Commodity ETF Alert August 2011 Issue

| August 9, 2011 | 0 Comments


All I can say is… wow!

The past week has been nothing short of crazy.

As I’m sure you know, the markets are in turmoil.  European debt worries are sending investors around the world into a panic.

In fact, markets spent most of last week dropping through the floor.  It wasn’t until Friday that some relieving news came from Europe and the selling finally subsided.

But then the weekend came and more bad news hit the wires…

Standard and Poor’s downgraded the US’s credit rating from AAA to AA+.  The once unimaginable move sent investors running for the exits on Monday.

And now, here we are…

It’s Tuesday and nearly every market is deeply oversold.  And for commodity investors, that spells opportunity.


Investors’ emotional panic attack has pushed many commodities down to bargain levels.

Take oil for example…

West Texas Intermediate (WTI) crude plunged from $99 all the way down to $80 a barrel.  That’s a scary 19% drop in a short, two-week time span.

But it’s mostly panic selling…

The important thing to realize is oil’s supply/demand fundamentals haven’t changed.  In fact, the world’s still consuming massive quantities of oil… just under 87 million barrels per day.

But what has changed is investors’ sentiment towards future oil consumption.  The recent rash of unsettling economic news has some economists lowering estimates for US economic growth.

And in a low (or negative) growth environment, oil demand will drop.

But the bears are jumping the gun…

As scary as the headlines are, there still isn’t enough data to suggest the US is actually entering another recession.

Yes, we’ve had some weak economic readings recently.  But the fact is, US GDP is still positive.  The economy may not be as strong as many investors and economists are hoping for, but it’s certainly not in recession territory.

And remember, China’s still growing like crazy…

In fact, a recent GDP report revealed the Chinese economy grew 9.5% year-over-year in the second quarter.  China accounts for a large portion of the recent increase in global oil consumption.

There’s no doubt China, along with other emerging economies, will continue putting upward pressure on global oil markets.

But recently, investors haven’t cared about these facts…

They’re selling now and asking questions later.  And the funny thing is, outside of another 2008 style economic meltdown, crude oil demand should actually increase in coming months.


As oil comes down, so does the price of gasoline.  Remember, it wasn’t long ago the national average gas price was nearly $4.00 a gallon.

But now, the national average is $3.64 and dropping quickly.  Falling gas prices are a silver lining to all these dark clouds covering the markets.  Consumers will feel the squeeze on their pocketbooks ease a bit… and they’ll start using more oil, not less.

And let’s not forget, the global oil market is still very tight…

The world has been pressuring the Saudis for months to further raise oil production. Remember, nearly two million barrels a day of supply are still off the market due to ongoing military action in Libya.

But now that oil prices are dropping so quickly, the Saudis will be very hesitant to increase production.  In fact, according to energy industry experts, the Saudis need a Brent oil price of $85 a barrel in order to balance their national budget.

If oil drops below that level, they’ll start tightening the spigot.  In other words, Saudi Arabia will likely lean towards reducing production rather than raising it.

And the same goes for other OPEC countries…

Their economies are dependent on oil revenues.  And if oil drops too far too fast, they’ll start easing up on production in order to push prices back up again.

So where does this leave us?

The fear fueled plunge in the markets is an excellent opportunity to buy oversold assets the world desperately needs… especially oil.  No question about it, this pullback in oil is an absolute gift to commodity investors.


My favorite way to invest in oil is the United States 12 Month Oil Fund (USL).  USL is an exchange traded fund designed to track the movements of WTI crude.  The value of USL shares reflects the average price of 12 Nymex oil futures contracts.


Take a look at the chart…

USL is currently trading at $37.16.  As you can see, USL is down sharply in recent trading.  Use this sell-off as an opportunity to add USL to your commodity portfolio at bargain prices.  The recent emotion driven sell-off has taken oil down to unsustainably low levels.


US 12 Month Oil (USL) is trading at $37.16
Buy USL up to $38.25 per share.
Our profit target is $46 or more.
Don’t forget your position sizing.

Commodity Review

Energy JJE $18.56 $22.69   -18.2%
Grains JJG $48.88 $48.50      0.8%
Industrial Metals JJM $40.59 $44.63    -9.1%
Precious Metals JJP $98.78 $89.93     9.8%
Softs JJS $74.28 $81.90   -9.3%
Livestock COW $29.97 $30.83   -2.8%
All Commodities DJP $45.65 $48.21   -5.3%


The recent panic sell-off is clearly causing some serious disruptions for energy commodities.

But like I said earlier, oil demand will likely rise now that prices have dropped.  And with emerging economies like China still in rapid growth mode, the recent emotional sell-off in oil is a golden buying opportunity.

Natural gas is dropping as well…

Investors pushed prices just below the $4 mmBtu level in recent trading.  But remember, natural gas has much more upside potential than downside risk.

We’re getting close to the point where some natural gas producers will simply stop bringing gas to the surface.  At prices this low, the economic viability of many wells is questionable.  In other words, these exceptionally low natural gas prices are unsustainable in the long run.

Remember, we have to be patient with natural gas.  If you don’t own natural gas yet, buy UNL up to $32.50.


Grains are holding up well in the recent sell-off.  In fact, corn is down a mere 3% the past few days… not bad considering the sheer panic in many other markets.

What’s the reason for this?

There are signs of poor pollination in many corn producing areas.  And that has many traders worried this year’s corn yields could be lower than expected.

However, let’s steer clear of grains for now.  Buying opportunities in other commodity markets offer much more profit potential.


Industrial metals are getting a shellacking…

perceived economic slowdown has aluminum, lead, and nickel dropping in a hurry. Investors are running for the hills in these markets as a recession would reduce demand for these metals.

Our positions in copper (JJC) and palladium (PALL) are falling due to these same fears.

But remember, there’s still no proof that the US economy is entering a recession.  And with many metals approaching deeply oversold levels… a buying opportunity is setting up.

Let’s keep holding JJC and PALL for a rebound…


If there was any question in your mind about the potential of gold, it should now be answered.  The shiny metal was up nearly $65 yesterday, surpassing $1,700 an ounce.

What’s fueling this epic surge?

Gold is quickly becoming the ‘safe haven’ trade of the century.  Investors are flocking to the precious metal as central banks around the world struggle to regain control of their economies.

We’re currently sitting on a fantastic 27% gain in on our IAU trade.  I’m sure it may be tempting for you to sell this big winner… don’t do it.  Gold still has strong upside potential.

In fact, JP Morgan just came out with a $2,500 gold price target by the end of 2011.

Let’s keep holding IAU and SLV for further upside…


Soft commodities are taking it on the chin…

Thankfully, our recent highly profitable trade in sugar was our only holding in softs. But now that we’re out of sugar, I wouldn’t mind if softs fell hard so we could buy them again at bargain levels.

Be on the lookout for buying opportunities in lumber, cotton, and coffee.


Cattle and hogs are holding up nicely.

Live cattle prices remain elevated due to high global beef demand and a record low US cattle herd.  These two factors point to a strong cattle market for the foreseeable future.

Portfolio Changes

  • This month we’re adding Oil (USL) to the portfolio.  See above for all the details.

Category: Commodity Trading

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.