Commodity ETF Alert April 2014 Portfolio Update

| April 22, 2014

 

NATURAL GAS:  THIS IS GETTING INTERESTING!

As you know, I sent out an email on April 8th, alerting you to the buying opportunity in the US Natural Gas Fund (UNG).

Here’s additional insight into why we made this trade, and how it’s performing thus far.

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Well, it turns out we’re not having to wait as long as we initially thought for natural gas prices to rise.

In fact, the commodity is pushing to multi-month highs near $4.73 mmBtu as I write.

As you know, the thesis for our recently established natural gas trade is that US Energy Information Administration (EIA) inventory reports will come in below expectations once summer rolls around.

But believe it or not, the EIA’s weekly reports are already falling short.

Let me explain…

The natural gas injection season starts when EIA inventory reports show week-over-week additions to storage instead of withdrawals.

Generally, the injection season starts in April and ends in October.

During this essential restocking period, US natural gas production is sent into regional storage facilities for the upcoming heating season.

As expected, the EIA reported the first storage injections of the season just a few weeks ago.

But here’s the deal…

For the week of April 4th, natural gas inventories rose by 4 bcf.  And for the week of April 11th, storage levels rose by 24 bcf.  While they are the first inventory additions of the season, both storage reports came in far below analysts’ expectations.

In fact, the forecast saw at least a 10 bcf build for April 4th and a 50 bcf build for April 11th.  As you can see, storage additions for the first two weeks of April were 50% lower than energy analysts predicted.

Clearly, producers weren’t anywhere near being able to put that much gas into storage.

And that brings up something very important…

The EIA predicts this year’s injection season will be the largest in history.  Given the abundance of natural gas here in the US, the government agency believes producers will have no problem providing a whopping 2,500 bcf of inventory by the end of October.

But since the first two inventory additions of the season fell wildly short of expectations, this task may not be as easy as the EIA thinks.

After all, natural gas producers fell on exceptionally hard times over the past few years.  The price of the commodity they produce fell to multi-decade lows in 2012.

And thanks to the ongoing spate of relatively low prices, drilling for dry gas has slowed to a snail’s pace…

According to Baker Hughes (BHI), dry gas rig counts are currently sitting at 316- that’s near a 19-year low!

Even with the dramatic surge in natural gas this past winter, explorers are still reluctant to start drilling for new dry gas sources.

Fact is, prices are still too low to warrant investment in new dry gas drilling in most US shale basins.  Instead, most companies are focusing on oil and natural gas liquids production, which carry a higher profit margin.

Now, as I mentioned earlier, the summer cooling season is exceptionally important this year.

If temperatures are above average in July and August, we’ll likely see week-to-week EIA reports fall short of expectations.  If that’s the case, the EIA’s lofty 2,500 bcf injection season estimate may prove to be a pipe dream.

In turn, it’s extremely likely gas prices rise significantly to account for the shortfall.

Bottom line…

The bullish potential for natural gas is substantial this summer.  If Mother Nature sends us some hot temperatures, we very well could see this commodity rise to the mid-winter highs of $6.50 mmBtu- and possibly higher.

As you’re likely aware, the recent rash of surprisingly bullish EIA reports has already sent the US Natural Gas Fund (UNG) beyond our buy-up-to-price of $25.50.

As a result, I’m moving UNG to a hold.

For now, just sit back and see what happens with upcoming inventory reports.

Now let’s be clear…

There’s still a possibility that weekly inventory reports improve in coming weeks.  If so, we could see natural gas fall back to the low $4 range.  If that happens, I suggest you use the dip as a buying opportunity.

Hang on folks, this could be a very interesting summer for natural gas investors!

 

COMMODITY REVIEW

COMMODITY TICKER CURRENT VALUE LAST MONTH CHANGE
Energy JJE $19.63 $18.54    +5.9%
Grains JJG $49.73 $49.78    -0.1%
Industrial Metals JJM $29.25 $27.45    +6.6%
Precious Metals JJP $63.53 $66.23    -4.1%
Softs JJS $53.82 $51.22    +5.1%
Livestock COW $30.85 $31.79    -3.0%
All Commodities DJP $40.22 $38.97    +3.2%

 

ENERGY COMMODITIES

In what’s usually a seasonally weak time for this commodity, WTI crude is on the verge of breaking above 6-month highs at $105 a barrel.

Why?

The Ukrainian situation has oil investors on edge.  If hostility in Eastern Ukraine keeps rising, there’s a very good possibility Russia invades the heartland of their western neighbor.

In such a scenario, there would be a drastic increase in tension between Western powers and Russia.  And you can bet your bottom dollar the US and its allies would apply hefty sanctions on Moscow for their actions.

And since Russia in one of the world’s largest crude producers, investors are concerned sanctions will affect the country’s oil exports.

It goes without saying that commodity investors are closely monitoring this situation!

GRAIN COMMODITIES

The spring planting season is here…

After a longer than usual spring thaw, US farmers are entering the fields.  And now that seed is getting in the ground, a bit of uncertainty is coming out of the grain markets.  As a result, corn, wheat, and soybeans are giving up some of the solid gains earned over the past three months.

What do we do with grains now?

Remember, we’re long all three of the major grains via the Teucrium Wheat Fund (WEAT), Teucrium Corn Fund (CORN), and Teucrium Soybean Fund (SOYB).

While we may see heightened volatility in grains over the next few weeks, there are some uncertainties that will likely lend bullish support to grains over the summer.

The first of which is the growing possibility of an El Niño (more on that in a minute).

Secondly, we can’t ignore the worrisome situation in Ukraine.  Since the country is one of the largest grain exporters in the world, continued political upheaval will keep grain investors guessing.

For now, keep holding WEAT, CORN, and SOYB for higher prices this summer.

INDUSTRIAL METALS

Copper recovered a portion of the hefty losses seen last month.  As you may remember, the red metal plummeted below $3 a pound in early March upon word of a Chinese corporate bond default.

But in recent weeks, the red metal managed to take back the highly important $3 level.  Even though Chinese economic data continues to come in on the weak side, there haven’t been any more defaults.

Obviously, that’s good news for the copper market.  As long as additional Chinese corporate defaults don’t occur, we may see copper add to recent gains.

However, given the uncertainty in the Chinese economy, there’s still no reason to get long any of the industrial metal complex, including copper.

PRECIOUS METALS

Gold and silver are back on the defensive again…

Both metals dropped precipitously last week as CPI data revealed US inflation is still running at a relatively benign level of 1.5%.  As I’ve said many times in the past, gold and silver will face additional headwinds as long as inflation remains low.

However, that doesn’t mean you shouldn’t be adding the metals to your long-term portfolio.  With precious metals trading near cost of production, it’s only a matter of time before prices rise.  It will require patience, but it is my firm belief gold and silver regain their former glory in the years to come.

Both the iShares Silver Trust (SLV) and iShares COMEX Gold Trust (IAU) are back in our buy range.  If you haven’t already, buy SLV up to $19.66 and IAU up to $12.52.

What about platinum and palladium?

Palladium is on the verge of a big technical breakout above $800 an ounce.  As you’re likely aware, the metal has been flirting with this highly important price level for the past month.

Remember, Russia is one of the world’s biggest suppliers of palladium.  If the worst-case scenario comes to fruition in Ukraine, we may see Russian palladium supplies come off the global market, along with their oil.

It may be a bumpy ride for a while, but keep holding the ETFS Physical Palladium Shares (PALL) for higher prices.  As of today, we’re sitting on a 2% gain in PALL.

Unfortunately, platinum isn’t performing quite as well as I would like.  Nonetheless, there’s simply no reason to sell the iPath DJ-UBS Platinum (PGM) at this point. Platinum’s long-term supply demand fundamentals are still heavily in favor of the bulls.

If PGM falls below $30.50 over the next two weeks, feel free to add it to your portfolio if you haven’t already.

SOFTS

Cocoa is still contending with the highly important $3,000 a ton mark.  So far, investors have been unwilling to push the commodity too far above this important level.

But listen to this…

The Australian Bureau of Meteorology just announced that their odds of El Niño occurring have jumped to 75% from 50%.  In other words, it’s starting to look like a near certainty that this weather anomaly makes an appearance.

And that means abnormal weather patterns will likely affect agricultural commodities this year.

For example, the West coast of Africa will likely suffer a drought…

And as I explained in our March trade alert, that’s bad news for the already tight global cocoa market.  If you haven’t already, go ahead and buy the iPath DJ-UBS Cocoa (NIB) up to $39.41.

And that’s not all…

Coffee is threatening to break firmly above the $2 a pound mark on El Niño worries as well.

If El Niño comes to fruition, Indonesia and Vietnam will likely see drought affect their Robusta coffee crops.  As you know, dry Brazilian weather was responsible for sending coffee from $1 to $2 a pound earlier this year.

LIVESTOCK

Add beef to the list of commodities likely to be affected by El Niño.

How?

The weather anomaly usually brings extended dryness to Australia.  And in case you’re unaware, the country is already suffering from a multi-year drought.  Ranchers have been forced to cull their herds in response to the lack of feed in recent years.

If El Niño develops, it will make the situation even worse.

Mix the above possibility with the multi-decade low in US cattle supply and the odds of a global beef supply crunch becomes more likely.

 

Category: Commodity Trading