WTI crude oil:
October WTI crude oil advanced 69 cents on volume of 1,003,835 contracts. Total open interest increased by 9,932 contracts, which relative to volume is approximately 50% below average. The September contract accounted for a loss of 11 of open interest, October -4,985, which means there were sufficient open interest increases in the forward months to offset the decline in the two delivery months and increase total open interest. For the past two days, crude oil has been experiencing positive open interest action: it increases when prices advance and declines when prices move lower.
As this report is being compiled on August 24 after the release of the EIA storage report, the October contract is trading sharply lower, down $1.44 or -2.97%. On August 15, OIA announced that October WTI crude oil generated a short term buy signal and and intermediate term buy signal on August 19. Currently, the October contract is trading in its value area of the 50 day moving average of 46.47 (last price is 46.72). The 100 day moving average stands at 46.95 and we want to see the 50 day moving average climb above the 100 day average before increasing our enthusiasm. We think that crude oil should be traded from the long side, but have no specific recommendation.
The Energy Information Administration announced that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 2.5 million barrels from the previous week. At 523.6 million barrels, U.S. crude oil inventories are at historically high levels for this time of year. Total motor gasoline inventories remained unchanged last week, and are well above the upper limit of the average range. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories increased by 0.1 million barrels last week and are near the upper limit of the average range for this time of year. Propane/propylene inventories rose 2.4 million barrels last week and are above the upper limit of the average range. Total commercial petroleum inventories increased by 6.6 million barrels last week.
October natural gas advanced 9.3 cents on strong volume of 416,676 contracts. Total open interest declined by 10,743 contracts, which relative to volume is average. The September contract accounted for a loss of 18,624 of open interest and will enter first notice day shortly.The COT report revealed that managed money liquidated 4,775 of their long positions and added 13,374 to their short positions. While commercial interests added 21,715 to their long positions and also added 15,007 to their short positions. According to the latest report, managed money is short natural gas by a ratio of 1.34:1, which is up from the previous week of 1.25:1 and the ratio two weeks ago of 1.15:1. On the other hand, commercials are long by a ratio of 1.07:1.
The moving average setup for natural gas is bullish with the 20 day moving average standing at $2.741, 50 day of 2.769 and the 100 day moving average of 2.617. Currently, the October contract is trading above all three moving averages at 2.847 and is up 5.3 cents on the day. Note that the 50 day moving average for natural gas is above its 100 day moving average whereas for October WTI crude oil, the 50 day moving average is trading BELOW the 100 day moving average, meaning that natural gas is the stronger of the two.
In our view, natural gas should be traded from the long side and as we have pointed out in previous reports it is entering its strong seasonal time frame of September and October. Although, the September contract will likely generate a short term buy signal on August 24, the October, November and December contracts will NOT generate short term buy signals on the 24th.
For the October contract to generate a short term buy signal, the low of the day must be above OIA’s key pivot point for August 24 of $2.787 and the low thus far has been 2.779. Tomorrow, the EIA storage report will be released and this is always a major market mover. We recommend a stand aside posture in the October through December contracts until such time as they generate short term buy signals. Do not short this market.
December gold advanced $2.70 on light volume of 145,829 contracts. Total open interest increased just 128. As this report is being compiled on August 24, the December contract is trading sharply lower, down $16.10 or -1.20% and has made a daily low of 1328.10, which is the lowest print since 1323.00 made on July 27. It appears likely that tomorrow December gold will generate a short term sell signal and today’s pivot point for the sell signal is 1341.80, which means tomorrow’s daily high must be below this number or tomorrows pivot pivot point.
Both the equity market and precious metals are on tenterhooks regarding the upcoming address on Friday by the chairman of the Federal Reserve and our belief is that Ms Yellen will take a somewhat more hawkish stance and by implication indicate that a September rate hike is on the table. This is negative for equities and precious metals and we are seeing the effect of this today. Currently, the S&P 500 E-mini is trading 4.75 points lower and volatility has been increasing during the past several days. We recommend a stand aside posture, but remain bullish on gold in the intermediate term.
December silver gained 6.7 cents on strong volume of 94,063 contracts. Total open interest increased by 1,219 contracts, which relative to volume is approximately 40% below average. The September contract, which will shortly be entering first notice day lost 13,752 of open interest, which means there were more than enough open interest increases in the forward months to offset the decline in September and increase total open interest.
As this report is being compiled on August 24, the December contract is trading 40.00 cents lower or -2.10% and continues to be weak relative to gold. This is a phenomenon we have seen many times before and actually provides a bullish set up because silver is trading close to the late June low of $18.360 made on June 30 whereas the gold contract is only making lows seen on July 27. Both gold and silver alternate between being the leader and the follower and silver has been the leader on the downside.
On August 19, OIA announced that December silver generated a short term sell signal and from August 19 through August 23 the December contract has lost 80.7 cents. The COT report released last Friday showed that managed money was long silver by ratio of 5.71:1, but this was down from the previous week of 6.82:1 and the ratio two weeks ago of 8.82:1. Three weeks ago, managed money was long silver by ratio of 12.66:1 and we have no doubt that the net long position will shrink further in this Friday’s report. December silver will generate an intermediate term sell signal if the daily high is below OIA’s key pivot point for August 24 of $18.603. Stand aside.