Commodity ETF Alert September 2014 Portfolio Update
CRUDE: WHERE HAVE ALL THE BULLS GONE?
As you know, I sent out an email on September 4th, 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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It’s not easy being a crude bull right now…
Nearly every trader I speak to is bearish of the commodity.
Not only is the resurgent US Dollar wreaking havoc on the entire commodity complex, but bears are quick to point out the oil oversupply situation here in the US.
Thanks to surging supply from North Dakota and Texas, US oil production is at its highest levels since 1986.
What’s more, the US Energy Information Administration (EIA) foresees US production growing to 45-year highs in 2015.
With US supplies of the commodity growing, it’s easy to understand why so many are downbeat on crude.
So why exactly are we bullish on West Texas Intermediate (WTI) crude in the face of such information?
Let me explain…
First of all, despite what some analysts will tell you, the largest factor behind this summer’s crude downturn has been the surging US Dollar. But while the currency has no doubt made spectacular gains in recent months, the rally won’t last forever.
Once the dollar finally turns lower, crude bulls will have better footing to push the commodity back to higher ground.
And what about the US supply situation?
There’s no question surging US oil production has been a headwind for the price of WTI.
But you have to remember. Oil is a globally priced commodity. And that means the price of WTI will move based on what producers on the other side of the world are doing.
Speaking of which, Saudi Arabia recently announced they cut production by 408,000 barrels a day (b/d) in August. What’s more, the Organization of Oil Producing Countries (OPEC) announced they’re ready to lower their 2015 production target from 30 million b/d to 29.5 million b/d when they meet in November.
We’ve seen this movie before…
When the price of oil gets too low, OPEC producers cut production to bring bulls back into the market. And remember, despite the miraculous revival for US production in recent years, OPEC is still the world’s top crude supplier.
So it’s easy to understand why OPEC production cuts have the tendency to push the price of oil to higher ground.
Now keep in mind…
While this summer’s crude oil price downturn has no doubt been severe, the recent price drop is likely just short-term market noise in a long-term bullish trend.
As you’re likely aware, oil is one of the world’s most essential commodities. Our modern global economy simply doesn’t work without it.
But the fact is, it’s getting very expensive to produce crude…
According to the International Energy Agency (IEA), $1.6 trillion was invested in 2013 to supply the world with energy.
That’s double the amount invested in the year 2000.
What’s more, the IEA estimates over $40 trillion will need to be invested between now and 2035 to meet the world’s energy needs.
But what’s really amazing is 60% of that gargantuan figure is needed just to compensate for declining output at mature oil fields.
In other words, massive amounts of capital will be needed just to keep oil global production from falling off a cliff!
So while it may appear the US oil revolution will forever save the world from high oil prices, the reality is far different.
Folks, barring some kind of global economic meltdown, the idea of crude plunging to $80 a barrel or lower are preposterous…
Global demand for this commodity is simply too high! What’s more, OPEC simply won’t stand for crude prices that low. They’ll do whatever it takes to get oil back to the $100 a barrel range.
Now let me be clear…
It’s not out of the realm of possibility to see WTI trade to the high $80 a barrel range in coming weeks if the US Dollar continues higher.
But if it does, use the weakness as a buying opportunity in the US Oil Fund (USO).
As I write, USO is still slightly below our maximum buy price of $34.90. If you haven’t already, go ahead and add this crude tracking ETF to your portfolio!
COMMODITY REVIEW
| COMMODITY | TICKER | CURRENT VALUE | LAST MONTH | CHANGE |
| Energy | JJE | $16.82 | $17.68 | -4.9% |
| Grains | JJG | $33.54 | $38.04 | -11.8% |
| Industrial Metals | JJM | $30.00 | $31.63 | -5.2% |
| Precious Metals | JJP | $60.24 | $63.05 | -4.5% |
| Softs | JJS | $43.47 | $45.35 | -4.1% |
| Livestock | COW | $31.57 | $29.24 | +8.0% |
| All Commodities | DJP | $34.36 | $36.46 | -5.8% |
ENERGY COMMODITIES
Without question, the past few months have been tough for natural gas bulls. Abnormally cool summer temperatures weakened natural gas demand, which sent the commodity below $4 mmBtu in July. And despite the fact inventories are still far short of last year’s levels, natural gas is seemingly stuck below this important price threshold.
But with Old Man Winter peeking around the corner, now’s not the time to give up on this commodity.
Speaking of winter…
The Farmers’ Almanac is predicting yet another bitterly cold one for the US. Three-quarters of the nation is expected to see extended periods of below normal temperatures.
Remember, the Almanac was spot on with their call for a frigid 2013-14 winter. If the highly respected publication is right again this year, we have a very good chance of seeing natural gas surge to the $6 area by mid-winter.
If you haven’t already, buy UNG at any price under $22.00.
GRAIN COMMODITIES
As I suggested in last month’s update, corn, soybeans, and wheat have done nothing but bleed to new lows. Corn is trading at a 4-year low near $3.30 a bushel, while wheat and soybeans are trading at $4.75 and $9.57 a bushel respectively.
Mother Nature has been so cooperative with planting, growing, and harvesting weather this year that bumper crops are expected in all three of the major grain commodities.
However…
This summer’s dramatic sell-off is pushing grains to levels that are unsustainable in the long run. Prices are simply getting too cheap. As a result, the time to be bearish on grains will soon come to an end.
INDUSTRIAL METALS
Unfortunately, copper couldn’t break through the trend line resistance at the $3.22 a pound area last month. The red metal has fallen back to technical support at $3.10 as investors wait to see how much higher the US Dollar will soar.
No doubt about it, the expected break to higher prices in copper has been delayed by the Greenback’s rally.
But let’s not give up on this trade just yet…
The US and Chinese economies are strong and copper demand is still expected to strengthen in the back half of the year.
If you haven’t already, go ahead and buy the iPath DJ-UBS Copper (JJC) at any price under $39.80.
PRECIOUS METALS
No doubt about, precious metals have been hit hard by the US Dollar’s voracious late-summer rally. The greenback is up 3.7% in the past month while gold, silver, platinum, and palladium are all down at least 6%.
When can we expect the US Dollar to finally turn lower?
The Federal Reserve announced last week they’re ending their quantitative easing (QE) program next month. However, the Fed also announced they’re in no hurry to raise interest rates.
So while it’s not out of the realm of possibility to see the Greenback trade higher on end of QE optimism, it will likely succumb to selling when investors realize rates will stay near zero for some time to come.
What do we do with our precious metals positions?
Let’s leave our iShares Silver Trust (SLV) and iShares COMEX Gold Trust (IAU) positions at a hold.
Remember, we moved these two ETFs to hold last month to account for the surprisingly strong US Dollar rally.
Despite unsustainably low prices, gold and silver could weaken further simply due to investor pessimism and fear. We’ll need to see a strong bullish trend reversal before we move SLV and IAU back to a buy.
What about palladium and platinum?
As you’re likely aware, both metals have sold off sharply in recent trading. Palladium has dropped $100 an ounce since the first of the month while platinum is nearing important technical support at $1,320 on ounce.
Of course, all this selling is due to the US Dollar rally.
While it may be easy to get disgusted with our PALL and PPLT positions, remember something…
South African PGM mines were in miserable shape before this recent price downturn. With platinum and palladium prices now trading sharply lower than they were just a short time ago, miners may have to shut-in even more production.
Of course, that means the long-term supply situation will only grow more bullish.
Remember, PALL is still well above our maximum buy price of $74.37. Keep holding the palladium ETF for an eventual return to higher prices.
As far as PPLT goes, keep nibbling at the long side of this ETF in very small increments. Since this high-priced platinum tracker is capable of very large price swings, you must keep your total position size within your risk tolerance.
SOFTS
What a wild month for cocoa!
The commodity sank in early September as weak-handed traders locked in profits at multi-year highs near $3,200 a ton.
But then something very strange happened…
As you’ve likely heard, the deadly Ebola virus is killing thousands of people in the West African countries of Liberia, Sierra Leone, and Guinea.
Investors are now fearing the outbreak will spread to Ivory Coast, which borders Liberia. If it does, cocoa exports from Ivory Coast (which is the world’s top supplier) could plummet.
Due to these newfound supply fears, cocoa has quickly surged back to $3,260. If there’s a confirmed Ebola case in Ivory Coast, we could see cocoa surge to $3,800 a ton or higher.
The Ebola outbreak is obviously a very serious situation. Keep holding your position in the iPath DJ-UBS Cocoa (NIB) for the potential of much higher prices.
What about coffee?
Once again we can sarcastically thank the rampaging US Dollar for sending coffee prices lower last month. The bean dropped from $2.10 a pound in late August to current prices near $1.78.
Despite the recent currency induced downturn, coffee still has very bullish fundamentals heading into year-end. As soon as the US Dollar turns lower, I fully expect this commodity to start trending higher once again.
Keep your position in the iPath Pure Beta Coffee (CAFE) at a hold until further notice.
LIVESTOCK
The ongoing bullish run in cattle is simply incredible. Feeder cattle have gained nearly $0.15 in September and are trading at yet another all-time high near $2.30 a pound.
Feeder cattle are now the second best commodity performer year-to-date, up 38% on the year. Only coffee has bigger year-to-date gains of 61%.
How much longer can this bullish price cycle last?
With the US cattle herd sitting near 60-year lows, there simply isn’t enough beef to go around. Asian export demand is extremely strong and US consumers are surprisingly resilient in the face of high meat isle prices.
While the spectacular yearly gains won’t likely continue, I wouldn’t be surprised to see feeder cattle stay above $2 a pound for quite some time. It will take years for US ranchers to rebuild their herds and increase supply.
Category: Commodity Trading
