The Crude Oil Trend Is Your Friend
Smart Profits Commodities Corner
Monday, May 12, 2008
by Lee Lowell, Futures Options & Commodities Specialist
To most people, the idea of sitting in front of a screen all day sounds pretty darn boring.
But to a former pit trader like me, nothing could be further from the truth. Given that I was one of the guys who set the price for crude oil when I worked on the trading floor at the NYMEX, I can tell you that watching the consistent upward march of oil prices today is absolutely fascinating.
To see this market in action on a daily basis is just amazing. Oil is king of the jungle and its ability to set new all-time highs almost daily is impressive.
When I last wrote to you two weeks ago, crude prices had just eclipsed the $120 a barrel mark. But as I’ve noted here before, you need to be very careful if you’re thinking about any kind of oil-based investment…
Beware The Pullback In Any Market… But Particularly This One
For several weeks now, the general trend in the oil market is pretty straightforward: A steady climb higher, but with large, profit-taking pullbacks along the way. After that, the rising trend continues, most likely setting new highs in the process.
If you know what to look for, you can almost set your watch by this trend. And after hitting another psychologically important mark at $120, the market didn’t disappoint.
Prices then hit the skids and shed a quick $10 a barrel - $10,000 for each futures contract.
But just as quickly as it fell, all the subsequent trading days have seen upside moves, culminating in oil now sitting at another all-time high of $126 a barrel. You can see the moves on this chart.
That $16 swing from pullback to new high added another $16,000 on every single futures contract held. So you can see just how lucrative the commodities market can be.
Unless some monumental incident occurs that turns it to the downside for good, this trend will continue for the foreseeable future.
Speaking of strong trends…
Gassing Up: Two-And-A-Half Year High For Energy’s Other Big Driver
What’s that old adage about how “the trend is your friend?”
Oil certainly isn’t alone in establishing a tradable trend. Natural gas futures have also enjoyed big moves over the last two weeks.
Since my last update, the front-month natgas futures contract slumped 1,000 points from a two-and-a-half year high of $11.400 per mmbtu, only to scream back higher and set even newer two-and-a-half year highs.
Right now it’s topping out at $11.600 per mmbtu - an $11,000 per contract move in the last two weeks. If you want action, the energy market will certainly provide it.
Oil and natural gas continue to be best buddies at the moment, moving in tandem, despite relying on very different underlying fundamentals. This upside momentum is because large hedge funds have their hands all over the market like vultures.
Don’t expect to see a long-lasting selloff in natural gas any time soon, especially with hurricane season heating up in June.
Not So Much Heavy Metal Here
Having enjoyed a furious price runup, only to get smashed back down again over the past month, it appears both gold and silver prices have started to stabilize.
In truth, a pullback wasn’t likely to last long, as many investors love to keep hard assets like gold and silver in their portfolios during times of both financial and geopolitical uncertainty. These metals are one of the ultimate safe havens - and now is no different.
In fact, it looks like these two markets may be getting ready to continue on with their eventual march higher. In the short-term, however, I believe we’ll see more consolidation at current levels.
Soft Relief
If it’s relief you want, the “softs” market (coffee, sugar, cocoa, orange juice and cotton) is providing it.
These commodities continue to tread water at price levels that have held over the last few weeks. However, this “basing” pattern is usually a precursor to large, sustained moves once it breaks out in one direction or the other, so prepare for some action here soon.
Specifically, coffee and sugar seem primed for the best upside breakouts, since they’re both sitting close to near-term lows.
As for cotton and orange juice, we’ll have to hang tight on these for a little while yet, until they decide which way they want to move.
But we’ll be monitoring the weather for the next few months. You may wonder what that has to do with commodities investing - but it’s a hugely important factor.
Since supply and demand and weather patterns are two major drivers of commodities prices, we’ll be paying attention to how the Brazilian frost season affects coffee prices and how the US hurricane season affects orange juice market.
Grains Try To Go 3-For-3 To The Upside
As for the grains, we’ve seen divergent moves in its three main components - corn, soybeans & wheat.
Wheat is hovering just above its 200-day moving average line - a very reliable support level. If it can hold here and start a renewed uptrend, it could present some opportunities.
Meanwhile, corn continues to trade near the top of its recent range, while soybeans prices are still bouncing between large moves both up and down. This is an erratic market at the moment, but it does appear tilted towards the upside.
I’ll be back in two weeks with the latest roundup of the commodities world. But these are the trends to keep in mind if you’re thinking of investing. Remember that with such volatile swings, it’s important to cap your risk.
Lee Lowell
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