Negative Energy: How Lower Energy Prices Change Commodity Fundamentals

November 20, 2014

Energy prices have dropped dramatically since the summer of 2015. Crude oil, coal and even natural gas prices are lower and this has significant impact on the cost of production of all commodities. In my latest piece for Seeking Alpha I look at how lower energy input costs have lowered commodity production cost which could make these raw materials fall even further during a secular bear market.

Article: Negative Energy: How Lower Energy Prices Change Commodity Fundamentals


Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities.

How Various Commodities Are Dealing With Grief And Loss (Of Value)

November 18, 2014

In my latest piece on Seeking Alpha I take a look at the five stages of grief and loss- denial and isolation, anger, bargaining, depression and acceptance and relate these emotions to the current state of some commodity markets.

Article: How Various Commodities Are Dealing With Grief And Loss (Of Value)


Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities.

Silver: Signs Of Life

November 17, 2014

Silver is cheap relative to gold. The physical silver market is tightening up and two consecutive Friday’s of bullish key-reversal patterns could signal a bottom for silver prices. In my latest article for Seeking Alpha I take a look at developments in the silver market.

Article: Silver- Sign of Life


Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities.

Gold Is On Trial And The Verdict Is Just A Few Days Away

November 17, 2014

In my latest article for Seeking Alpha I examine recent developments in the gold market. We have witnessed two Friday’s in a row where gold put in bullish key-reversal patterns. Gold is tightening up, Russia is a major official sector buyer and the Swiss referendum scheduled for November 30 could add new life to the gold market which has been frustrating bulls and bears alike.

Article: Gold Is On Trial And The Verdict Is Just A Few Days Away


Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities.

Longs Washed out of Cocoa

November 14, 2014

As posted on CQG.

Longs Washed out of Cocoa

Cocoa has been in a sustained long-term uptrend since July 2013 that has taken prices from $2170 per ton to a high of $3399 on September 22, 2014. A rush of buying in late September as fears of Ebola took hold of the cocoa futures market caused the recent high. Those highs brought many speculative longs to cocoa. The buyers were looking for a challenge of all-time highs established in March 2011 at $3,826. Unfortunately, for the longs, the cocoa market reversed in late September and prices fell like a stone, closing last Friday at $2875- over 15% lower than those recent highs.

Cocoa Technicals

The recent sell-off in cocoa futures was sharp and painful for the longs.

20141114 Cocoa Daily

As the daily chart illustrates cocoa fell over 15% over a 5-6 week period. This has washed out some of the speculative longs as open interest dropped 14% over the same period. The price swoon left a gap on the daily chart between $3274 and $3283. Last week cocoa stabilized around the $2875 level. Historical volatility has dropped momentum indicators seem to be turning, as does the relative strength index.  The weekly chart also tells a story.

20141114 Cocoa Weekly

The weekly cocoa chart is clearly oversold. The decrease in open interest, the total number of open long and short positions, indicates that the move lower has been the result of long liquidation. Open interest is now at the lowest level since August 2013 when the rally commenced. Moreover, at current prices support for cocoa is very close to current market levels. There is a double bottom on the weekly chart at $2,853 which should be firm support considering the fundamentals in cocoa.

 

Cocoa Fundamentals

The over yearlong rally was the result of increasing Asian demand for chocolate confectionary products. Particularly in China, chocolate has become more popular in recent years and a new generation of chocoholics has been consuming more and more of the delicious treat increasing demand for cocoa beans. Considering 1.3 billion Chinese (not to mention increasing demand in other Asian nations) the potential for demand is huge.

The largest producers of cocoa beans in the world are the West African nations of Ghana and the Ivory Coast.
Together these countries produce more than 50% of world cocoa supplies. The spread of the Ebola virus across West Africa caused a great deal of speculative buying in September. Prices rose quickly from $3,019 per ton on September 11 to 3,399 on September 25 due to reports of increasing Ebola cases in Sierra Leone, the Republic of Guinea and Liberia. Guinea and Liberia both border on the Ivory Coast, the world’s largest producer of cocoa beans. Fears that Ebola would cross the porous borders and make its way into the two cocoa producing nations caused a speculative buying rush. An Ebola outbreak in the Ivory Coast and/or Ghana would affect production and logistics as the economies of these two countries depend on the cocoa growing and transportation business.

Cocoa demand has continued to be strong from Asia and Ebola is still prevalent in West Africa. The fundamentals for cocoa remain strong.

The bottom line…

Cocoa sold off from recent highs as speculative longs rushed to buy on Ebola fears. When the market ran out of buying it reversed and washed those longs out of their positions. The decrease in open interest validates the long liquidation. An oversold condition in cocoa, turning momentum indicators and a double bottom very close to current trading levels creates an interesting opportunity in the commodity. Demand for cocoa beans continues to be strong in Asia and the Chinese traditionally love to buy price dips in commodity markets. Look for the Chinese and other Asian nations to use today’s lower prices as a buying opportunity. Moreover, Ebola continues to plague West Africa and cases in the Ivory Coast and Ghana are not only possible, they are probable due to porous borders with affected nations.  Historical volatility has dropped in recent weeks making cocoa option prices cheaper. Consider buying some cheap call options at current levels. Look for a continuation of the long-term rally that began over a year ago. Cocoa is now in the buy zone. Given the double bottom formation on the weekly chart at $2853 cocoa is a low-risk high-reward opportunity at current price levels in terms of futures or options. The case for higher cocoa prices and perhaps an eventual challenge of all-time highs over $3,800 per ton is compelling.

Article: Longs Washed out of Cocoa


Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities.

Coffee: After a dramatic sell-off, coffee could start to percolate again soon…

November 13, 2014

As posted on CQG.

Coffee: After a dramatic sell-off, could start to percolate again soon…

The price of coffee has been extremely volatile lately. Back on October 6 active month coffee futures made new multi-year highs at $2.2550 per pound- a pretty astounding price move considering that coffee traded below $1.20 on January 2, 2014. A drought in Brazil, the world’s largest producer of coffee beans lifted prices and has kept them high for most of the year.

The technical picture

The rally to above $2.255 per pound encouraged speculative buying in the futures market, the price seemed set to challenge all-time highs established in May 2011 at $3.0625 per pound. Then, all of a sudden, the music stopped.

20141113 Coffee

As the chart illustrates coffee made a new high in October just a few cents above the April highs and then tanked. Open interest built to almost 174,000 contracts on the rally in September and early October only to disappoint the longs when prices turned south. Since the highs- open interest, the number of open long and short positions, has dropped to just under 164,500 contracts. The price correction lower has flushed some speculative longs out of the coffee futures market. Momentum and relative strength indicators are currently saying that coffee is oversold. Daily historical volatility has dropped to the lowest level in many months. In addition, there is a gap on the daily chart. The low price on Friday October 17 was $2.0850. Coffee only traded up to a high of $2.0635 on the next trading session, October 20. This created a gap on both the daily and weekly coffee charts. In the world of technical analysis, price gaps usually are filled.

The fundamental picture

Supply and demand fundamentals that lifted coffee prices in 2014 remain issues. Although there has been some rain in Brazil, overall dry conditions continue to plague the country. Brazil is approaching the December start to its summer rainy season with a severe water shortage. More than 10 million people across Sao Paulo state, Brazil’s most populous region, have been forced to cut water use over the past six months. In coffee growing regions, last year’s drought has damaged many coffee producing regions. To add insult to injury leaf rust, a devastating coffee fungus, is plaguing growing areas in Central America. The supply side in the coming months, given fungus and dry conditions, is certainly weak at best.

On the demand side, worldwide consumption of coffee continues to increase with population growth. In Asia, coffee popularity continues to grow at the expense of tea with trendy coffee shops springing up everywhere. I was in New York City last week and I could not help but notice that there are now more Starbucks and Dunkin’ Donut shops around the city than bars. On some blocks there are more than just a few coffee shops with coffee consumers lined up for their daily, or hourly, fix.

The bottom line

Coffee futures can be very volatile. The price has come down dramatically over the past month. Right now, coffee futures are oversold and volatility has dropped. Lower volatility means lower option prices. I believe that coffee prices will start to percolate again soon. This may be the perfect time to pick up some call options on coffee futures; the fundamentals are still strong from both a supply and demand standpoint. The rally that began last year may really start to reassert itself, particularly if those expected December rains in Brazil fail to materialize.

CQG Article: Coffee: After a dramatic sell-off, could start to percolate again soon…


 Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities.

 

The Commodity Black Hole: Will The Dollar Cause Commodity Prices To Make New Lows?

November 12, 2014

In my latest article for Seeking Alpha I look at the dollar rally and its effect on commodity prices. The dollar looks poised to test some long-term resistance levels and that is bad news for commodity prices which could fall into a black hold if the trajectory of the greenback continues.

Article: The Commodity Black Hole: Will The Dollar Cause Commodity Prices To Make New Lows?


Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities.