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Commodities Quarterly: Energy, grains, metals and more – here’s what’s in store in Q4

But what will it cost me later this quarter?

But what will it cost me later this quarter?

Andrey Bezverkhiy is a Hong Kong-based financial professional (see below for his bio). Here he presents the first of his quarterly previews about what is set to shape the commodities market.

Energy

The fourth quarter is an interesting time for energy products. Winter in the northern hemisphere is approaching and you may be thinking of buying natural gas (NG) or heating oil (HO) futures and holding them during the colder months. Such a plan won’t succeed – no one buys heating oil in winter. Suppliers of HO start tracing customers and offering lucrative price plans at the end of summer when prices bottom out. So why do futures prices behave differently? Historically, prices for NG and HO tend to peak in October, and in November they slowly go south. Do not expect prices to grow after early November unless winter is really cold and existing inventory levels aren’t sufficient.

The current price for HO is at historical highs, so it may drop faster than you anticipate. NG inventories are too high, so don’t expect prices to go above US$4 to US$4.3. Watch the US weather closely and if there are no bad surprises, go short (futures or ETFs) in early December to play safe. But if you hear about weather shocks, quit your positions at once and wait.

Unlike NG and HO, crude oil (CL) has no strong seasonal tendencies. Also, you can’t buy pure CL anymore – it comes with a dose of politics nowadays. That’s why I don’t suggest any moves because there may be too many events that may rock the market: quantitative easing (QE), US elections, US debt issues and EU turmoil. There are also factors like inventory levels and weather events. Long story short: unless you are watching this market closely, do not touch it. I will buy CL if it falls below $75 to $80, but at current levels, I don’t like it.

Metals

Industrial metals (copper, lead, aluminum) won’t get much love in Q4. Prices are heavily affected by real growth in the manufacturing sector, which is not going to happen in 2013, according to market gurus like Marc Faber, Jim Rogers and Nouriel Roubini. All of them predict more troubles in 2013. But back to Q4 2012: The US elections and QEs by the US, EU and Japan may lift markets. However, do not assume that this upturn will last – use it to close any long positions.

Precious metals (PMs) (gold, silver, platinum) aren’t in any better shape. Yes, QE should lift prices of PMs as inflation hedges, but given the amount of noise in media, this has been priced in already. Besides, I expect to see a drop in PMs as soon as the US election fuss fades away and people sober up to see the same old issues there and in Europe: debt, unemployment, recession. China may add to the troubles, too, as its two major customers have huge holes in their pockets. All of this will drive people from markets into cash. I expect gold will stay within $1.6k to $1.8k; platinum $1.5k to $1.7k; and silver won’t rise above $38. Only two things can lift prices drastically if they take place simultaneously: much stronger QEs and real signs of growth worldwide.

Grains

There isn’t anyone left on this planet who doesn’t know about this year’s drought. Prices for wheat, corn and soybeans made records, some even made all-time records. Now the drought is over. Record seeding volumes are reported in South America and the US. India says it has large stocks of wheat that it doesn’t want to keep. Russia is using every opportunity to rule out a wheat ban and I tend to believe this as Russia recently became a WTO member and does not want to lose face. China is silent, but there are rumors of better crops this year and government interventions to cool down the market.

Prices have begun to decline, but are still at elevated levels and some players are hoping for a further upwards trend. But why? I think a bearish situation will last at least until mid/end November when crops will be harvested and sold, but new crops will still be far away. The only wildcard is Russia, where there is some discord in the government regarding a possible wheat export restriction. So I would stay away from wheat until its fate becomes clear and I would go short on soybeans and corn (I’ve been doing this for the last couple of weeks of September).

Meats

Back to the drought! It lifted the cost of feed, and farmers began to slaughter more pigs and cows than usual. Supply increased and prices dropped. It’s too late to short but too early to long yet. For now, I suggest waiting and reading “commitments of traders” (COT) reports for further developments. For those who do not know about COT, read Larry Williams’ book about it. He made $1m out of $10k in one year. How? His book tells you.

Softs

Sugar, coffee, cocoa and orange juice are my favourite ones. They are terra incognita compared with other commodities as most of them are not produced in the US and wild moves are normal. Sugar was at 30 cents/pound last year; now it is about 20 cents. We have hit a seasonal bottom for the commodity. I am long sugar. Coffee went down from $3 to $1.5 within a few months, so there is no more downside potential left as seasonally coffee goes up during colder seasons.

Cocoa has two crops per year and there is very little reliable information about this commodity. I have quit my shorts recently but I do not expect an uptrend anytime soon either. This year Ivory Coast, which produces about three quarters of world cocoa, introduced a new system of cocoa auctions. There is major uncertainty about this new arrangement, and weather prospects are not quite clear for the coming crop either – there is talk that it is too dry. I have a rule: stay away if you hesitate. And I DO hesitate.

Orange juice (OJ): I have thoughts about buying it once the price reaches $1 to $1.10. I was playing OJ futures but I sold my longs when the hurricanes came. It is important to know what weather will be like in Florida, the major producing state in the US. It is getting quiet now, so the futures may lose their value. At the same time, the COT report looks pretty bullish, so I do not rule out buying OJ again soon.

Fibre

Cotton: I am not interested. The market is not clear in terms of supply and demand and I prefer to stay aside. Lumber: I am watching COT but I do not see any developments at the moment. By the end of Q4 the picture may become bullish as demand starts to heat up, anticipating a new season for constructors. We shall see. For now, I am waiting.

About the author

I have several years of proprietary trading experience in equities and commodities. As the economic plague (let’s be honest here) has evolved, I have found myself trading mostly commodities because this sector is about real things that we need in our day-to-day lives, not exotic structured products with fancy names and troublesome outcomes.

The beauty of commodities is that they will never overstate profits or lie to you about their real value. Commodities do not use off-balance sheet vehicles or unrealistic forecasts. They are not sued by competitors or authorities for improper practices, and they do not award themselves unjustified huge bonuses and personal loans at shareholders’ expense. They are just subjects of trade. And that is why I praise them.

I am a rare breed of scalper or day trader: I usually take positions for weeks. I do several trades per week and I want to share my insights with those potentially interested in this sector. If you want to read more, stay tuned for my next update on this site in January, and in the meantime visit my other blog.

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