Commodity ETF Alert August 2013 Issue
IT’S TIME TO SHORT OIL!
Without question, crude has been one of the best performing commodities over the past few months.
While many hard assets have been stuck in neutral, crude is up around 15% since early June.
What sent oil higher?
Unpredictable Middle East upheaval…
I won’t go into all the details here, but let’s just say things haven’t exactly been stable in the Middle East and North Africa.
The Syrian war is ongoing, Egypt is falling apart (again), and Iran is a constant worry.
This is unfortunate news not only from a humanitarian standpoint, but from a price perspective as well.
High oil prices hurt the global economy. Paying more at the pump takes a toll on consumers and their ability to spend on other items.
Now, on the surface, it may make sense to see oil trading at $106 a barrel. The Middle East is an important oil-producing region.
When there’s geo-political trouble, markets are quick to price in the possibility of supply disruptions.
As you may know, this is called a fear premium…
Right now, there is $5 to $10 premium in the price of West Texas Intermediate (WTI) based on troublesome Middle East issues.
But if you take these problems out of the equation, fundamentals simply don’t support oil at $106 a barrel or higher…
Let me explain…
In the US Energy Information Administration’s (EIA) most recent weekly oil inventory report, investors found that US oil production is surging. In fact, for the week of August 9th, production averaged 7.6 million barrels per day.
Of course, this is nothing new. Quickly growing US production is a trend that started a few years ago. Advances in drilling technology have unlocked billions of barrels of oil under US soil.
And listen to this…
As recently as June, US crude stockpiles were at their highest level in decades- just over 390 million barrels. Of course, oil inventories have come down in recent weeks due to higher demand from the Summer driving season.
But even so, US stockpiles are still plentiful at the current level of 360.5 million barrels.
Once the summer driving season draws to a close in late August, US stockpiles will start rising as demand eases.
And you know what happens when supply increases- prices fall.
In fact, many oil industry experts are predicting a swift correction for oil in the not so distant future. For example, Gulf Oil CEO Joe Petrowski predicted in a recent CNBC interview that oil would fall to $50 a barrel by the end of the year!
While it’s unlikely that crude will collapse to $50 in coming months, it’s very possible that the commodity can fall into the mid-$80 a barrel range.
That represents a phenomenal profit opportunity for us…
Folks, the only thing supporting oil at $106 a barrel is problems in the Middle East. And the fact is, it’s highly unlikely that these issues will push oil prices much higher.
If they do, it will only represent a better shorting opportunity before the price inevitably turns lower this Fall.
So how do we make this trade?
Take a look…
ABOUT INVERSE OIL
The US Short Oil Fund (DNO) is the perfect way to capitalize on falling oil prices. Since DNO is an inverse ETF, it trades opposite the price of crude. In other words, when the price of oil falls, DNO rises.
TECHNICALLY SPEAKING
As you can see, DNO is trading close to 52-week lows thanks to the recent rise in the price of oil. But once we see the crude market turn south in the not so distant future, DNO is going to rise- and quickly.
WHAT TO DO NOW
US Short Oil Fund (DNO) is trading at $32.34
Buy DNO up to $33.00 per share
Our profit target is $38.00 or more
COMMODITY REVIEW
| COMMODITY | TICKER | CURRENT VALUE | LAST MONTH | CHANGE |
| Energy | JJE | $17.16 | $17.29 | -0.8% |
| Grains | JJG | $44.74 | $48.33 | -7.4% |
| Industrial Metals | JJM | $30.08 | $29.03 | +3.6% |
| Precious Metals | JJP | $67.08 | $62.87 | +6.7% |
| Softs | JJS | $48.22 | $46.39 | +3.9% |
| Livestock | COW | $27.30 | $27.02 | +1.0% |
| All Commodities | DJP | $37.27 | $37.14 | +0.4% |
ENERGY COMMODITIES
Natural gas had a rough couple of months…
In what’s usually a seasonally strong period for the commodity, the summer months have been undeniably boring this year. Natural gas traded between $3.50 and $3.70 mmBtu for most of July before collapsing down to $3.20 last week.
What’s more, last week’s EIA inventory numbers were undeniably bearish as storage additions rose 96 billion cubic feet (bcf). That’s well above last year’s reading of 24 bcf, and the 5-year average build of 40bcf.
However, the strongest time of year for natural gas is quickly approaching. September through December are traditionally strong months as investors bid up the commodity ahead of the Winter heating season.
For the rest of this month, let’s keep the US 12-month Natural Gas (UNL) at a hold. There’s a very good chance we’ll see this commodity test $3.00 mmBtu in coming weeks. But once September arrives, we’ll be moving UNL back to a buy.
GRAIN COMMODITIES
What a remarkable collapse for the grain markets over the past month…
Spot corn is down a whopping 34% from early July highs of $7.20 a bushel. Soybeans have collapsed 18% to trade at the lowest price since June 2012. And wheat is stuck in a brutal downtrend that’s been in place since the start of the year.
Why such bearishness for these markets?
Mother Nature is providing near perfect growing conditions in the US this year.
Well-timed rains, along with moderate temperatures, are making it more likely that the USDA’s robust grain forecast will come to fruition.
As a result, grain prices are essentially going in the gutter.
However…
We could see a surprise rally out of grains in coming weeks. All three of these markets are extremely oversold and due for a rebound. But unless we see a dramatic weakening in supply/demand estimates from the USDA, rallies will likely be short-lived.
INDUSTRIAL METALS
Pat yourself on the back…
We nailed the bottom in the copper market last month! As you know, we purchased the iPath DJ-UBS Copper (JJC) when the red metal was trading at $3.10 a pound. As of yesterday’s close, copper was trading at $3.31!
What’s sending the metal higher?
A recent trade report out of China revealed the country grew much better than expected in July. In fact, imports to China leaped 10.9% year-over-year while exports grew 5.1%. That’s a much better reading than analysts were expecting.
As of last night’s close, we’re up 8% in JJC. But with confidence now growing for the industrial metals sector, we should see copper jump to the $3.50 area in coming weeks.
Keep holding JJC for further gains!
PRECIOUS METALS
In case you haven’t noticed, platinum and palladium have nearly recovered all their losses from the ‘June swoon’.
Palladium jumped to $750 an ounce a few weeks ago and looks poised to break above the June high of $770 soon. It’s still very likely this metal breaks to a new yearly high in coming months.
As a result, keep holding the ETFS Physical Palladium Shares (PALL) for further upside.
The iPath DJ-UBS Platinum (PGM) is making a strong comeback as well. With platinum jumping to $1,500 an ounce last week, our PGM trade is finally giving us a slight gain from our official entry of $33.11.
Of course, if you bought PGM below $30.50 like I recommended in the June update, you’re sitting on gains of 10% or better.
But no matter where your entry point is, keep holding PGM for further upside.
If recent better-than-expected Chinese economic data readings continue into year-end, we may see the entire metals complex really soar.
SOFTS
There’s been some surprising strength out of soft commodities in recent weeks. Cocoa has jumped back above $2,400 a ton, cotton is near 52-week highs, and sugar is forming a bottoming pattern around 17 cents.
What’s going on?
There are some individual changes to supply/demand factors in specific commodities that account for this strength. But the common ingredient making all these commodities move higher is the recent weakness in the US Dollar.
In case you haven’t heard, there’s still a lot of indecision from the Fed surrounding their tapering plans. One day they say they’ll start trimming bond purchases soon, and the next they say more data is needed to support the decision.
This wishy-washy, wait and see approach has sent the US Dollar to multi-month lows near $81. If Ben Bernanke and the Fed decide they’ll hold off on tapering this year, it’s a safe bet that the Dollar will trade even lower.
LIVESTOCK
Lean hog prices are the strongest they’ve been in years thanks to increasing demand in the US and China.
But that’s not all…
The recent outbreak of PEDV is still causing worries. This nasty virus wipes out 50% of young swine on newly affected farms. The virus now affects 16 states and those numbers are growing with each passing week.
Clearly, the hog market has a bit of a supply/demand issue right now. But while it may seem tempting to go long this market due to this uncertainty, much of this issue has already been factored into prices.
As a result, it’s best to steer clear of hogs.
Portfolio Changes
- This month we’re adding inverse oil (DNO) to the portfolio.
Category: Commodity Trading
