CEA Portfolio Update – October 2015

| October 27, 2015

More Evidence Of A Looming Oil Bottom…

As you know, we chose not to initiate a new position in the Commodity ETF Alert portfolio this month.

While there are tempting opportunities in a few oversold assets, the risk/reward simply isn’t in our favor right now.

However, that will likely change soon…

A number of promising technical and fundamental developments are occurring in various commodity markets.

When I see a low-risk/high-reward buying opportunity deserving of our attention, I’ll let you know immediately.

But until then, let’s dig a bit deeper into the shifting fundamentals of the oil market…

As you know, the price of West Texas Intermediate (WTI) crude has been under bearish pressure for most of this year.

Despite a few valiant attempts by bulls to carry the commodity to higher prices, WTI is currently trading just shy of $45 a barrel.

That’s just a stone’s throw away from the 2015 low of $38.

Where does this market go next?

The most likely scenario right now is a revisit of the low $40 a barrel area- and possibly a retest of the yearly low.

With refinery maintenance season in full swing and the resulting drop in utilization, demand for crude has waned the past few weeks.  As a result, US crude inventories are climbing towards the multi-decade high levels seen earlier this year.

Clearly, this is not the time of year for bulls to be pressing the market.

But here’s the deal…

There are a few very important factors suggesting WTI will likely bottom in the fourth quarter of 2015 or first quarter of 2016.

First of all, US production is already weakening.  In fact, the US Energy Information Administration (EIA) estimates total US crude production declined by 120,000 barrels per day (bpd) in September- a steeper than previously estimated decline.

What’s more, production is now on the verge crossing below year ago levels at 9 million bpd.

With that in mind, let’s take another look at drill rig counts…

The most recent Baker Hughes rig count revealed there were 594 oil directed rigs operating in the US.   That’s down 1,001 rigs from the same time last year, or a 63% drop.

Clearly oil exploration in the US is hitting the skids.

But here’s where the bullish case for oil gets even more compelling…

Two of the largest oil services providers in the world, Schlumberger $SLB and Halliburton $HAL, recently reported Q3 earnings.

In their conference calls, both companies projected a large swath of US oil exploration companies are on the verge of shelving drilling projects for the remainder of the year.

With yearly budgets exhausted and oil prices still in the gutter, there’s simply no reason to keep putting new holes in the ground.

As a result, the US oil directed rig count will likely take another steep dive over the next two months.  

In fact, $HAL suggested rig counts could drop another15-20% from current levels by year-end.

Folks, it’s just a matter of time before the ongoing US oil production drop starts accelerating.  Some industry experts predict monthly declines of 125,000 bpd in early 2016.

Now that we know US supply is virtually guaranteed to decline in coming months, let’s look at demand…

According to research firm Wood Mackenzie, global oil demand will grow by 1.23 million bpd in 2016.  This outlook is in line with OPEC’s estimate of a 1.25 million bpd global demand increase next year.

Due to the upswing in global demand and downturn in US oil production, many analysts feel the oil market is quickly approaching a new balance point.

When this juncture is reached, the price of WTI will likely return to the $70 a barrel area or higher- a $25 a barrel increase over current prices.

Of course, if WTI drops into the upper $30 a barrel range in late 2015, the potential upside in 2016 grows even more.

Bottom line…

Given the valuable insight from $SLB and $HAL, it looks as though the fourth quarter of 2015 or first quarter of 2016 will be an important tipping point for the oil market.

And with the US oil production slowdown expected to accelerate in 2016, it’s just a matter of time before crude bulls regain control.

What do we do in the meantime?

As far as oil goes, we wait.  The optimum buy in point for a bullish oil position is not yet present.  But when it appears, you’ll be the first to know.

Now let’s be clear…

While WTI holds some amazing profit potential in 2016, there are other commodities experiencing important fundamental shifts.  As a result, they have strong upside potential as well.

Those commodities, and some of the companies producing them, will be the focus of upcoming reports!


Commodity Review

Commodity Ticker Current Value Last Month Change
Energy JJE $7.20 $8.14 -11.5%
Grains JJG $32.89 $32.64 +0.8%
Industrial Metals JJM $20.88 $21.36 -2.2%
Precious Metals JJP $54.40 $52.58 +3.5%
Softs JJS $32.72 $28.50 +14.8%
Livestock COW $25.69 $25.79 -0.4%
ALL COMMODITIES DJP $24.14 $24.64 -2.0%
As of 10/26/15


Energy Commodities

With oil discussed above, let’s take a look at natural gas…

The gaseous commodity is under immense bearish pressure thanks to quickly deteriorating fundamentals.  Not only is production staying stronger than expected this Fall, but above average temperatures are set to envelop the Central and Eastern US for the next few weeks.

What’s more, longer-term weather outlooks are suggesting an El Nino fueled 2015-2016 winter will be warmer and wetter than last year’s frigid affair.

To top it off, the Energy Information Administration (EIA) is projecting end of October inventories will total 3,956, which would be 158 bcf over the 5-year average and the highest end of October reading ever recorded.

Given the current bearish predicament, it’s not out of the question to think natural gas will plunge to the $2.00 mmBtu level- a price not seen since 2012.

We currently have no position in natural gas and will stick to the sidelines until this market hits extreme oversold levels.


Grain Commodities

Corn and soybeans remain range bound as farmers are having a relatively uneventful Fall harvest season.

According to the USDA crop progress report released yesterday, 75% of the US corn harvest is now complete, which is ahead of the 2010-2014 average completion reading of 68%.

As far as soybeans go, 87% of the harvest is complete, which is beyond the 80% average completion reading for the past four years.

With harvest season humming along like a well-oiled machine, it’s unlikely we see any surprise rallies like we did last year when heavy rain kept farmers out of the fields.

Until we see data supporting the notion of a supply disruption or unexpected increase in demand, grains markets are best avoided.


Industrial Metals 

From a technical perspective, copper has finally made a turn for the better the past month.  The red metal was able to break free from the downtrend that took it from $2.90 a pound in May down to $2.25 by late August.

What’s more, copper appears to be forming a basing pattern in the $2.30 range.  By all technical indications, the economically sensitive metal appears to be forming a bottom.

But the fundamental picture is still murky for copper…

As you likely heard, China cut interest rates again last Friday.  That’s the sixth rate cut in the past year from the People Bank of China (PBoC).   While it’s clear the PBoC is desperately trying to stimulate growth, it’s also evident the Chinese economy is on much shakier ground than we thought earlier this year.

While the country officially reported Q3 GDP growth of 6.9%, which is still relatively healthy, there’s evidence to suggest growth is much weaker- in the 3% range.

Bottom line…

While copper may be able to put together a few small technical rallies, we still don’t have the fundamental tailwinds needed to get long this market.


Precious Metals

Both gold and silver have developed very intriguing technical patterns over the past month…

Gold is forming a bullish flag pattern just shy of the 200-day moving average at $1,180 an ounce.  At the same time, silver looks poised to surpass its 200-day moving average at $16 an ounce.

Could the metals finally break free from the bearish chains that have held them down the past few years?

While the price action over the past month is encouraging, it’s still too early to tell just how far bulls are willing to push the metals.

Keep in mind, both gold and silver still have important technical resistance to overcome at $1,200 and $16.70, respectively.

Should the Fed give concrete guidance that they’ll keep interest rates lower for longer in their meeting this Wednesday, we may see more capital flow into the precious metals complex.



Without question, softs were the best performing commodity complex over the past month.  Bullish moves from sugar, lumber, and orange juice took our softs complex tracking ETF (JJS) sharply higher on the month.

Will this strength continue?

Quite possibly.

A very strong El Nino weather pattern has the potential to disrupt crops the world over.   The commodities most at risk of supply disruptions are cocoa and sugar.

While it’s tempting to get long sugar right now, there’s a distinct possibility the world’s largest producer, India, uses the recent rally from multi-year lows to dump unwanted inventories on the market.

Such action would certainly send the commodity back to lower ground.

However, if we see a reasonable market pullback in sugar, we may use it as an opportunity to get long.  A recent supply/demand outlook from the International Sugar Organization suggests the sugar market will go into deficit this crop year and next.


Live cattle succumbed to a rather vicious selloff in September…

The commodity sank 15% last month as investors focused on slowing demand from meat packers.  With demand weakening, there was a noticeable buildup of heavy cattle in feedlots- a bearish signal.

But the weakness didn’t last long…

Live cattle regained all their September losses the first few weeks of this month when investors realized beef supplies will likely remain restricted through the end of this year and into 2016.

While I don’t foresee another stunning rally to record highs anytime soon, both live and feeder cattle should maintain current prices for the foreseeable future.


Category: Commodity Trading