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WTI crude oil: June 2017 WTI crude oil will generate a short term buy signal provided the low on May 16 remains above OIA’s key pivot point for May 16 of $48.50.

June WTI crude oil advanced $1.01 on strong volume of 1,411,079 contracts. Total open interest increased by 14,748 contracts, which relative to volume is approximately 50% below average. However, the June contract lost 46,809 of open interest, which means there were sufficient open interest increases in the forward months to offset the decline in June and increase total open interest. Yesterday, the June contract made a daily high of 49.66, which is the highest print since 49.76 made on April 28.

From May 10 through May 15 the June contract has gained $2.97 and total open interest has increased every day for a cumulative gain of 53,472 contracts. This is outstanding action. 

The COT report released on Friday revealed that managed money added only 68 contracts to their long positions, but added a massive 47,222 to their short positions.  As of the May 9 tabulation date, managed money was long WTI crude oil by a ratio of 1.63:1, down sharply from the previous week of 2.19:1 and about half the ratio of 3.26:1 made two weeks ago. The high ratio occurred three weeks ago when it hit made a high of 4.98:1. 

Yesterday’s rally began in the evening session on Sunday when Saudi Arabia and Russia announced that cuts in production would continue until the first quarter of 2018. As we said in yesterday’s note: “Before reaffirming bearish positions, we want to see what volume and open interest tells us about trading activity on May 15.” 

We are withdrawing our bearish recommendation, though we are not prepared to issue a bullish one. June and July gasoline generated short term buy signals yesterday and heating oil is likely to generate a short term buy signal today. The American Petroleum Institute storage report will be out this afternoon and tomorrow is the EIA report, which is always a major market mover. If June WTI generates a short term buy signal today, we expect a pullback, perhaps a sharp one before the market resumes its upward trend. Conceivably, the buy signal could reverse, but we think this is unlikely because the OPEC meeting is still almost 2 weeks away (May 25) and the psychology of the impact will be supportive.

Gasoline: On May 15, June and July 2017 New York gasoline generated short term buy signals. Both contracts remain on intermediate term sell signals.

Heating oil: June heating oil will generate a short term buy signal provided the daily low is above OIA’s key pivot point for May 16 of $1.5029. Heating oil remains on an intermediate term sell signal.

Natural gas:

June natural gas lost 7.5 cents on light volume of 408,747 contracts. Total open interest declined by 5,176 contracts, which relative to volume is approximately 45% below average. The June contract accounted for a loss of 18,673 of open interest. Yesterday’s downside action followed a new high for the move on May 12 in the June contract made a high of $3.431, which is only fractionally above the April 7 print of $3.413.

The COT report released last Friday revealed that managed money added 6,970 to their long positions and liquidated 5,510 of their short positions. Commercial interests added 1,239 to their long positions and also added 2,457 to their short positions. As of the May 9 tabulation date, managed money was long natural gas by a sky-high ratio of 3.34:1, up sharply from the previous week of 3.08:1 and substantially above the ratio two weeks ago of 2.71:1. The ratio of longs to shorts in the latest report is the highest recorded by OIA in 2017.

As this report is being compiled on May 16 June contract is trading 10.9 cents lower or -3.25%. On May 11 June and July natural gas generated a short term buy signal and at the time had already been on an intermediate term buy signal.

We have been leery about the rally for three reasons: First, natural gas consumption is driven by air-conditioning demand and therefore it is key that temperatures in the Midwest, South and East remain unseasonably warm. This is not the case. Second, natural gas prices tend to top in the month of May and then decline in June, July and August. Third, the net long position of managed money is at a stratospheric level.

Once a short term sell signal is generated, there will be a massive amount of potential selling pressure to drive prices lower into the weak seasonal time frame just ahead. The June contract will generate a short term sell signal if the daily high is below OIA’s key pivot point for May 16 of $3.215. Stand aside.

From the May 10 note on natural gas:

“As we pointed out in the May 8 note on natural gas, nat gas tends to top in the May time frame and then declines during the months of June, July and August. We have no recommendation for natural gas except that no one should try to short this market. Additionally, the natural gas rally is NOT being driven by above normal temperatures in the Midwest, South and East. Higher temperatures increase consumption due to higher use of air-conditioning.”

Dollar index: On May 16, the June and September 2017 dollar index will generate a short term sell signal. This reverses the May 11 short term buy signals. Both contracts remain on intermediate term sell signals.

Euro:

The June euro advanced 53 pips on light volume of 134,615 contracts. Total open interest increased by 2,489, which relative to volume is approximately 25% below average. However, a total open interest increase in yesterday’s trading confirms the bullish trend of the market as new buyers continue their move into the euro.

As this report is being compiled on May 17, the June contract is rocketing higher, up 103 pips or +0.94% and has made a new high for the move of 1.1106, which is the highest print since 1.1062 made on November 10, 2016. Looking at the chart, there is no resistance until the 1.1408 print made on November 9, 2016 the evening of the US presidential election.

On March 13, OIA announced that the June euro generated a short term buy signal and an intermediate term buy signal on March 16. We are bullish on the euro, but advise against chasing the rally.

The June contract is substantially overbought relative to its 20 and 50 day moving averages and the daily/weekly Bollinger bands. The June contract should find support this week at the 1.0925 level. A violation of this would suggest that further correction is in store and would provide an opportunity to get long the euro. Stand aside and most important: do not short the euro.

EUR/GBP: EUR/GBP: will generate a short term buy signal on May 16. This reverses the March 31 short term sell signal. The pair remains on an intermediate term sell signal, but we expect this to reverse in the period just ahead.

Live cattle: June and August 2017 live Chicago cattle will generate short term sell signals on May 17. Both contracts remain on intermediate term buy signals.