WTI crude oil: May and June 2017 WTI crude oil will generate short term buy signals on April 5, but remain on intermediate term sell signals.
May WTI crude oil advanced 79 cents on April 4 on volume of 1,031,727 contracts. Surprisingly, total open interest increased only 809 contracts, which is a major disappointment for anyone bullish on WTI crude oil. It is a bit concerning that total open interest was tepid despite crude oil approaching 30 day highs.
The May contract lost 15,613 of open interest,, which means there were barely enough open interest increases in the forward months to offset the decline in May. Previously, we have written about the skepticism of many analysts and those in the speculative community about the ability of crude oil to advance. Yesterday’s action would appear to be the canary in the coal mine supporting this narrative.
As this report is being compiled after the release of the EIA storage report, the May contract is trading 13 cents higher on heavy volume after making a new high for the move of 51.88, which is above yesterday’s print of 51.30 and the highest level since 53.43 made on March 8.
As clients know, though we think crude oil prices will remain firm, we are much more excited about the prospects for gasoline. Accordingly, we have recommended the initiation of long positions in the gasoline ETF UGA and to utilize options on futures for NY gasoline.
From the March 30 note on WTI crude:
“As we pointed out in yesterday’s report, the summer driving season is beginning and we are confident this will result in firmer gasoline prices going forward. In yesterday’s report we recommended using options for gasoline futures due to their volatility and the gasoline ETF UGA.”
On April 5, the Energy Information Administration announced that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.6 million barrels from the previous week. At 535.5 million barrels, U.S. crude oil inventories are above the upper limit of the average range for this time of year. Total motor gasoline inventories decreased by 0.6 million barrels last week, but are in the upper half of the average range. Finished gasoline inventories decreased while blending components inventories increased last week. Distillate fuel inventories decreased by 0.5 million barrels last week but are in the upper half of the average range for this time of year. Propane/propylene inventories fell 1.2 million barrels last week and are in the lower half of the average range. Total commercial petroleum inventories increased by 1.0 million barrels last week.
Natural gas: May and June 2017 New York natural gas will generate intermediate term buy signals on April 5 after generating short term buy signals on March 10.
May New York natural gas advanced by a very strong 16.5 cents on strong volume of 538,837 contracts. However, the main event in yesterday’s trading was the spectacular increase of total open interest, up 32,545 contracts, which relative to volume is approximately 140% above average. The massive increase indicates that huge numbers of new buyers were rushing into natural gas even as prices climbed to multi-month highs.
The COT report released last Friday revealed that managed money liquidated 2,431 of their long positions and also liquidated 13,828 of their short positions. Commercial interests added 23,070 to their long positions and also added 8,510 to their short positions. As of the March 28 tabulation date of the report, managed money was long by a ratio of 2.15:1, up from the previous week of 1.96:1 and substantially above the ratio two weeks ago of 1.67:1.
As this report is being compiled on April 5, the May contract is trading close to unchanged on the day, but has made another new high for the move of $3.347, which is the highest print since February 9 (3.311). Yesterday’s massive increase of open interest indicates that Johnny-come-lately’s are beginning to climb on board natural gas, which suggests the rally will stall.
For those of you who entered bullish positions a week or two ago, we recommend taking partial profits and moving up exit points on remaining positions.
From the March 10 note on NY natural gas:
“Natural gas has been advancing in the face of a blizzard in the Northeast, and now that it is on a short term buy signal, we recommend waiting for a pullback before initiating new bullish positions in futures. For those of you who trade equities, the natural gas ETF UNG can be employed and it tracks natural gas prices fairly closely.”
Australian Dollar: The June Australian dollar will generate a short term sell signal on April 5, but remains on an intermediate term buy signal.
The June Australian dollar lost 40 pips on volume of 87,084 contracts. Total open interest increased by 972 contracts, which relative to volume is approximately 50% below average, but a total open interest increase on yesterday’s decline indicates that short-sellers were in control and driving prices lower (75.35).
The COT report released last Friday revealed that leverage funds added 945 contracts to their long positions and liquidated 6,397 of their short positions. As of the March 28 tabulation date, leverage funds were long the Australian dollar by a massive 4.81:1, up substantially from the previous week of 3.25:1 and almost double the ratio two weeks ago of 2.78:1.
As a result, we think the Australian dollar has terrific potential as a bearish trade now that it is on a short term sell signal. The reason: the massive long position held by funds will add selling pressure as they liquidate when prices continue to decline. However, wait for a counter trend rally, which could last from 1-3 days before initiating bearish positions.
As this report is being compiled on April 5 the June contract is trading 10 pips higher on the day and has made a daily high of 75.77, which is below yesterday’s print of 76.04 and a low of 75.49, which is above yesterday’s low of 75.35.
Dollar index: The June dollar index is getting close to generating a short term buy signal and this will occur if the daily low is above OIA’s key pivot point for April 5 of 100.608. The low thus far in trading on April 5 has been 100.305.
S&P 500 E-mini:
The June S&P 500 E-mini is getting close to generating a short term buy signal. This will occur perhaps in tomorrow’s trading provided the low of the day is above OIA’s key pivot point for April 5 of 2367.58. Although, this number will likely change somewhat in tomorrow’s trading, it provides a frame of reference for a resumption of the uptrend.
As this report is being compiled on April 5, the June contract is trading 17.00 points above yesterday’s close and has made a new high for the move of 2375.00, which is the highest print since 2378.75 made on March 21. The catalyst for today’s move is likely an optimistic view of the employment report, which will be released by the Department of Labor on Friday. We have no recommendation.