WTI crude oil:
July WTI crude oil advanced 34 cents on light volume of 980,933 contracts. Volume was slightly above that of May 22 when the July contract gained 46 cents on volume of 974,812 and total open interest increased by 6,400 contracts, a number that was substantially below average. On May 23, total open interest declined by 5,180 contracts, which relative to volume is approximately 75% below average. The July contract accounted for a loss of 21,296 of open interest.
From May 17 through May 23, crude oil has advanced each day for a total gain of $2.47 while total open interest in this time frame declined by a total of 126,025 contracts. While price action has been outstanding, open interest action has been horrible and this indicates that both longs and shorts are liquidating on the rally
As we stated in the past couple of notes, crude oil is in desperate need of a correction, and the upcoming OPEC meeting on May 25 may be the catalyst. Crude oil has continued to rally since the May 19 short term buy signal, but this is not going to continue. Today’s EIA report showed a substantial stock decline of 4.4 million barrels, yet as this report is being compiled on May 24, the July contract is trading 33 cents lower.
Additionally, the high (thus far) for May 24 of 51.88 was made in the early hours of the session on May 24 (4:00 a.m.-5:00 a.m. EDT)) and after the release of the positive EIA report, the July contract could only make a high of 51.83, five cents below the print made several hours earlier. On May 23 the high for the July contract was 51.79 and since then, the July contract has been able to exceed it by a mere 9 cents.
On May 19, OIA announced that the July contract generated a short term buy signal, and it continues to be on an intermediate term sell signal. The viability of a continued advance will depend upon the extent and duration of the correction. If the correction is shallow and of short duration and quickly returns to the current highs, we would expect crude oil to continue to advance.
Tomorrow is the OPEC meeting in Vienna and we expect a “buy on the rumor-sell on the news” event unless there is a major surprise. Crude oil needs to undergo some corrective action before new buyers have confidence that prices have seen their lows in the short term.
The Energy Information Administration announced on May 24 that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 4.4 million barrels from the previous week. At 516.3 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 0.8 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 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 increased by 1.5 million barrels last week but are in the lower half of the average range. Total commercial petroleum inventories decreased by 3.5 million barrels last week.
July natural gas lost 11.2 cents on volume of 500,747 contracts. Total open interest declined by 2,677 contracts, which relative to volume is approximately 75% below average. The June contract accounted for a loss of 20,239 of open interest, which means there were almost enough open interest increases in the forward months to offset the decline in June. The relatively low volume combined with a modest total open interest decline indicated that holders of long positions were not panicking.
As this report is being compiled on May 24, the July contract is trading nearly unchanged on the day and has made a daily high of $3.345, which is above OIA’s key pivot point for the generation of a short term sell signal of 3.304 and has made a daily low of 3.269, which is below yesterday’s print of 3.303.
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.
Silver: On May 23, July 2017 New York silver generated a short term buy signal, but remains on an intermediate term sell signal.
July 2017 NY silver lost 5.2 cents on heavy volume of 104,295 contracts. Total open interest declined by 3,944 contracts, which relative to volume is approximately 35% above average. This indicates that both longs and shorts were liquidating. As we pointed out in yesterday’s research note, managed money has dramatically pared their net long position from three weeks ago when they were long by ratio of 5.16:1. In the latest report they were long by 1.35:1. Until New York gold generates a short term buy signal, we recommend a sideline stance. Gold will not generate a short term buy signal on May 24.
The June British pound lost 30 pips on substantial volume of 123,262 contracts. Total open interest declined by 1,202 contracts, which relative to volume is approximately 50% below average.
As this report is being compiled on May 24, the June contract is trading 35 pips lower. We have mentioned in previous notes that the pound is beginning to look tired at current levels. However, this has been going on for over a month. For example, the major new high for the move in April occurred on April 18 (1.2929) and a second new high of 1.2983 on April 28. This was taken out on May 5 (1.3004). The high thus far for the entire move was made on May 18 (1.3059) from the low $1.2001 made during the week of January 16, 2017.
In summary, from the first major high made on April 18 to the May 18 high, the pound gained just 1.30 cents. In our view, this indicates that momentum in the pound is slowing. For the pound to generate a short term sell signal the high of the day must be below OIA’s key pivot point for May 24 of 1.2912. The high thus far in trading after the release of the Federal Reserve minutes is 1.3008, though the June contract is now trading 23 pips lower. Stand aside until a short term sell signal is generated.