Consolidation and pullbacks are normal and should be viewed as healthy for the sustainability of a bull market in commodities. This may be the perfect time to load up on commodities that have lost their luster where the fundamentals are still sound. The recent correction was attributed to the shifting market sentiment that we may have a global slowdown and threats from regulators as opposed to a change in supply and demand characteristics. Instead of exiting commodities completely, the smart money is likely to move from the more high profile contracts such as energies to more innocuous contracts such as livestock and softs. In the case of crops, any substantial increase in the supply of one crop is invariably at the cost of some other. The world’s arable land is diminishing, while demand driven by population and incomes are increasing. The world has consumed more food than it has produced for the past five years. That being said we are still friendly to agriculture if one can deal with the volatility.

Energies

The U.S. Department of Energy said that crude oil supplies were down 1.6 million barrels last week to 295.3 million barrels and 100,000 barrels were added to the Strategic Petroleum Reserve. September crude oil fell $6.24 to $123.26, with prices now almost $25 off their highs. We have yet to give up on seeing $150 but the path of least resistance for now remains down. Presently, we are not interested in trading oil long or short as the volatility is a bit rich. Support comes in at $122, which is the 100 day moving average in addition to being the level where the last run started in early June when prices rose from $122 to record levels. If that level was to give way the next stop should be $116 followed by $106 on a total collapse. If we were to change direction once again resistance comes in at $132 followed by $135.

Supplies of gasoline were up 2.9 million barrels, while heating oil supplies were up 1.2 million barrels. Over the past four weeks, gasoline demand was down 2.4% from a year ago while distillate demand was up 3.6%. Gasoline and heating oil will continue to look for guidance from crude and where crude goes
they will follow. September RBOB lost 14 ½ cents last week and closed under the 100 day moving average for the first time since August of 07’ for this particular contract. Prices have come off 17% from their highs just 2 weeks ago, but with continued demand destruction we could see prices come off more. Heating oil gave up ground as well as prices in September lost virtually 20 cents on the week closing at the lowest level in 12 weeks. We could find some moderate support at last week’s lows, but if we trade south and break support we may not see any buying emerge until we get closer to $3.32 on September. First resistance comes at $3.74. We would stand clear of gasoline and heating oil until we get a clearer picture on crude.

Natural gas suffered the same consequence as prices were hit particularly hard giving up $1.56 in September; in the last 3 weeks prices have come off 33% or in dollar terms $44,000 per contract in the futures market. EIA reported an injection of 84 BCF which was greater than the 5 year average of 57 bcf and higher than last year at 70 bcf. Total gas in storage stands at 2.396 trillion cubic feet which puts stocks 12.7% under last year’s levels and 0.9% below the 5 year average. We want to be a buyer of call spreads into September and October but have exercised patience as opposed to try and catch a falling knife. If we start to see signs of a bottom we will be quick to act as we think this correction may be a bit overdone and on any signs of increased demand or perhaps a hurricane we could see prices pop back $1-2 relatively quick. Although on the daily chart we are oversold we did trade below the 200 day moving average last week, which is not particularly bullish. We expect the selling to not necessarily abate, but to slow this week. Support comes in just below $9 with resistance at $9.80 on September. If probing for a bottom make sure to use stops as this market is unforgiving because of the massive leverage and sporadic movements.

Livestock

October hogs closed just over 100 ticks higher on the week even with the USDA saying that frozen pork inventories on June 30th were up 11% from a year ago, which was more than expected. We remain long October call options for clients and also put on a calendar spread buying October and selling August looking for the spread to narrow going into expiration. We entered the spread with October at a 5 cent discount to August and are looking for 2-3 cent move. August pork bellies were up their 3-cent daily limit 3 days last week after their storage numbers were less than expected. This is a classic example of how one could get into trouble positioned the wrong way in a thinly traded market.

October live cattle were marginally higher on the week but, still not able to break away from the 100 day moving average that has been acting like a magnet to prices of late. Last week’s low should support at 103.80 with first resistance at 105.75 followed by 107.25. We are currently positioned long in October with clients looking to add to the position on a move above 106.70. August feeder cattle were down 220 ticks on the week and are approaching a buy point. We will most likely start scaling into longs for clients
closer to 111.00, ultimately expecting the 100 day moving average at 110.50 to support. The on-feed number came in as expected with placements a bit smaller than anticipated. The report should support the deferred contracts. The marketing’s number was a little lower than expected, but is not expected to be a market mover.
The first shipments of US beef in 4 years arrive in Korea this week.

Financials

Stocks: The Dow ended the week down 126 points or 1.1% to 11371. The S&P lost 3 points or 0.2% to 1258 while the NASDAQ rallied for the second week in a row to add 28 points or 1.2% to finish at 2311. The most recent rally in stocks may be attributed to a rule change on short selling as the government orchestrated a short squeeze trying to force a bottom as opposed to let nature take its course. If it was not for falling energy prices, there could really be no justification for stocks to continue moving higher. The banks are still not lending, global economic growth has slowed considerably, job cuts are on the rise and house prices have yet to bottom. As we have repeatedly voiced, use rallies in the stock market to work out of longs as we expect more pain and new lows.