Post by Savant on Sept 14, 2004 8:16:27 GMT -5
Market in Pause ~ Pullback Mode - Published 0900 EDT Tuesday September 14 2004
By 1300 Monday, the market was beginning to show signs of tiredness and shortly thereafter pulled back fairly sharply into the close, but rebounded almost as sharply in the closing minutes, indicating that some inherent strength remains in this market. Today's trading could be influenced to some extent by the onslaught of Hurricane Ivan and as we suggested yesterday might happen, Energy markets snapped back and closed sharply higher and are expected to trade higher going into today.
One of the most amazing things about markets is their ability to anticipate events, sometimes far into the future. The run-up in Oil towards $50 happened on a background of rumor and Energy innuendo and pulled back equally sharply, also on no appreciable news.
A while back, we suggested that some reason might emerge that would justify the price run-up that took place and perhaps over the next few days we may experience the "Perfect Storm" conditions that could produce a secondary upward spike in Oil related markets.
That spike has already begun to take shape and obviously could be significantly exacerbated, should Ivan inflict severe damage on some of the platforms and other facilities that essentially produce about 25% of US Energy needs. In addition to that, comes news overnight of the very sharp 40% increase in Oil imports by China and added to that some increasingly aggressive sabotage aimed at disrupting Iraq's Oil exports.
The Perfect Storm Takes Shape
China reports soaring oil imports
China has been a net importer of crude oil since 1996
China's oil imports for the first eight months of 2004 rose by nearly 40% compared with the same period last year, according to state media reports.
RISING DEMAND
Global economic expansion is driving what the International Energy Agency says is the biggest increase in oil demand for 24 years. There is higher than expected demand in industrialized countries and China's rapidly expanding economy has created a huge demand boost. US demand has risen because of strengthening economic recovery and greater need for higher grade crude oil suitable for processing into gasoline for the fuel-hungry SUVs.
Chinese demand is up almost 40% this year. Traders are betting this rapid growth will continue for several years although there is some chance that the economy will "overheat" and oil demand growth will slacken. Among suppliers only Saudi Arabia has significant spare capacity that it can make available to the market.
LOW OIL STOCKS
Oil companies have tried to become more efficient in recent years and operate with lower stocks of crude oil akin to just in time inventorying and this means there is less of a cushion in the market against supply interruptions.
Events such as violence in the Middle East, ethnic tension in Nigeria and strikes in Venezuela have had a greater effect on prices in the past year than might have been the case if stock levels were higher. Add to that Russia and Lukos and what ever else my occur.
OPEC STRATEGY
The producers' cartel Opec accounts for about half of the world's crude oil exports and attempts to keep prices roughly where it wants them by trimming or lifting supplies to the market. In the past, Opec ministers tended to wait for prices to dip before agreeing to cut output.
China's booming economy is now using huge amount of oil
But Opec is now acting more aggressively, announcing production cuts to pre-empt any weakening in prices. International oil companies traditionally used times of seasonally weaker demand, when prices were lower, to rebuild stocks.
These windows now appear to have been closed. Data error is an additional factor, some analysts say. Consumption forecasts by market experts turned out to be too low. The result was that producers kept supplies even tighter than was needed to prevent rebuilding of stocks
ACTION OF SPECULATORS
The combination of low stocks and Opec action to keep them low leaves the market exposed to the prospect of sudden price rises if supplies are threatened. This has not gone unnoticed by professional market speculators and Hedge funds and other speculators betting on the possibility of higher prices have themselves exacerbated price pressures in the market.
So for now we are in a secondary spiking mode that once again will have to exhaust itself, but this time an excellent opportunity to sell short may be presented in the days ahead, especially if things get out of hand and we get back in a secondary parabolic mode as happened back in August. Seasonally, the time to be shorting the Energy markets should be more attractive going into the fall...
Other Trading ideas and Updates
What many readers may not know is our system was out of commission for an extended period due to one of those once in a blue moon occurrences - A catastrophic system failure, where everything goes dead and recovery and rebuilding becomes a major ordeal...
Thankfully we are virtually 100% back on line and working back up to more normal activity. However, just prior to that unfortunate event we had made some periodic recommendations with some success and the last one we made was on July 28 when we recommended buying September Coffee at the market, essentially averaging down on a higher priced position that we were unavoidably stopped into some days earlier at 71.80, but as we reported then, we were prepared to sit that one out, confident that Coffee would make a low sometime in the near future and begin to ascend. So we added a second contract at 68.10 and we actually stated as follows:
Aggressive traders should buy 1 Sep Coffee at the market and if they so choose could buy additional contracts at 69 stop, 70 stop etc or buy September or December 70 calls in the same way. This is a bit of a crap shoot, but we consider it worth risking profits from already successful trades to build a position in Coffee...
We actually intended to add additional contracts at 71 and 72, but that is kinda hard to do and since we were just getting back on line last few days, regrettably we were unable to push the envelope. But as of today, that does leave us long 4 Coffee contracts with an average price of 69.675 and two December 70 Coffee Calls at 5.90.
The good news is there is somewhat of a short squeeze going on in the September Coffee contract which is due to expire in a just a few more days and the December Coffee contract has also moved up quite sharply. So we are initiating action today to try and get out of half of these positions at the market and try and ride the other half by placing stops below the market.
So: We are advocating selling 2 September Coffee Contracts at the market on open and selling 2 at 73.00 even on a stop basis. We will sell 1 December Coffee call also at the market on open and sell the second call at 8.50 stop.
You may recall a few days later following what was one of the sharpest pullbacks we had ever seen in the summer months in Orange Juice, that we wanted to be buyers of Orange Juice in the low 60's and basically remain a buyer of dips into the end of the year. Our reasoning was that Orange Juice had gotten way oversold on ideas that Atkins dieters and low carb fanatics were avoiding any Orange Juice or Orange related products and after we saw the first awesome rally prior to the mini-crash in juice, we also reasoned that old habits die hard, but at that time we could not have possibly foreseen what Hurricane Frances inflicted on some of the major Orange growing areas in Florida, as nothing like this had ever happened before in recent memory and Orange Juice traditionally was at the mercy of Jack Frost in wintertime, so the net result was our recommendation to buy in the low 60's, at 62 or better specifically, went on to produce spectacular returns at Orange Juice subsequently soared to as high as 85.50 before falling back some. We would also recommend selling Orange Juice for now and await the next potential entry point.
In conclusion: Gold has been acting better in recent days and the Dollar is beginning to look vulnerable to that continuation move to the downside we spoke about a while back. US Treasury Bonds may be nearing their highs at this time. Grains appear to be bottoming.
Have a Great Tuesday
Trade Well
Savant
By 1300 Monday, the market was beginning to show signs of tiredness and shortly thereafter pulled back fairly sharply into the close, but rebounded almost as sharply in the closing minutes, indicating that some inherent strength remains in this market. Today's trading could be influenced to some extent by the onslaught of Hurricane Ivan and as we suggested yesterday might happen, Energy markets snapped back and closed sharply higher and are expected to trade higher going into today.
One of the most amazing things about markets is their ability to anticipate events, sometimes far into the future. The run-up in Oil towards $50 happened on a background of rumor and Energy innuendo and pulled back equally sharply, also on no appreciable news.
A while back, we suggested that some reason might emerge that would justify the price run-up that took place and perhaps over the next few days we may experience the "Perfect Storm" conditions that could produce a secondary upward spike in Oil related markets.
That spike has already begun to take shape and obviously could be significantly exacerbated, should Ivan inflict severe damage on some of the platforms and other facilities that essentially produce about 25% of US Energy needs. In addition to that, comes news overnight of the very sharp 40% increase in Oil imports by China and added to that some increasingly aggressive sabotage aimed at disrupting Iraq's Oil exports.
The Perfect Storm Takes Shape
China reports soaring oil imports
China has been a net importer of crude oil since 1996
China's oil imports for the first eight months of 2004 rose by nearly 40% compared with the same period last year, according to state media reports.
RISING DEMAND
Global economic expansion is driving what the International Energy Agency says is the biggest increase in oil demand for 24 years. There is higher than expected demand in industrialized countries and China's rapidly expanding economy has created a huge demand boost. US demand has risen because of strengthening economic recovery and greater need for higher grade crude oil suitable for processing into gasoline for the fuel-hungry SUVs.
Chinese demand is up almost 40% this year. Traders are betting this rapid growth will continue for several years although there is some chance that the economy will "overheat" and oil demand growth will slacken. Among suppliers only Saudi Arabia has significant spare capacity that it can make available to the market.
LOW OIL STOCKS
Oil companies have tried to become more efficient in recent years and operate with lower stocks of crude oil akin to just in time inventorying and this means there is less of a cushion in the market against supply interruptions.
Events such as violence in the Middle East, ethnic tension in Nigeria and strikes in Venezuela have had a greater effect on prices in the past year than might have been the case if stock levels were higher. Add to that Russia and Lukos and what ever else my occur.
OPEC STRATEGY
The producers' cartel Opec accounts for about half of the world's crude oil exports and attempts to keep prices roughly where it wants them by trimming or lifting supplies to the market. In the past, Opec ministers tended to wait for prices to dip before agreeing to cut output.
China's booming economy is now using huge amount of oil
But Opec is now acting more aggressively, announcing production cuts to pre-empt any weakening in prices. International oil companies traditionally used times of seasonally weaker demand, when prices were lower, to rebuild stocks.
These windows now appear to have been closed. Data error is an additional factor, some analysts say. Consumption forecasts by market experts turned out to be too low. The result was that producers kept supplies even tighter than was needed to prevent rebuilding of stocks
ACTION OF SPECULATORS
The combination of low stocks and Opec action to keep them low leaves the market exposed to the prospect of sudden price rises if supplies are threatened. This has not gone unnoticed by professional market speculators and Hedge funds and other speculators betting on the possibility of higher prices have themselves exacerbated price pressures in the market.
So for now we are in a secondary spiking mode that once again will have to exhaust itself, but this time an excellent opportunity to sell short may be presented in the days ahead, especially if things get out of hand and we get back in a secondary parabolic mode as happened back in August. Seasonally, the time to be shorting the Energy markets should be more attractive going into the fall...
Other Trading ideas and Updates
What many readers may not know is our system was out of commission for an extended period due to one of those once in a blue moon occurrences - A catastrophic system failure, where everything goes dead and recovery and rebuilding becomes a major ordeal...
Thankfully we are virtually 100% back on line and working back up to more normal activity. However, just prior to that unfortunate event we had made some periodic recommendations with some success and the last one we made was on July 28 when we recommended buying September Coffee at the market, essentially averaging down on a higher priced position that we were unavoidably stopped into some days earlier at 71.80, but as we reported then, we were prepared to sit that one out, confident that Coffee would make a low sometime in the near future and begin to ascend. So we added a second contract at 68.10 and we actually stated as follows:
Aggressive traders should buy 1 Sep Coffee at the market and if they so choose could buy additional contracts at 69 stop, 70 stop etc or buy September or December 70 calls in the same way. This is a bit of a crap shoot, but we consider it worth risking profits from already successful trades to build a position in Coffee...
We actually intended to add additional contracts at 71 and 72, but that is kinda hard to do and since we were just getting back on line last few days, regrettably we were unable to push the envelope. But as of today, that does leave us long 4 Coffee contracts with an average price of 69.675 and two December 70 Coffee Calls at 5.90.
The good news is there is somewhat of a short squeeze going on in the September Coffee contract which is due to expire in a just a few more days and the December Coffee contract has also moved up quite sharply. So we are initiating action today to try and get out of half of these positions at the market and try and ride the other half by placing stops below the market.
So: We are advocating selling 2 September Coffee Contracts at the market on open and selling 2 at 73.00 even on a stop basis. We will sell 1 December Coffee call also at the market on open and sell the second call at 8.50 stop.
You may recall a few days later following what was one of the sharpest pullbacks we had ever seen in the summer months in Orange Juice, that we wanted to be buyers of Orange Juice in the low 60's and basically remain a buyer of dips into the end of the year. Our reasoning was that Orange Juice had gotten way oversold on ideas that Atkins dieters and low carb fanatics were avoiding any Orange Juice or Orange related products and after we saw the first awesome rally prior to the mini-crash in juice, we also reasoned that old habits die hard, but at that time we could not have possibly foreseen what Hurricane Frances inflicted on some of the major Orange growing areas in Florida, as nothing like this had ever happened before in recent memory and Orange Juice traditionally was at the mercy of Jack Frost in wintertime, so the net result was our recommendation to buy in the low 60's, at 62 or better specifically, went on to produce spectacular returns at Orange Juice subsequently soared to as high as 85.50 before falling back some. We would also recommend selling Orange Juice for now and await the next potential entry point.
In conclusion: Gold has been acting better in recent days and the Dollar is beginning to look vulnerable to that continuation move to the downside we spoke about a while back. US Treasury Bonds may be nearing their highs at this time. Grains appear to be bottoming.
Have a Great Tuesday
Trade Well
Savant
