Bloomberg Access:{OIAR<GO>}

WTI crude oil:

July WTI crude oil lost $1.34 on volume of 1,280,948 contracts. Total open interest increased by 8,319 contracts, which relative to volume is approximately 60% below average. However, a total open interest increase, though light indicates that new short-sellers were entering the market and driving prices to a new low for the move of $47.73, which is the lowest print since 47.70 made on May 12.

As this report is being compiled on June 1, the July contract is trading 55 cents higher on the day and has made a daily high of 49.17, which is substantially below yesterday’s print of 49.71. Today’s action is disappointing especially because of the substantial decrease in inventories reported by the EIA of 6.4 million barrels which should have been a catalyst for substantially higher prices if in fact crude was in a healthy price environment.

Though the July contract generated a short term buy signal on May 19, it appears likely that this is going to reverse. We’ve seen numerous reversals since the beginning of April. For a new short term sell signal to occur, the daily high must be below OIA’s key pivot point for June 1 of $48.82. As stated in yesterday’s note, we see no reason to be involved in the crude oil market.

The Energy Information Administration announced on June 1 that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 6.4 million barrels from the previous week. At 509.9 million barrels, U.S. crude oil inventories are in the upper half of the average range for this time of year. Total motor gasoline inventories decreased by 2.9 million barrels last week, but are near the upper limit of the average range. Both finished gasoline inventories and blending components inventories decreased last week. Distillate fuel inventories increased by 0.4 million barrels last week and are near the upper limit of the average range for this time of year. Propane/propylene inventories increased by 3.4 million barrels last week but are in the lower half of the average range. Total commercial petroleum inventories decreased by 5.2 million barrels last week.

Natural gas:

July natural gas lost 7.4 cents on heavier than normal volume of 504,991 contracts. Volume increased from May 30 when the July contract lost 16.5 cents on volume of 493,212 contracts and total open interest increased by 1,742.

On May 31, total open interest increased substantially, up by 11,838 contracts, which relative to volume is approximately 10% below average. However, the total open interest increase on yesterday’s decline to a multi-week low indicates that new short-sellers were beginning to enter the natural gas market in much larger numbers and driving prices to a low of $3.061.

During the past two days beginning on May 30, the July contract has fallen 23.9 cents while total open interest increased by a total of 13,580. What this clearly indicates is that longs are not moving prices lower and it appears they are digging in and refusing to liquidate. From May 26 when July made a high of 3.328 to today’s low is a decline from high to low of approximately 10%. In our view the lack of liquidation by longs indicates there is much more to go on the downside.

As this market is being compiled on June 1, the July contract is trading lower again, down 7.2 cents or -2.34% and has made a new low for the move of 2.988, which may continuation chart is the lowest print since 2.986 made on March 23, 2017. The market began its slide during the Memorial day weekend shortened session and the decline has been non-stop since then. A counter trend rally can occur at any time and this would be the opportune time to initiate bearish positions. Do not chase this decline. 

From the May 23 note on natural gas:

“We think a short term sell signal is on the horizon and the heavy net long position of managed money combined with relatively low temperatures throughout the Midwest, South and East indicates that air-conditioning demand is not going to be above normal. This is a major driver for natural gas prices during the summer months. As we pointed out in previous notes, June, July and August tend to be weak seasonally. Stand aside until a short term sell signal is generated.”

Gold

August gold advanced $9.70 on light volume of 2 15,356 contracts. Total open interest increased massively, up by 8,732 contracts, which relative to volume is approximately 55% above average. This indicates that new buyers were moving aggressively into gold and driving it to a high of $1276.80, which is the highest print since 1275 70 made on May 1.

As this report is being compiled on June 1, the August contract is pulling back, down $5.80 and has made a low of 1263.70, which is above yesterday’s print of 1262.00. As we pointed out in previous notes, our concern for gold is any rally in the dollar will depress gold prices. Today, the dollar is having a slight rally and gold is falling. We think there will be an opportune time to initiate bullish positions in gold, but it’s premature at this time.

Euro:

The June euro advanced 57 pips on volume of 219,427 contracts. Total open interest declined by 1,799 contracts, which relative to volume is approximately 55% below average. The the June contract accounted for a loss of 4,119 of open interest. As this report on June 1, the June contract is trading 40 pips lower and has not taken out yesterday’s low of 1.1174.

We are waiting for the euro to correct down to the 20/50 day moving averages of 1.1092/1.0892 respectively. This will cause the dollar to rally, possibly generating a short term buy signal. On March 13, OIA announced that the June euro generated a short term buy signal and an intermediate term buy signal on March 16. Do not enter new bullish positions at current levels.