Commodity ETF Alert June 2014 Portfolio Update
CRUDE OIL: ISIS TENSION HAS BULLS IN CONTROL…
As you know, I sent out an email on June 12th, alerting you to the buying opportunity in the US Oil Fund (USO).
Here’s additional insight into why we made this trade, and how it’s performing thus far.
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What a mess…
After spending hundreds of billions of dollars, and losing nearly 5,000 US soldiers’ lives in the Iraq war, Americans are watching Iraq fall back in to chaos.
As you’ve likely heard, a highly organized terrorist group, going by the name of Islamic State of Iraq and al-Sham (ISIS), has overrun the northern half of Iraq.
Mosul, Tikrit, and a handful of other cities, have already fallen to the well-funded militants.
And now the terror-wielding extremists have their eyes set on the Iraqi capital, Baghdad. The most recent reports reveal the group is on the outskirts of the city.
But Baghdad is just the start of ISIS’ ambitions…
A document released earlier this week shows the militants’ goals include taking out the border between Jordan, Syria, and Iraq.
And over the next five years, they want control of the entire Middle East/North African region- including Saudi Arabia.
Is this group capable of gaining control of such a large region?
I highly doubt it. Taking over the northern half of Iraq, which was already bordering on chaos, is different from taking over sovereign countries. In my opinion, ISIS will be slowed dramatically once the US and other Middle Eastern governments get involved.
But here’s the deal…
ISIS is going to cause big problems in the Middle East for the foreseeable future.
And since this region holds the lion’s share of global oil production and supply, oil prices will likely remain under the bulls’ control for some time to come.
As you’ve likely noticed, a substantial fear premium has already been factored in to West Texas Intermediate (WTI) and Brent crude prices. WTI is trading at $106 a barrel (near multi-year highs at $111), while Brent is crossing the tape at $114 (near multi-year highs at $117).
The recent rallies in WTI and Brent came in spite of the fact ISIS remains far from the key oil producing regions in southern Iraq.
In case you’re unaware, the area near the Basra holds some of the largest oil fields in the world.
For example, the West Qurna field is estimated to have 21 billion barrels of oil in place. Another is the Majnoon field, which holds around 13 billion barrels. Also, the Rumaila field sits close by with an estimated 17 billion barrels.
Clearly, southern Iraq holds a wealth of oil…
That’s why investors will be watching closely for signs of turmoil in Southern Iraq. If it happens, you can expect a rather swift move to the $111 area or higher in WTI.
While that scenario is unlikely, it’s not impossible.
In fact, recent news reports reveal the rebels have just overtaken one of Iraq’s largest oil refineries in Baiji. This sprawling facility processes around 300,000 barrels of crude per day.
Bottom line…
The ISIS uprising presents a big problem for Iraq and the entire Middle East. Unless they’re stopped (and soon), their reach and influence will likely continue growing. In response, global oil prices should remain under bulls’ control for the foreseeable future.
As you know, we’re using the US Oil Fund (USO) as our means to be long WTI crude. USO is currently trading at $39.16 a share, which is still slightly below our original maximum buy-up-to-price of $39.20.
However, since you’ve had ample time to enter under $39.20, I’m moving USO to a hold.
Without question, it’s going to be an interesting few months for the price of oil. Keep holding USO for a potential spike in WTI!
COMMODITY REVIEW
| COMMODITY | TICKER | CURRENT VALUE | LAST MONTH | CHANGE |
| Energy | JJE | $19.90 | $19.23 | +3.5% |
| Grains | JJG | $45.52 | $49.97 | -7.0% |
| Industrial Metals | JJM | $30.09 | $29.91 | +0.6% |
| Precious Metals | JJP | $65.79 | $63.48 | +3.6% |
| Softs | JJS | $50.79 | $50.80 | 0.0% |
| Livestock | COW | $32.11 | $30.76 | +4.4% |
| All Commodities | DJP | $39.93 | $39.84 | +0.2% |
ENERGY COMMODITIES
Natural gas is all over the map in recent trading. The gaseous commodity spiked to multi-month highs at $4.85 mmBtu on June 16th before succumbing to selling pressure. As of yesterday’s close, natural gas was trading near technical support at $4.40.
What’s causing all this volatility?
Weekly EIA inventory reports are painting a mixed picture of just how much gas is going into US storage caverns. One week the number beats analyst expectations, the next it falls short. Conflicting information has traders grasping at both sides of the market.
Of course, weather is playing an important role in all this…
For the most part, temperatures were normal to slightly above average in the US over the past month. However, the NOAA is expecting temperatures to be well above normal for the Eastern part of the US over the next two weeks.
As a result, we’ll likely see natural gas demand rise in the near future, which should put a bid back under the market.
If you haven’t already, buy the US Natural Gas Fund (UNG) at any price under $25.27.
GRAIN COMMODITIES
It has been an ugly few weeks for grains. Corn and wheat are down dramatically from the highs set in early May. In fact, the two grains are down nearly 10% over the past month.
Why such bearishness?
First of all, the US planting season basically went off without a hitch. What’s more, growing conditions are nearly ideal. In fact, the USDA just revealed in their weekly crop progress report that around 75% of the US corn crop is in “good” or “excellent” condition.
As of now, there is very little reason to believe grains will rise dramatically over the next few months. We may see a few short covering rallies in the near future, but beyond that grains will likely stay subdued.
INDUSTRIAL METALS
China’s flash PMI reading was released Saturday evening. Remember, this highly important report reveals whether the manufacturing sector expands or contracts over a certain time period.
For the month of June, China’s PMI reading came in at 50.8. This is far better than last month’s reading of 49.7. But even more importantly, it signifies that the country’s manufacturing sector is once again expanding after a multi-month downturn.
What’s this information mean for you?
If Chinese economic data continues coming in strong, copper will be a buy target again soon. Remember, China is the world’s largest consumer of the red metal. If China’s economy is rebounding, copper will rebound along with it.
PRECIOUS METALS
Wow!
Last week was a whopper for precious metals bulls. Gold and silver surged late last week after Federal Reserve Chairwoman Janet Yellen revealed the central bank’s updated stance on interest rates and quantitative easing.
Gold has rallied nearly $50 an ounce in the past week, while silver has surged $1.25.
While that may not seem like much in the grand scheme of things, last week’s bullish action has these metals on watch for further gains… especially considering the fact the latest US consumer price reading came in hotter than expected.
In case you’re unaware, consumer prices rose 0.4% last month, pushing the year-over-year inflation reading to 2%. May’s inflation jump was the highest in over a year.
The latest bullish move in precious metals has our positions in the iShares Silver Trust (SLV) and iShares COMEX Gold Trust (IAU) beyond our buy-up-to prices.
As a result, I’m moving both SLV and IAU to a hold. Keep both ETFs nestled safely in your long-term portfolio.
Platinum and palladium are seeing their fair share of volatility as well…
Both metals rose strongly in early June as investors factored in the worsening South African labor situation. In case you’re unaware, mine workers have been on strike for months in search of higher pay.
With the market getting tighter by the day, investors pushed palladium to multi-year highs of $850 an ounce on June 10th.
However, word of a pending South African labor deal is weakening bulls’ resolve. If the two sides do come to an agreement in the near future, don’t be surprised if platinum and palladium fall.
But given the bullish long-term supply/demand fundamentals, I suggest you keep holding the ETFS Physical Palladium Shares (PALL) and iPath DJ-UBS Platinum (PGM) through any downturn.
These metals will remain a buy on any substantial pullback in price.
SOFTS
Our cocoa trade is right on track. The iPath DJ-UBS Cocoa (NIB) ran to a new multi-year high at $41.03 a few days ago on strong cocoa prices.
What’s sending cocoa higher?
Investors are factoring in growing global chocolate demand, a tight market, and the high odds of an El Niño hitting later this year.
It may be a bumpy ride, but cocoa will likely run to the $3,400 a ton area in the long run.
As a result, let’s keep holding NIB for higher prices.
And what about coffee?
The commodity worked its way down to technical support at $1.70 a pound in recent trading. However, investors used this important pivot point as a buying opportunity. As of last night’s close, coffee was trading at $1.77.
What’s more, Brazilian coffee harvest reports are starting to come in. That means investors will have plenty of information to trade off in coming weeks. I suspect we’ll see an uptick in coffee trading volatility soon.
If you haven’t already, go ahead and buy the iPath Pure Beta Coffee (CAFE) at any price under $23.90.
Be patient with both your soft commodity trades. Long-term weather disruptions should keep a bullish tone in both markets.
LIVESTOCK
The bull run in feeder cattle is simply incredible…
Just when you think the commodity can’t run any higher, it does just that. In fact, cash buyers are paying around $2.30- $2.40/pound for 600-pound steers in Montana and Wyoming.
That’s an all-time record high!
As long-time readers are aware, we haven’t played the rally in cattle due to the lack of an effective ETF to do so. The only ETF that comes close is the iPath DJ-UBS Livestock ETN (COW). But due to the 45% weighting of lean hogs in the COW portfolio, it’s not a pure play on rising cattle prices.
Regardless, the rise in cattle prices is a very interesting phenomenon to watch. It shows you exactly what can happen when long-term supply/demand levels become unbalanced.
In the cattle market’s case, multi-decade lows in the US cowherd have prices soaring!
Category: Commodity Trading
