Commodity ETF Alert December 2009 Issue

| December 8, 2009 | 0 Comments



Oil… we played the “Black Gold” trade earlier this year and racked up gains of more than 44%.

Here we are almost ten months later and I’m seeing another opportunity in Oil.  Three key indicators are pointing to higher oil prices:

  1. Built up demand for a New Year’s rally…
  2. Shipping costs moving higher…
  3. And, optimism in the Oil industry.

I’m going to go through all three of these topics one at a time.

However, the key takeaway is simple.  All three indicators are pointing to higher Oil prices… And we’re going to establish a position in anticipation of the price move.

New Year’s Rally

It was December 31st and I was at a New Year’s party a few years back.  My friend Karen had just been through a rough 12 months.  She was putting a divorce and job problems in the rear view mirror.

She proudly announced that, “this New Year would be her year for great things!”

And it was.

Now, Karen’s not the only one to put the problems of a prior year behind her at the stroke of midnight on December 31.  Millions and millions of people have the same attitude.

The New Year wipes away the old problems and gives everyone a clean slate.

You’ll see the same thing happen on Wall Street.  At the beginning of the year, analysts get together and give predictions on every facet of the economy.  They’re looking into their crystal balls and trying to predict the next 12 months.

Everyone’s usually in a positive mood and expecting the markets to move higher.

The economy will grow, consumers will be confident, and money will flow like water! The positive outlook typically holds at least for the first few weeks.  Just look at analyst estimates from 2008 and 2009.

Despite the economic troubles ahead, many were predicting further growth and everyone seemed to have a positive outlook on the markets.

Like lemmings over the cliff….

Anyway, I think we’re going to see the same thing in January of 2010.  Here’s the big difference… we’re exiting a recession instead of entering one.

And that means the positive New Year’s outlook is more likely to be right than wrong.

Why should you care about these estimates?

Because new estimates set the tone for the early part of the year.  As analysts look for economic growth, they’ll extrapolate to better corporate sales and earnings… that will lead to increased economic activity… that means estimates need to be moved even higher!

It’s a cycle that will repeat itself several times over.

Remember, the markets feed off of rumor and expectation as much as they do fact and analysis.  As economic numbers and growth rates are adjusted up, expectations for things like energy demand in general, and Oil demand in particular, will move higher as well.

It doesn’t take a genius to see this coming… expectations of higher economic growth mean higher demand for energy.  Higher energy demand means higher Oil prices!

As analysts move estimates up, it will create little ripples in the market pushing prices up.  And that leads me to indicator number two… shipping costs.

Higher Shipping Costs

If you don’t follow the Baltic Dry Index, it’s something I recommend you keep an eye on… at least every once in a while.  The index simply tracks the cost to ship goods across the ocean.

It’s a rough measure of how busy the shipping companies are.  And, it can often be used as a proxy for global demand.  After bottoming out at the end of 2008, this index has been steadily rising.

Just look at the chart…


It’s an early sign of economic recovery.  It means demand for commodities is growing. Think about it… if there was no demand for your commodity, why would you ship it?

Rising shipping costs mean rising demand.

And that’s what we’re seeing in Oil.  It supports the theory that economic growth will build next year… and that means higher Oil prices.

With shipping prices rising, Oil producers are shipping more product.  It also means they’re starting to express little slivers of optimism.

Oil Industry Optimism

This last indicator is something you need to dig for.  Unlike the Baltic Dry Index, you can’t put a number on it.  But it’s an important symbol nonetheless.

I’m of course talking about optimism from industry analysts and corporate executives.

I listened to a number of earnings reports from leading oil companies in the industry. What struck me was the thinking Oil prices would be building again.  Many industry executives point to global economic growth driving increased demand for Oil… and that means bigger Oil profits in the next few years.

Remember, most corporate executives are taught to sandbag estimates… lower estimates are easier to beat.  Nothing drives a stock price like an upside earnings surprise.

So they make it as easy as possible.  They have a built in bias towards conservative outlooks for the industry.  That’s why any positive outlook is a major event in my mind.

And that’s what I’m seeing right now.

Take a quick look at estimates for the Oil industry.  In the last 30 days, analysts have started raising earnings estimates for companies like Exxon Mobil (XOM), Chevron(CVX), and BP (BP), just to name a few…

And a more positive outlook bodes well for not only the industry, but Oil prices too.

All in all, I see Oil prices moving higher in the first quarter of the New Year… a trend beyond that will be driven by actual supply and demand.

Here’s how we can trade the rising price of Oil…


For this trade, I want to use the iPath S&P GSCI Crude Oil ETF (OIL).

Basically, the ETF manager buys futures contracts for West Texas Intermediate Crude.  These futures contracts are actively traded on the New York Mercantile Exchange (NYMEX).  When you buy an ETF, you’re buying a piece of the contracts owned by the ETF.


The 200- and 50-day moving averages are both moving higher.  The recent retreat in Oil prices has pulled the Oil ETF down toward the $24 level.  This gives us a great entry point.

The key resistance level for this Oil ETF is at $27.50.  Next resistance is at $30.  With the economy recovering, we could easily see a retest of these levels in the next few months.


The iPath S&P GSCI Crude Oil Total Return ETN (OIL) is trading at $24.73.
Buy OIL up to $25.50 per share.
Our Profit Target is $32.50.
Don’t forget your position sizing.

Commodity Review

Energy JJE $24.95 $26.45 (5.7%)
Grains JJG $40.15 $39.02 2.9%
Industrial Metals JJM $38.12 $36.09 5.6%
Precious Metals JJP $61.14 $58.47 4.6%
Softs JJS $47.82 $46.83 2.1%
Livestock COW $27.80 $27.94 (0.5%)
All Commodities DJP $40.74 $40.46 0.7%


The Energy complex fell by 5.7% in November… one of the biggest monthly losses in a while.  Oil prices fell on news the US Dollar was moving higher.

Oil storage levels have been rising.  But, I see this buildup as merely preparation for an economic rebound.  Ultimately as the economy recovers, demand for Oil will rise and push prices higher.

News China might be curbing demand for Oil hasn’t helped prices.  But, I think this will soon blow over.  Talk of China shifting to alternative energy sources is all a rumor… I’ll believe it when I see it.

I know we just exited an Oil trade a few weeks ago, but the recent pullback in prices gives us a great re-entry point.  We’re going back to the well for another play on rising Oil prices… see above for all the details.

Natural Gas (GAZ) is still hovering around the $13 level.  Consider buying this commodity below $15.50.  Oversupply continues to weigh on the market.  I’m still expecting a cold winter and an economic rebound to burn off some of the Gas inventory (Yes… the pun was intended!).

I’m expecting prices to move higher as we get deeper into winter.  Hold tight.


Grain prices continued moving higher this month.  They climbed a hefty 2.9%.  Corn was flat over the last month, but Soybeans and Wheat pushed higher on a slower than normal US harvest.

The USDA lowered production estimates because of the slow harvest and threats of poor weather.  This caused prices to move higher.

Rice production in India and the Philippines has been hampered by poor weather.  India recently announced a need to import rice.  Remember, they’re in a severe drought.

This could create a supply imbalance and keep demand for other grains (like corn, wheat, and soybeans) high.


Industrial Metals jumped this month by a whopping 5.9%.  Great news for our trades in Aluminum and Copper.  Remember, continued economic growth will drive demand for these basic commodities… there’s no escaping the higher prices ahead.

Copper hit a new high late last week.  We’re up 53% on this trade already…Remember, our price target on Copper is $45.50.  We could hit this level soon so watch this trade closely.  Get ready to ring the cash register with some nice profits!

Our Aluminum trade is performing nicely as well.  We rolled this trade out a few weeks ago and we’re already trading above our buy-up-to price.  I’m moving Aluminum to a hold.


I can’t believe how high and how fast Gold is moving.  I’m increasing our price target on IAU to $150.

Two months ago we put on a trade in Platinum.  Last week we hit our price target of $45… not bad, a 39% gain in just over two months.  If you haven’t already, take your profits off the table.

Silver touched a new high just a few days ago as well.  We’ve seen gains as much as 18% in the commodity.  Give this trade more time… we should see it move still higher.

So, you’re probably wondering why we’re seeing gains like this in the Precious Metals group… its inflation, pure and simple.  Investors see inflation down the road – especially as unemployment numbers improve.

That means the only way to invest is with hard assets.  That’s why these precious metals are performing so well… hold tight, I think it only gets better from here.


The Softs complex racked up another +2% gain.  Coffee, OJ, and Cocoa moved higher while Sugar stayed flat.

Remember, Cocoa is traded on the London Exchange.  Fluctuations in the British Pound will push around the price of Cocoa.  Recently the Pound has been drifting lower… so Cocoa is moving higher.


Over the last month, Livestock prices moved lower… but only by 0.5%… not much to write about here.  While Lean Hog prices climb, Feeder Cattle prices are falling.

Portfolio Changes

  • This month we’re adding Oil (OIL) to the portfolio.  See above for all the details.
  • Once again, Gold (IAU) is jumping higher… I’m moving Gold’s price target up to $150.
  • Aluminum is now above the buy-up to price… I’m moving Aluminum to a hold.
  • Platinum (PGM) hit our price target… take your profits now.  Congratulations on a great trade.

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.