Commodity Corner

Views on commodities and energy

The research is in … it pays to watch inventories

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Traders, hedge funds and Commodity Trading Advisors, who speculate in the volatile commodity markets, devour information on how much of a particular commodity is held in storage for sale in the future. For those who trade on fundamentals, it’s part of the discipline to keep track of inventories, such as the daily changes of stocks at warehouses used by exchanges to back delivery against futures contracts. Now Gary Gorton, a professor of finance at the Wharton School, Fumio Hayashi at the University of Tokyo and K. Geert Rouwenhourst of Yale have produced a paper on inventories and trading performance. Read more about it here. The research establishes a theory of storage, showing how a strategy using low inventory commodities would produce better returns than trading commodities with higher-than-normal inventories. It’s pretty interesting and if you need proof that it pays to watch inventories, give it a read.
 
Of course, most traders already know that. Given unprecented global demand for crude oil, grains and metals in recent years, a commodity that appears to be in short supply is likely to rise in price. But inventories are part of a mix of market influences, and in the short term a trader ignores other factors like global demand, geopolitics, technicals, sentiment, market positioning, and investment in infrastructure at their peril.

Double whammy: retail heating oil and gasoline both over $3

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The skyrocketing price of U.S. heating oil– at an average of $3.11 per gallon– has caught many Americans unprepared for the winter.  It’s the first time ever that U.S. consumers are paying more than $3 per gallon for both heating oil and gasoline.  

“We’ve never seen a year like this…people are scared,” said Susan Kooperstien of the Action for Boston Community Development, a nonprofit that helps low-income families get fuel assistance.  So far, ABCD estimates 16,000 families have inquired about the assistance.

Weather in Brazil, the focus of coffee trade

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For many agricultural commodities, weather news influences day to day market prices. This is particularly true of coffee, when it comes to weather in Brazil, the largest coffee producer in the world. Coffee has a reputation as one of the most volatile commodities in futures markets in New York and London. For instance, prices for robustas or arabicas, the two traded types of coffee beans, can rise 5-10 percent in a day on any hint of polar air reaching Brazil’s coffee belt during the June-August frost season.Yet the fear of a freeze in growing areas, looks out of proportion to the actual history of damage to coffee plants from winter weather. Brazil’s crop has only suffered three frosts in the past 32 years. The last severe one was in 1994, although there was some minor losses to cold in Parana in 2000.

The winter over southern Brazil has been milder in recent years, some say because of global warming, and many of the coffee producers have moved northward out of Parana, which used to be one of Brazil’s biggest coffee producing states, to warmer areas in Minas Gerais, now the top producer.

Oil a steal compared to…

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The Cleveland Indians, celebrating with a $447.25 per barrel beer….

Oil’s record run to near $100 a barrel has brought it within striking distance of the price for the equivalent volume of Coca Cola, but it’s still a bargain compared to Jack Daniels whiskey and Chanel No. 5.

                                    
PRODUCT                     US$/BARREL
Gasoline #                               103.50
Coca Cola                                 126.45
Milk                                          163.38
Snapple                                    237.72
Perrier Mineral Water                 300.61
Tropicana Orange Juice             307.44
Budweiser Beer                        447.25
Scope Mouthwash                    682.34
Starbucks Venti Latte               954.24
Pinot Grigio Wine                    2,117.75
Bertoli Olive Oil                       2,370.71
Jack Daniels Whiskey             4,237.63
McIlhenny Tabasco Sauce        6,155.52
Visine A.C. Eye Drops             39,728.64
FLONASE Nasal Spray           902,304.00
Chanel No.5 Parfum             1,666,560.00

Selling durum in red-hot markets

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As sky-high wheat prices soar even higher thanks to unstoppable gold and oil, Ward Weisensel, the chief operating officer of the Canadian Wheat Board, shared some of his views on durum wheat from his vantage point on top of one of the world’s last remaining stockpiles. The farmer-run marketing agency, which is one of the world’s largest grain exporters, plans to try to move as much wheat as possible from the Canadian Prairies to Asia, Europe, the Middle East and other markets to rake in record-high prices. Here’s part of my interview on durum wheat, used to make pasta and couscous. The farmer-run CWB accounts for more than half of world durum trweisensel.jpgade.

Q. Do you still have significant (durum) quantities for sale?
A. We have reasonable volumes in relation to our core customer base. Our intention is to work with them. But what we’re seeing is a lot of demand out in the marketplace — tremendous demand on the durum side — and the reason prices are so high is there’s real issues whether there’s sufficient durum in the world to supply that demand.

Chicago traders eye crude oil, dollar for price direction in grains, soy

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Chicago grains and oilseed markets are likely to continue tracking crude oil and the dollar in the week beginning on Sunday evening, Nov. 4 — the dominant trends all harvest season. 
    The CBOT  soyoil market  was near a 33-year high on Friday of 42.79 cents a lb, rising as the dollar fell to a record low against a basket of currencies and crude oil rallied on strong domestic jobs data. Crude rose more than $2 to near $96 a barrel. Cheap dollars make exports of soyoil and other grains cheaper. High crude oil makes soyoil-derived biodiesel fuel more economical.
    CBOT floor traders say the soyoil market is now eyeing the all-time high of 51 cents made in the fall of 1974, especially given the strength in crude and talk of $100 crude oil that once seemed fanciful. Crude went above $95 last week.
     “We’re still going to be watching what’s going on in the outside markets ahead of the USDA report next week. It seems like people aren’t looking for a lot in the report,” one CBOT trader said. 
    The U.S. Department of Agriculture updates its world and domestic production and export numbers on Friday, Nov. 9. Traders are most interested in (1) U.S. corn and soybean production and (2) Australia’s wheat crop and exports. The Nov. 9 report will be USDA’s last U.S.  numbers until its final 2007 crop summary is issued in January. 
    Early indications from private market analysts last week pointed to USDA trimming the U.S. corn crop now at a record 13.318 billion bushels and raising its soybean forecast from 2.598 billion bushels. A smaller corn output would likely give the corn market a boost, expectations that could be built into prices before Friday if the consensus grows.
    But it’s early, with additional private forecasts to be issued ahead of the Nov. 9 report.  

The general consensus among traders is that USDA also has no choice but to reduce its Australian wheat production estimate, now at 13.50 million tonnes after dry weather shrunk yields. That is already at about half what Australia usually harvests. But it’s difficult to tell what impact a slightly smaller Australian wheat forecast will have on CBOT wheat, as traders have already priced in a smaller crop than 13.50 MMT.  The market has falling more than 15 percent from record highs above $9.50 last month as northern hemisphere winter wheat seeding pointed to bumper harvests next summer — if, that is, the weather (and climate) cooperates. That is a big IF.
     Besides, wheat volatility has been over the top this fall — trading in 30-cent limit swings on the slightest market news. Hot speculative money keeps sloshing through the grain pits. It’s definitely keeping veteran grain traders on their toes. 
     Another factor to watch: next week index funds should start rolling their December CBOT corn and wheat long positions into CBOT March, May, July and even December 2008 deferred deliveries. That could add a little volatility to the mix and add some pressure to front-month spreads, floor traders said.  
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The oil bone is connected to the gold bone …

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      …the gold bone is connected to the grain bone and the grain bone is connected to the…
    In their Daily Grain Comment on Thursday, analysts at AG Edwards helped illustrate the connectedness of energy prices and grains, something that was not typical just a couple of years ago. (pdf here?)
    Prices for commodities are increasingly rising and falling in unison. Investment funds have diversified their portfolios into commodities in recent years, looking at metals, grains and energy futures as more of a single asset class that can add balance to the traditional mix of stocks and bonds.
    Traditionally, gold and corn for instance, or crude and soybean oil, had little or no connection when markets moved. Now, its not unusual to see everything move togethe, as investment managers shift money into or out of the sector. What were unrelated markets can appear to have dependence, although there is plenty of capital shifting between individual commodities as well. It is not unusual to hear a grain trader cite gold, or oil futures as a feature of their markets.
    Ags and energy markets have also been linked by the increased use of biofuels made from farm commodities.
    Thursday was a case in point.
    Chicago Board of Trade corn, wheat and soybean futures had finished overnight trading with gains, thanks to a rally in crude oil past a record high $96 a barrel, gold was at a 28-year high and the weak dollar was helping grain exports.
    The overnight trend, more often than not, sets the stage for trading in the more active dayside session.
    So, traders, ‘called’ CBOT corn futures to open 2 to 3 cents a bushel higher, soybeans 7 to 10 cents higher and wheat 10 to 12 cents higher in keeping with the overnight trend.
    But as it got closer to opening time (9.30 a.m. CDT), doubts began to creep in. Why? Because crude oil began falling in a bout of profit-taking after it’s rise to a record high.
    And gold began retreating after breaching the $800-an-ounce mark. The stock market was down more than 200 points on its way to a 362 point shakeout for the day.
    CBOT grain traders changed their calls, now seeing corn opening mixed – either 2 cents a bushel higher or 2 cents lower. They scaled back the wheat call to 3 to 5 cents higher, and soybeans also 3 to 5 cents higher.
    At the opening bell, all three commodities opened down, and ended lower on the day, as did oil and gold.   

– K.T. Arasu

Oil market stuck in a hamster wheel?

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rtr1tmb6_comp.jpgU.S. crude oil prices gushed to a record over $94.50 a barrel Wednesday after a government report showed a surprisingly big decline in stockpile levels last week. And more declines in inventories could be on the way.

Energy analysts are saying the industry is selling off huge amounts of oil in storage because of the shape of the forward price curve — oil prices get cheaper for delivery out into the future — and the market may now be in a vicious circle…. or perhaps a hampster wheel.

Gold and oil…not as tight as they look

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With gold closing in on $800 an ounce and crude on $100 a barrel, it’s natural to assume a close connection. Gold is supposed to hold its value better than other assets when inflation is rising, so many investors consider it an inflation hedge. A glance at a weekly graph plotting New York gold futures over crude oil futures shows that while joined at the hip during last bout of commodity buying, going back they have frequently parted ways. The correlation coefficient, a statisical measure of how closely any two variables (like gold and oil) trade together, was 0.58 averaged over October, on a scale of -1.0 to 1.0. Stretched over five years, its more like 0.21, showing gold and oil are nearly independent (zero being not correlated.) Moreover, even as the gold market gets excited about breaking the 1980 records at $850 in spot and $875 for COMEX futures, in inflation-adjusted terms gold’s value is not near a record. Crude at $100 is basically its highest price ever in absolute and real terms. But gold’s inflation adjusted record was put at $2,079 an ounce by consultants GFMS Ltd. Deutsche Bank said in a report last week that gold needs to rise another 74 percent to reach an all-time high in real terms. So it looks cheap compared to oil. Why is gold lagging? It’s a good question. Part of the answer can be found in a relatively non-scary inflation picture, that defies the record rally in energy prices and many other commodities. Also, gold is not “consumed” the way other commodities are, being more of a monetary asset (and an adornment.) So demand for raw materials to feed China’s economy is less of a factor.

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A more compelling chart, (and prettier, if you like symmetry) shows gold’s inverse relationship with the dollar, which makes sense since gold is considered more of a currency than oil is. When the dollar goes down, gold often goes up and visa versa. The gold/dollar correlation is -0.76 in October and -0.54 over the longer period (full negative correlation is -1.0, think opposite ends of a seesaw). If the dollar keeps falling, gold could be expected in coming months to strike a nominal, if not a real, record high.

“Superspike” Goldman says time to cash in on oil and gold

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Goldman Sachs, which shook up commodity markets two years ago with its prescient ‘superspike’ theory that oil prices will top $100 a barrel, thinks it may be time for a short bout of profit-taking

After a 50 percent surge so far this year to $93 a barrel, crude is ripe for a temporary bout of “tactical” selling before resuming a climb that could take it into triple-digit territory, Goldman said.