Volumes in most commodities over the past couple of weeks have been very disappointing, but I cannot say that I am hugely surprised. The past couple of years have added so much volatility to especially energy and grains, that a period where the market, and trader for that sake too, are exhausted, leaving us staring at relatively low range trading. That is not to say there are no interesting stories and observations to be had.
WTI Crude managed to stay inside a $2 range this week, with no real attempt to break out. Support and resistance was found at purely short-term technical levels that constitute the middle of the trading range set from the beginning of the December last year.
However, we find a major cause for concern in WTI Crude, because of the accumulation of speculative longs that now dominates the futures market and especially ETFs. The sums of these longs are now in parallel to when prices were well over $100 from where they are now. So with expiry approaching, and a negative roll yield of 8-10 per cent, funds and ETFs might be forced to reduce net positions moving into the next month.
We believe that this particular theme will dominate trading in the near term and could add downside pressure to crude. The extent of the move down in prices might push prices towards new lows, specifically our target for crude this year of $25.
We have seen the same range bound trading in the grains throughout the past couple of weeks; however, news of buyers out of the Asian regions has bid prices up towards the end of this week, sparking some speculation that physical interest at current prices may establish a bottom, with real value being sought after at current levels.
The technical outlook is at a crossroads for especially corn, with the 50-day moving average being tested above the 373.50 level.
A break above this level signals a reversal in the daily trend and could provide an excellent opportunity for fresh longs targeting 401.50 and 426 in the short term.
This particular strategy should be driven by momentum, so we need confirmation of this within the next two-three sessions before fear of failure.
With commodities having taken a breather over the past few weeks, we believe we are standing in front of a burst of volatility, especially with respect to energy. And although there are some serious risks to energy at present, grains appears to have little downside, with good opportunities especially in corn.
The author is a commodity analyst with Saxo Bank
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