March 17 is a risk on day with equities trading higher and making new highs for the move, the dollar index sharply lower and making new lows for the move while grains are rallying along with precious metals and petroleum.
WTI crude oil:
May WTI crude oil advanced $1.92 on volume of 1,201,225 contracts. Volume exceeded that of March 11 when WTI advanced 66 cents on volume of 1,170,732 contracts and total open interest increased by 26,058. On March 16, total open interest declined by 9,575 contracts, which relative to volume is approximately 60% below average, but a total open interest decline indicates that there were insufficient numbers of new buyers in the forward months to offset the decline in the April contract, which lost 55,876.
As this report is being compiled on March 17, the May contract is trading sharply higher, up $1.55 or +3.85% and the dollar index is sharply lower while equities are making new highs for the move. The May contract has made a daily high of $41.57, which is the highest print since 41.66 made December 15, 2015.
On March 3, OIA announced that April and May WTI crude oil generated short-term buy signals and intermediate term buy signals on March 10. Though, we have not recommended bullish positions, we advised clients not to short the market and there are large numbers of market participants trying to pick a top in crude. The fundamentals are clearly bearish, but the reality is markets tend to do what is most counter intuitive and this fools most market participants.
From the March 13 note on crude:
“The performance of crude oil was outstanding on Wednesday March 10 when the EIA storage report was released and Thursday when SPX pulled back over 20 points from the high after the announcement from the ECB. Both WTI and Brent remained firm throughout the two day period, and though crude needs to correct its over bought condition, especially since WTI generated an intermediate term buy signal on March 10, we think higher prices are ahead. “
Brent crude oil:
May Brent crude oil advanced $1.59 on volume of 884,489 contracts. Total open interest exploded higher up, 28,835 contracts, which relative to volume is approximately 15% above average meaning aggressive new buyers were entering the market in above average numbers and driving prices higher (40.44). The May contract lost 5,459 of open interest, which means there were enough open interest increases in the forward months to offset the decline in May and increase total open interest above average. Due to the relatively small decline of open interest in the front month contract relative to the front month contract in WTI it is easy to see how total open interest increased substantially in Brent.
As this report is being compiled on March 17, the May contract is trading $1.02 above yesterday’s close, or+2.63% versus WTI trading +3.52% and has made a daily high of 41.57, which is only slightly above the March 8 print of 41.48. This may indicate the rally is stalling.
As we pointed out in today’s note on WTI, the high in the May contract is at its loftiest level since December 15. However, the high in May Brent on December 15 was 41.64 only slightly above today’s high. Again, this may be confirmation that a further rally from this point will be labored. This could set the stage fort crude rolling over.On February 26, OIA announced that May Brent generated a short-term buy signal and an intermediate term buy signal on March 7.
Natural gas: On March 16, April and May 2016 natural gas generated short-term buy signals, but remain on intermediate term sell signals.
April natural gas advanced 1.7 cents on volume of 259,830 contracts. Total open interest declined by a massive 10,800 contracts, which relative to volume is approximately 45% above average meaning liquidation was extremely heavy. As this report is being compiled on March 17, the April contract has made a new high for the move of $1.912, which is the highest print since 1.954 made on February 18.
We think that there is a high likelihood natural gas will continue to advance and one reason is that managed money is heavily short the market. As of the latest COT report managed money is short by a ratio of 1.92:1 (futures only), which means there are almost 2 short positions for each long position. Though natural gas fundamentals leave much to be desired, the market is beginning to enter its period of seasonal strength, which continues through May. If temperatures begin to get unseasonably warm, natural gas consumption could increase substantially, and this would be a new catalyst for higher prices.
The Energy Information Administration announced that working gas in storage was 2,478 Bcf as of Friday, March 11, 2016, according to EIA estimates. This represents a net decline of 1 Bcf from the previous week. Stocks were 998 Bcf higher than last year at this time and 807 Bcf above the five-year average of 1,671 Bcf. At 2,478 Bcf, total working gas is above the five-year historical range.
The June dollar index lost 74.3 points on heavier than normal volume of 31,059 contracts. Total open interest increased by 753 contracts, which relative to volume is average. As this report is being compiled on March 17, the June dollar index is trading sharply lower, down 1.175 points, or -1.22%. The June contract has made a daily low of 94.675 and this is the lowest print since 94.750 made on October 21, 2015. We have been negative on the dollar index for quite some time even though the investment community has been bullish.
From the March 13 note:
“We have been unimpressed with the performance of the dollar index for some time and shared this view with readers in the March 6 research note. Last week, the March contract fell to its lowest level since mid February.”
From March 6: “WTI On Buy Signal-AAPL On Buy Signal-Emini Open Interest Increases Positive for Rally.“
“In our view, the dollar index (DXY) and futures look weak. Open interest action has been negative for the most part on rallies and declines. Additionally, trading volumes in dollar index futures have dried up.”
“Nearly one year ago, the dollar index made its first major top of 100.390, and this was taken out by a fraction during the week of November 30, 2015 (100.510). The double top is separated by a period of nearly 9 months and it will take substantial euro weakness for the dollar index to break above it decisively. The 50 day moving average of the DXY is slipping below the 100 day moving average.”
In yesterday’s trading, the total open interest declines in the currencies and S &P 500 Emini reflected the expiration of the March contract and as a consequence the open interest stats have no significance with respect to supply and demand. As a result, we are not reporting on currencies in today’s report, but will resume coverage tomorrow.