Lean hogs: On June 2, August lean hogs will generate short and intermediate term buy signals. This reverses the short-term sell signal of May 20 and the intermediate term sell signal of May 24.
August lean hogs advanced by a strong 1.375 cents on heavy volume of 45,328 contracts. Total open interest increased by a massive 4,838 contracts, which relative to volume is approximately 325% above average. Yesterday’s strong market action confirmed the hog market was in the process of breaking out and has continued on June 2 with the August contract trading 1.425 cents above yesterday’s close and has made a new high for the move of 83.750, which takes out the previous high print of 82.290 made on May 17. This is the highest print since 84.250 made the week of June 1, 2015 for the July 2015 contract.
A possible driver of prices is the extreme tightness in pork supply in China and Chinese hog prices have increased by over 35% during the past year. If exports pickup substantially, higher prices could be in the offing, and it appears that the market is already anticipating this. We have no recommendation.
July corn advanced 9.00 cents on volume of 386,934 contracts. Total open interest exploded higher, up 22,444 contracts, which relative to volume is approximately 135% above average meaning aggressive new buyers were entering the market in very large numbers and driving prices to a new high for the move of 4.14, which takes out the previous high of 4.13 1/2 made on May 27.
As this report is being compiled on June 2, the July contract is trading 4.00 cents higher and has made a new high for the move of 4.19 1/2, which is the highest print since 4.21 made the week of October 5, 2015. The COT report released last Friday showed that managed money was long by ratio of 1.51:1, which was up from the previous week of 1.36:1 and the ratio two weeks ago of 1.22:1. However, this means there are large numbers of speculative shorts remaining in the market who will be forced to cover as prices continue their rise. OIA has been warning clients against shorting corn and we have reprinted the research note from May 25. We have no recommendation.
From the May 25 research note on corn:
“As we pointed out in yesterday’s report, according to the latest COT report managed money is net long, but not by a substantial amount, which means there are large numbers of short-sellers who are going to be forced to cover as prices continue to advance.”
“From May 20 through May 25 (four sessions), total open interest has increased by 46,778 contracts while July corn advanced 15.25 cents. This indicate that short sellers are not capitulating and buyers are driving the train. We see higher prices ahead. Do not short corn.”
July Chicago wheat advanced 9.25 cents on volume of 103,369 contracts. Total open interest increased by 61 contracts, and though this is a minuscule number, it is important to keep in mind that managed money is massively short Chicago wheat according to the COT report released last Friday and tabulated on May 24. Managed money was short Chicago wheat by 3.25:1 in the latest report, which is the highest ratio seen during the past couple of months and up sharply from the previous week of 2.44:1 and the ratio two weeks ago of 2.67:1.
Additionally, the July contract accounted for loss of 4,368 of open interest, which means there were sufficient open interest increases in the forward months to offset the decline in July and increase total open interest slightly. Again, this confirms that short sellers are not capitulating, which means it is likely we prices will continue to advance until a sufficient contingent of spec shorts have been blown out.
On May 27, OIA announced that July Chicago wheat generated short and intermediate term buy signals, and as this report is being compiled on June 2, the July contract is trading 9.25 higher and has made a daily high of 4.87, which is the highest print since 4.92 3/4 made on May 3. We have no recommendation.
July soybeans advanced 21.25 cents on surprisingly light volume of 284,592 contracts. Volume on June 1 compares to May 26 when the July contract lost 5.75 cents on volume of 294,145 contracts and total open interest declined by 256. In other words, volume yesterday was below that of May 26 when soybeans had a minor decline and the daily range was 24.75 compared to the range yesterday of 34.50 and a strong advance. This indicates that many potential participants were on the sidelines.
On June 1, total open interest increased by 8,369 contracts, which relative to volume is approximately 5% above average. Compare the open interest increase in corn to that of soybeans and it is readily apparent that market participants had a greater appetite for corn than soybeans even adjusting for the difference in volume. The July contract accounted for a loss of 781 of open interest and there were open interest increases in the August 2016 through November 2017 contracts.
As this report is being compiled on June 2, the July contract is trading sharply higher, up 39.50 or + 3.55% while meal is trading + 4.23% higher on the day. The July contract has made a daily high of 11.41 1/4, which takes out the August 2014 high of 11. 17 and is the highest price since July 17, 2014 (11.48 1/4). If the July 17, 2014 print is taken out there is no resistance until $12.49 1/4, which was the low made on July 9, 2014 and is the high of the gap between 11.48 1/4 and 12.49 1/4. Stand aside.
From the May 27 research note on soybeans:
“Although, soybeans tend to top out in the month of June, we strongly advise against picking a top in this market even though managed money is very heavily net long. With respect to long positions acquired at substantially lower levels, we recommend holding them with appropriate stop loss protection. We advise against initiating new bullish positions at current levels.”
WTI crude oil:
July WTI crude oil lost 9 cents on volume of 940,936 contracts. Total open interest declined by 2,102 contracts in the July contract accounted for a loss of 15,254. As this report is being compiled on June 2, the July contract is trading 13 cents above yesterday’s close and has made a daily low of 47.97, which is above yesterday’s print of 47.75 and a daily high of 49.47, which is slightly above yesterday’s print of 49.25.
It appears that crude oil has lost some of its momentum and the first indication the market may be close to generating a short-term sell signal would be if it makes a daily high below OIA’s pivot point of $48.63. A confirmed sell signal would occur if the daily high is below OIA’s key pivot point for June 2 of 46.46. We have no recommendation.
The Energy Information Administration announced that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 1.4 million barrels from the previous week. At 535.7 million barrels, U.S. crude oil inventories are at historically high levels for this time of year. Total motor gasoline inventories decreased by 1.5 million barrels last week, but are well above the upper limit of the average range. Both finished gasoline inventories and blending components inventories decreased last week. Distillate fuel inventories decreased by 1.3 million barrels last week but are well above the upper limit of the average range for this time of year. Propane/propylene inventories rose 1.3 million barrels last week and are near the upper limit of the average range. Total commercial petroleum inventories decreased by 2.7 million barrels last week.
Natural gas: On June 1, July and August natural gas generated short-term buy signals and remain on intermediate term buy signals.
July natural gas advanced strongly, up by 9.3 cents on heavy volume of 462,427 contracts. Volume increased substantially from May 31 when the July contract gained 11.9 cents on volume of 394,957 contracts and total open interest declined by 206. On June 1, total open interest declined by a massive 22,088 contracts, which relative to volume is approximately 75% above average meaning liquidation was substantial and powering the market higher, not new buying. This is negative.
As this report is being compiled on June 2, the July contract is trading 2.8 cents above yesterday’s close and has made a new high for the move of $2.424, which is the highest print since 2.427 made on April 25. The EIA released its natural gas storage report today and there was a stock build of 82 Bcf, but this has not dented the advance thus far.
Natural gas should have a pullback lasting 1-3 days and this would be the opportune time to initiate bullish positions. Our concern is that natural gas prices tend to top out in mid-June, which means that the bull move may have only 2 to 3 weeks to go unless temperatures begin to rise substantially, which would kick in cooling demand.
The Energy Information Administration announced that working gas in storage was 2,907 Bcf as of Friday, May 27, 2016, according to EIA estimates. This represents a net increase of 82 Bcf from the previous week. Stocks were 712 Bcf higher than last year at this time and 753 Bcf above the five-year average of 2,154 Bcf. At 2,907 Bcf, total working gas is above the five-year historical range.
The June dollar index lost 42.2 points on volume of 21,583. Total open interest increased by a massive 894 contracts, which relative to volume is approximately 55% above average meaning aggressive new short-sellers were entering the market in substantial numbers and driving prices lower (95.340). The June contract, which is facing expiration gained 15.
As this report is being compiled on June 2, the June contract is trading close to unchanged on the day. The first sign the dollar index is about to generate a short-term sell signal will be if the daily high is below OIA’s pivot point for June 2 of 95.348. The continued strength of the dollar index is based upon the Federal Reserve raising interest rates in June. Though, there is a low expectation of it occurring in June, if the Fed takes this off the table, even temporarily we could see the dollar index plunge substantially. We have no recommendation.