Many financial markets are approaching illogical valuations of their products, and while no one knows how high the stock market will go or when it will turn. Fortunately, there are other investment opportunities that fit both logic and risk. Today, we’ll look at the unleaded gasoline market and the growing support that will push us into the spring driving season.
First a bit of background. There has been a record setting shift taking place within the petroleum sector. Speculators have loaded up on crude oil contracts above, adding 240k contracts above $52 per barrel. This set a new net long speculative record and brought our COT Ratio indicator to its highest level since August of 2014. Much of the buying appears to based on the idea the new administration will be domestically oil friendly. We agree. One could argue that the current connections from the White House to the board rooms of the major petroleum corporations are even closer than those of the Bush/Cheney era.
Much of the buying appears to based on the idea the new administration will be domestically oil friendly. We agree. One could argue that the current connections from the White House to the board rooms of the major petroleum corporations are even closer than those of the Bush/Cheney era.
Speculators don’t appear to be grasping the might of the petroleum industry. The recent rally has been a boon to many after two years of suffering. Commercial producers have been able to use this rally to generate much-needed revenues both in the short-term and now, on a longer horizon as well. Our take is that fracking will find a way to be profitable below $60 per barrel. Their forward selling of anticipated production is likely to continue even as they set new net-short position and total position records.
Shifting gears, we see further credence added to our oil price cap as petroleum producers are hedging their raw oil sales through the purchase of their oil’s refined products. In other words, we see a tremendous shift in the crack spread. The petroleum industry is currently geared to profit from declining crude prices and rising refined product prices.
Commercial traders in unleaded gasoline have been net buyers for six straight weeks. This has pushed commercial momentum into positive territory and put us on the lookout for buying opportunities. The tension that builds up between the speculators and the commercial traders is a big part of our reversal identification process. This has made unleaded gasoline’s decline in the face of commercial buying a market we’ve been watching closely.
- The swing highs and lows are created by the tension between the commercial traders and the speculators as published in the Commitments of Traders report.
Each of the occurrences highlighted above shows the same type of setup. First, we only take traded in line with the commercial traders’ momentum. If they’re buying, so are we. Next, the futures market becomes overbought or, oversold as indicated by our short-term market momentum indicator. This creates an overbought or, oversold market, which is at odds with the commercial traders’ collective opinion of future prices. Once the speculative move is
Once the speculative move is rebuffed by the added capacity of the commercial marketplace, the commercial total crude oil position is more than twice the size of the speculators’; we enter the market in line with the commercial traders’ momentum. In this case, we published a buy signal in April unleaded futures. As always, we place a protective stop at the recent swing high or, low – $1.6266 for this long position.
Finally, unleaded gas tends to show seasonal strength from now until Memorial Day weekend. We see no reason for this to change. In fact, we see domestic car travel increasing for the coming year. Therefore, we’ll sit with this position longer than usual. If we’ve caught the bottom, the legs should run.
For more on our methodology, our mechanical program or a free trial of our discretionary Commitments of Traders nightly email, please visit, COTSignals.com.
This material has been prepared by a sales or trading employee or agent of Commodity & Derivative Advisors and is, or is in the nature of, a solicitation. This material is not a research report prepared by Commodity & Derivative Advisors’ Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.
The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Commodity & Derivative Advisors believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.