Resource Alert: Commodities Weekly Market Briefing

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Welcome to the weekly resource brief where we break down opportunities in the dynamic commodities markets. The mandatory use of options allows us to control risk and take advantage of longer-term trends in the true Supply and Demand markets.

These futures options have many advantages and offer a more pure play with leverage on leverage benefits not available with typical equity options plays.

In addition to identifying profitable option plays, the intention is to educate, inform and even entertain with our discussion about the vital economic building blocks, Commodities, which are the underlying basis for all investments.

Briefing for May 1, 2012 - Follow the Leader and Vertical Cost Drilldown

Asset Correlation Equation

Though this commentary is devoted mainly to commodities, the equity asset class cannot be ignored for its macroeconomic market evaluation. A weekly analysis of stock performance in the broad sense via the major index scorecard puts global financials in context.

The broad based S&P 500 index surpassed the 1400 level again Friday to finish +1.8% higher up 24 points on the week. The NASDAQ jumped +2.3% and the Dow rose +1.5% over the five day period ending April 27th.

The continuation of the asset uptrend can be measured by the quarterly stock response to earnings announcements. Repeated worry about robust corporate profits puts traders on edge every market cycle. Any disappointment has been short lived as new index highs have consistently been achieved in the post crisis economy.

April did finish negative, down -0.8% in the S&P, for the first time in four months. With the index up 11% year to date and an excess of 70% of stocks so far from that basket reporting better than expected numbers the trend looks to remain positive.

Fear is Healthy, Inaction is Dangerous and Often Costly

Every major pullback selloff prior to earnings has been a buying opportunity in stocks over the last few years. The fear that expectations would not be met and reverse the bullish market course has unfortunately left many retail investors on the sidelines.

Bloomberg April 30th - "S&P 500 Halts Four-Month Advance Amid Global Economic Concern"

Analysts predict U.S. shares will rise enough this year to boost the S&P 500 to a record, even as Wall Street strategists say the best is already over for American equities.

Individual price forecasts for stocks show the combined projection for the gauge has risen to 1,569.74, according to analyst estimates compiled by Bloomberg. That compares with the October 2007 high of 1,565.15. At the same time, strategists who base their predictions on assessments of the economy say this year's rally represents all the gains investors will see.

Bullish forecasts are based on analysts' expectations that S&P 500 earnings will reach records every year through 2014 as stimulus by the Federal Reserve props up the U.S. economy."

An on again / off again tolerance for risk enters the markets every few sessions as the fear de jour puts asset up-trends in peril to some. An overriding concern about a slowdown in Europe and China has paralyzed the ability to see the financial opportunity.

The market action tells a much more opportunistic tale with prices where they are in spite of the potential challenges. Trading options can help smooth out some of the volatility with long term price objectives in mind if you buy enough time to be right.

Future Focus

With equities within striking distance of the month ago relative highs the other highly followed asset groups of gold and oil look poised for major gains. An extended resource price depression has seen the Commodity Research Bureau Index finally reverse higher from four-month lows last week. The CRB 300 level is an important weekly support to lean on for a buyers bounce.

At the same time the dollar index has turned lower set to act as a commodity catalyst as it approaches three month lows near 78. That coincides with the long held downside objective that is a halfway retracement of the December to January rally run up.

Last week the Resource Alert Briefing analysis covered the extreme reward to risk situation in silver as it sits at the $30/$31 level. Another supportive factor is the resilient tone in the sister metal gold. The powerful gold rally above $1650 sets up for an attack on $1680 and then the $1700 range pivot once again.

The multi year post crash chart below shows the nearly straight up moves in stocks and gold. These asset classes have moved together while having very different motivations. A couple months pause in gold looks to be the base for another leg higher. Trade the trends until proven otherwise...



An overlay of an oil chart above would put the crude line somewhere in the middle only 4.7% below the post 2008 highs. Keep an eye on those key three indicators, (S&P, gold, and oil), to measure market action and reaction.

Cost Control

One commodity market function is to shift price risk via future prices. Airlines as end users have been notorious for not utilizing this efficiently to lock in the number one expense in jet fuel. Banking and financing for fuel is complicated with the open ended line of credit for the hedges an enormous liability.

Southwest Airlines (LUV) has famously made more money at times with the derivatives trades than actual consumer flight revenue. That is eye opening because if it was lucky to be that right, a bad turn could be disastrous and not a necessary risk to take. Remember the goal of a true hedge is to make money in the futures market to offset the price change in the cash market.

Taking coffee pots off flights, ala American, to lighten the weight load does little to help the bottom line but it is an attempt to proactively deal with the ever-rising fuel price. Many airlines do nothing and hope for the best. Last I checked hope was not a trading strategy...

In a true it all comes back to commodities buyout, Delta Airlines (DAL) has taken it to the extreme. This can be viewed as another bullish sign as the purchase here is viewed as a bargain by management.

Reuters May 1 - "Delta buys refinery, first airline to make own fuel"

Delta Air Lines Inc (DAL.N) will buy a Pennsylvania oil refinery from ConocoPhillips (COP.N) for $150 million, the most audacious move yet by an airline trying to save money on fuel costs.

Delta said the first ever purchase of a refinery by an airline would allow it to cut $300 million annually from jet fuel costs, which reached $12 billion last year. It said production at the refinery along with other agreements to exchange refined products for jet fuel would provide 80 percent of its fuel needs in the United States.

The company will bring in a management team and outsource the trading operations at the 185,000 barrel per day Trainer, Pa., refinery.

Oil major BP (BP.L) will supply crude oil to be refined at the plant under a three-year agreement. BP and former refinery owner Phillips 66 will get a share of the gasoline, diesel and refined fuel to sell, in exchange for supplying Delta with jet fuel in other locations.

The deal will ease fears that the closure of several major U.S. East Coast refineries would cause a shortfall in gasoline or diesel supplies this summer. The governor of Pennsylvania has scheduled a news conference for Tuesday at Trainer, which has been idled since last September pending a sale.

"Refining capacity we thought we weren't going to have, it looks like we will," said Katherine Spector, an analyst with CIBC World Markets in New York.

Atlanta-based Delta said the deal will include pipelines and other assets that will provide access to the delivery network for jet fuel reaching its Northeast operations, including its hubs at New York's LaGuardia and JFK airports.

Delta said it expects the purchase to add to its earnings and expand margins in the first year of operations as it recovers its investment. In addition to the $150 million purchase cost, Delta will also spend $100 million to re-tool the refinery to expand jet fuel output, it said."

Current Portfolio Positions

June 2012 Canadian Dollar (CDM12) 100.5 call at 160 points ($1,600): A breakout move above 101.5 sets up a potential 2 point run to 103.5. CD$ support held at 99.5 and reversed prices higher on the last two downturns. The move above 101.33 highs from March 1st signals a rally run. A sideways trading range between 99.5 and 101.5 sets up a breakout rally above 103.5. The In The Money option has a high Delta payoff on the CD$ price increase. The position sits at 155 points ($1,550), which represents a 3% loss. HOLD.

October 2012 Natural Gas (NGV12) 3.5 call at 160 points ($1,600): October NG may have finally found a bottom at $2.3 after the straight down decline from $3.2. The run Tuesday has pushed up to the 30 day high at $2.66. The halfway recovery resistance sits at $2.75 to confirm a reversal higher. Time is an ally with the October option. A push above $3.2 in the October contract lights higher prices to the $3.7 target. The position sits at 8.9 points ($890), which represents a 44% loss. HOLD.

September 2012 Cocoa (CCU12) 2400 call at 160 points ($1,600): A rally run has pushed Cocoa back above $2350 and new month highs. Sep Cocoa found a base at $2100 in the last weeks and rebound back from triple digit losses in the last sessions. A secondary push to $2450 basis September contract set up an attack on resistance peak. Another thrust above $2450 sets up for a test of crucial $2500/$2550 to put in price bottom. The larger target of $2900 is the halfway point of multi-month decline. The position sits at 1400 points ($1400), which represents a 12% loss. HOLD.

July 2012 Crude (CLN12) 110/115 call spreads at 152 points ($1,520): Support held $102 last week on the heavy unwinding sales. Follow through confirmation is needed on eclipse of $106 Tuesday. The bull flag breakout above $105 sets up a rally run to $120. Crude prices had traded between $109.50 and $104.50 for weeks before a dip below the channel. Broken support at the $105 breakout area needs to be recaptured to spark another rebound. The recent peak touched the nine month highs target at $110. The reversal has put crude at multi week highs again and above bull flag breakout. A full $30 retracement sets up for a move to $135. The position sits at 122 points ($1,220), which represents a 19% loss. HOLD.

June 2012 Gold (GCM12) 1750/1825 call spreads at 15 points ($1,500): Half of the spreads were sold at $1000 profit per position last week. The option premium had pushed to more than double the initial premium cost again on a run above $1750. Weekly support needs to reclaim $1700 after the sharp drop in the last weeks. The push above the $1675 October lows targeted the next upside at $1725 and $1750. New relative highs at $1800 months ago still set a goal at $2000 an ounce on a breakout of the trading range. Expiration is May 24th. The position sits at 3 points ($300), which represents a 61% loss. HOLD.

July 2012 Corn (CN12) 700/850 call spreads at 32 points ($1,600): Another price crush saw support reverse back above $6.00 last week. The front month cash May contract sits a full 30 cents higher at $6.65 monthly highs. A move above $6.70 sets sights on breakout run to $7.10+. The recent recovery and attack on $6.50 resistance revealed resilient trend strength. A Bounce off $6.00 has twice rallied Corn $0.50+ in the last months. A move back inside the range from $6.80 to $6.50 lows Oct 11 is a good sign to test recent highs again. The breakout above that highs at $8 projects a run to double-digit $10 Corn. The position sits at 8.5 points ($425), which represents an 73% loss. HOLD.

October 2012 Sugar (SBV12) 25/31 call spreads at 135 points ($1,512): A drop from 24 cents just two weeks ago has pressured Sugar to new 6 month lows. Sugar prices hit lower lows at 22.5 cent area after pushing above 24 cents before the failure last week. Technically prices need to attack three-month high resistance at 24.5 cents for the October contract. Sugar prices had held again the critical quadruple + bottom at 22.5 cent area which now represents a bottom confirmation level. This was also the September and October three-month lows. This support base also coincides with the June breakout that rallied to contract highs at $0.26. The previous upside resistance levels at 25 and then 25.5 are now areas to watch for breakouts. The position sits at 40 points ($4488), which represents a 70% loss. HOLD.

It ALL comes back to commodities!

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Alan Knuckman can be followed on Twitter at twitter.com/AlBk2Comodities .

 
At the time of publication, Alan Knuckman held no positions in the stocks or issues mentioned.