WTI crude oil:
January WTI crude oil advanced 11 cents on volume of 1,248,594 contracts. Total open interest increased by 21,625 contracts, which relative to volume is approximately 25% below average. The January contract accounted for a loss of 21,731 of open interest. As this report is being compiled on December 6, the January contract is trading 96 cents lower and has made a daily low of 50.28, which is the lowest print since 50.18 made on December 2.
The COT report released on Friday revealed that managed money liquidated 12,774 contracts of their long positions and also liquidated 16,633 of their short positions. Commercial interests added 22,053 to their long positions and also added 17,602 to their short positions. As a result, managed money was long WTI crude oil by a ratio of 1.98:1, up from the previous week of 1.87:1 and the ratio two weeks ago of 1.67:1. Keep in mind that the COT tabulation date was Tuesday, November 29.
Crude oil remains overbought, and though we think prices will inch their way higher, we want to see more of the correction before recommending bullish positions. On December 1, OIA announced that January and February 2017 WTI crude oil generated short and intermediate term buy signals.
January natural gas advanced 21.8 cents on surprisingly light volume of 495,938 contracts. Total open interest increased by 18,178 contracts, which relative to volume is approximately 25% above average. The January contract lost 2,250 of open interest. Yesterday, the January contract made a high of $3.656 and this is been taken out on December 6 with a new 52 week high of 3.732.
On November 25, OIA announced that January and February 2017 natural gas generated short term buy signals and both contracts were already on intermediate term buy signals. The move in higher natural gas is due colder temperatures in the east and midwest. Though natural gas has been on a short term buy signal for approximately two weeks, total open interest action has been sporadically positive.
The COT report released on Friday revealed that managed money liquidated 6,273 of their long positions and also liquidated 36,516 of their short positions. Commercial interests liquidated 6,049 of their long positions and added 1,830 to their short positions. As a result, managed money is long natural gas by a ratio of 1.30:1, up from the previous week of 1.11:1 and the ratio two weeks ago of 1.07:1. The market has come very far very fast and if you’re not already involved on the long side, we recommend a stand aside posture. Do not short natural gas.
The March dollar index lost 74.9 points on extremely heavy volume of 102,884 contracts. Total open interest declined only 486 contracts, which relative to volume is approximately 80% below average. The COT report released on Friday revealed that leverage funds added 1,144 to their long positions and liquidated 3,131 of their short positions. As a result of the latest report, leverage funds are long the dollar index by ratio of 1.17:1, up sharply from the previous week of 1.02;1, but down from the recent high ratio of 1.29:1.
As this report is being compiled on December 6, the dollar index has reversed course and is trading 49 points higher on the day. The key to the movement in the dollar index is the action in the euro and though it rallied up sharply from yesterday’s low of 1.0510, the path of least resistance for the euro is lower.
On the other hand, the Federal Reserve will be meeting in about a week and though there is no doubt that the committee will raise interest rates, their forward guidance is going to substantially affect the dollar index.
The December euro gained 1.10 cents on heavy volume of 322,164 contracts. Total open interest declined by 1,111 contracts, which relative to volume is approximately 85% below average, but a total open interest decline on yesterday’s advance is bearish. However, we are unable to determine whether the open interest decline was caused by the sharp loss, which took the December contract low of 1.0510, the lowest print since 1.0490 made during the week of November 30, 2015, or when it rallied sharply from the low to 1.0802.
As we said in the previous research note on the dollar index, the path of least resistance for the euro is lower and problems regarding Italian banks and the stability of the Italian political system will continue to be on the front burner and is euro negative. Among other negatives is the continued flood of migrants into Europe, which will exacerbate a fortress Europe type of environment.
Additionally, if the current president elect continues to cozy up to Russia’s dictator Putin, the Baltic countries will likely engage in arms building. A threat of a potential Russian invasion into these countries will further destabilize Europe. Another major factor is going to be the French election which takes place on April 23, 2017. If there is a runoff, the second election will occur on May 7.
We suspect that the euro will make its low shortly before the April 23 vote. In summary, we think the euro is headed for parity with the dollar, although it is difficult to determine the time frame for this. On a seasonal basis, December tends to the a very positive for euro performance while January is weak. February through April is more positive than negative. For ideas on how to trade the euro, please call or email.