Current Ideas/Analysis.
Cotton #2 CT2020Z
Screen: COT data
Expiration: 11/20/20
Contract Unit: 50,000 Lbs
Price Quotation: $0.0001 per Lb.
Cotton #2 (2020z) 65.85 ($0.6585 per pound)
Fundamental Look:
· The most recent commitment of traders (COT) report shows a 4% increase in total open interest week to week.
· Commercial long positions – up 52%
· Commercial short positions – up 1%
· Large speculator long positions- down 9%
· Large speculator short positions- up 12%
(commercial hedgers are indicated by the red line in the bottom panel, while large speculators are represented by the green line in the bottom panel*)
Despite the fact that commercial hedgers increased their long positions this week (per the most recent Commitment of Traders report), the extent to which commercials remain net short, indicates potential weakness in cotton prices, in my view. Of note is that commercials have been ahead of the prior moves down (specifically in February of 2020 and April of 2019). Additionally, not lost on me are projections within the most recent WASDE report, indicating that 2020/2021 Cotton stocks are expected to be 4.4 million bales higher than 2019-2020.
Technical Look:
· On a technical basis, I detect a slowing in momentum relative to recent price action.
· Moreover, prices have been in an uptrend since April of this year, while momentum (using the 14 period RSI as a measure) had begun to cool.
· But in all candor my thoughts around cotton weakening are based more on the above mentioned COT data, than any technical formation this time around.
· I will note that current prices for the December contract are near the upper end of the Bollinger Bands (20 period, and 2 standard deviations). This played a secondary role in the call however.
Natural Gas 2020U
Screen: Moving Avg Crossover, Rising RSI, COT data
Expiration: 9/28/20
Trading Unit: 10,000 mmBTU (Million British Thermal Units)
Price Quotation: $0.001 per mmBtu.
Natural Gas (2020U) $2.356
Fundamental Look:
· EIA (Energy Information Administration) data for week ending 8/7/20
· Working gas in storage increased 1.7% over the prior week, at 3,332 Bcf
· Current storage is 22% higher than this time last year, and 15% above the 5 year average
· The most recent commitment of traders (COT) report shows no change in open interest week to week.
· Commercial long positions – down 3%
· Commercial short positions – down 2%
· Large speculator long positions- up 4%
· Large speculator short positions- down 19%
On the face of things, the level of inventories relative to the 5 year average gives me a bit of pause as it relates to bullish prospects for natural gas long term. Still, the market reacted positively to the most recent inventory report, despite the 5 Bcf build (versus expectations for a 40 Bcf increase).
More important to me (at least for the moment), is the behavior of commercials and large speculators on the most recent COT report. Open interest in its entirety as relatively flat from a week prior. While commercial longs decreased their long positions, by 3%, I also make note that their short positions declined by 2% as well. This coming in conjunction with a 4% increase in long positions by large speculators speaks to the potential for additional upside in natural gas for the moment.
Technical Look:
· On a technical basis, I would make note that the 10 period EMA crossed the 100 period EMA on August 7th, with prices increasing 17% since that time.
· This in coming in conjunction with increased momentum and open interest, which I see as bullish.
· In candor, I think a move into natural gas following the most recent move would be a bit late.
· Despite the positive factors (in my view) specific to momentum, the contract current price ($2.356) in proximity to its top Bollinger band ($2.419) indicates that a reversion to the mean may be in order in the short term.