Wrap:

"Although we have recommended writing out of the money calls in the July option, we are getting concerned that the movement higher in the rest of the grain complex may pull wheat higher as well. Due to this potential risk, we do not see the reward of the trade being worthwhile considering the possibility of an adverse move. We recommend that speculators liquidate short call positions and move to the sidelines."

Cotton:

July cotton lost 77 points on heavier than normal volume of 31,299 contracts. Open interest declined by a massive 2,309 contracts, which relative to volume is approximately 180% above average, meaning that liquidation was extraordinarily heavy. For the past 3 days beginning on May 29, July cotton has declined 2.06 cents while open interest has declined by 5,996 contracts. The open interest decline during the past 3 days relative to 3 day volume is approximately 140% above average. In short, there has been a massive amount of liquidation at the lower end of the trading range. As we stated in the Weekend Wrap of June 2, cotton was overdue for a technical rally, and as this report is being compiled on June 3 cotton is trading up the 3.00 cent limit higher.

From the June 2 Weekend Wrap:

"Although the long to short ratio has fallen significantly in the current reporting period, based upon recent history, it has further to fall, which means more selling pressure by managed money. On May 19, we recommended bearish positions for cotton and gave the reasons in the May 19 Weekend Wrap. Since then, cotton has fallen sharply, but is overdue for a good-sized technical bounce. However, once this occurs, we believe that cotton will resume its downtrend."

By Garry Stern




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