Commodities: Is Now the Time to Begin Scaling In?

By Matthew Bradbard | November 24, 2008 | 11:13 AM | 0 Comments

Obama, Biden, Geithner, and Clinton they are all welcome changes with a new administration, but have things really improved yet? Our 2 main focuses are: when will oil bottom and when will the dollar top? That will be when most commodities should be bought, looking for, at minimum, a tradable bounce and potential reversal. Our bias is that all commodity accounts should have exposure long sugar and long silver. Contact us for exact details on the trades. We expect over the next 2 years to see 25 cent sugar and $25 silver; current prices are 12 cents/lb. and $10/ounce respectively.

To find out exactly how we are positioning our clients in commodity futures and options, Contact us today at 1-888-920-9997.

Energies

The US Department of Energy said that crude oil supplies were up 1.6 million barrels last week to 313.5 million barrels. The DOE also said that refinery use increased from 84.6% to 84.9% of capacity. January Crude oil ended down 7.17 and traded below $50/barrel for the first time since January 07’. We may get a bounce from oversold levels depending on what direction the US dollar decides to move this week. $58 serves as resistance. If given the opportunity, we may advise clients to explore longs below $45. The ongoing weakness is attributed to selling pressure from the worsening outlook for demand and growing tendency of investors to cling to cash. Goldman Sachs said that they were suspending their recommendations in the energy markets - a sign that the fundamental experts are spent. OPEC meets on November 29th to see if they have more tricks up their sleeves hoping to stabilize energy prices.

Supplies of gasoline were up 500,000 barrels while heating oil supplies were up 400,000 barrels. Over the past four weeks, gasoline demand was down 2.2% from a year ago while distillate demand was down 3.3% from a year ago. January heating oil lost 11.9 cents or 6.5% last week. As with Crude we may get a bounce from extremely over sold levels in heating oil. 1.6514, last week’s low will serve as support with resistance at 1.8000. Retail gas prices have been cut in half and in most areas around the country drivers can find prices below $2/gallon. January prices on the board were down 18.28 cents last week or 14.4%. I never expected to see a trade below $1/gallon but we are getting close.1.0239, last week’s low should serve as support with resistance at 1.2700. Since mid July prices are down 70% in RBOB compared to a 60% drop in heating oil and 67% in Crude.

The US Department of Energy said that underground supplies of natural gas were up 16 billion cubic feet from last week's revised figures to 3.488 trillion cubic feet. Supplies are now down 1.4% from a year ago. January natural gas closed up 1 penny at $6.50. As long as the lows from the last 2 weeks hold just above $6.20 one may take a stab at a light long position looking for a bounce back over $7. The 50 day moving average comes in at 7.40 and with some help from outside markets we may get a trade to that level.

Softs

March cocoa closed up $59, helped by doubts about the size and quality of the upcoming cocoa harvest in the Ivory Coast and Ghana. We would be a buyer of March between 1940-2000. Resistance comes in at 2100 followed by 2170. At the current price we are approximately 9% from the contract lows (August 07’) and 58% from the contract highs (July 08’) we are more encouraged to be long than short.

The USDA said that world ending stocks of sugar will be down 4 million tons in 08-09 to 24% of annual use. Brazil's sugar production was up 1% in 08-09, but India's production was down 20%. March sugar ended down 32 ticks last week. A failed rally has sugar closing 107 ticks off the weekly high. We are continuing to accumulate May 14 calls for clients looking to hold for a move back above 13 in coming weeks. Other ideas would be March back spreads, long futures while simultaneously buying puts for protection opposed to a stop as we could see a trade to 10.75. Over the last 4 weeks we have seen trades up to 12.30 sold and to be convinced prices are moving higher we would need to see a close above those levels.

Temperatures were cooler last week in central Florida, but safely above freezing - a reminder that we are nearing the season of possible freeze warnings. January orange juice lost 6.80 cents last week. We are advising clients to get long at 76 with buy stops at 81 and 86 looking to build longs if the recent lows hold. If getting long we would have our initial stops at 73.00; 240 points below the contract low. Additionally, with options we like the March 115 calls for $325.

Prices below 40 cents have been rejected the last 2 weeks in March cotton. Even with a rally off the lows last week prices still closed 82 ticks lower and cotton has now closed lower for the last 5 weeks. Some potential trade ideas would be to get long futures with a stop at 38.90 or to get short futures while simultaneously buying 3 March 50 cent calls for 175 points ($875 each). We would look to cover the futures at a 3-4 cent profit and hold onto the options for an eventual move to 50 in coming months. This strategy would be delta neutral so a move higher would be close to a wash.

March coffee was 4.70 lower last week as prices are trying to find a value zone. We see support at 110.10 with resistance at 115.00 followed by 118.25. Updating on current positions we advised clients to buy back the 95 puts we previously sold in a fence strategy last week. They now only own March 125 calls; instead of a cost of 4 cents they now own these at 6 cents. We would look for an exit on a trade back towards 122.

 

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Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions. Calculations of profit and loss have not factored in commissions and fees.