Brent Crude and Heating Oil continue to have the lowest hedge fund positions for the past year.
Spread Edge Capital specializes in seasonal spread trading across a wide variety of commodity markets. A spread trade is the simultaneous purchase and sale of the same commodity with different delivery dates. SpreadEdge publishes a weekly Newsletter that provides several seasonal spread trade opportunities every week.
Overview
Each week the SpreadEdge Newsletter documents an extensive list of seasonal, technical and fundamental indicators for the various commodity markets. This week there are several markets in the Energy sector that are flashing extreme levels. These indicators include % carry yield, hedge fund position estimates, and relative price and positioning. Each of these indicators will be reviewed in the following sections.
% Carry Yield
Futures calendar curves vary in shape over time. Some often invert, with front-month contract prices exceeding those of later contracts, resulting in positive carry. Conversely, some curves exhibit contango, leading to a negative carry. % Carry yield is the one-year calendar curve yield as a percentage of contract notional value. Markets tend to reverse when they get at or near their highest or lowest levels over the past 52 weeks.
- Heating Oil is very near its lowest % carry yield level for the past year.
Hedge Fund Position Estimates
The Commitment of Traders (COT) report, issued by the Commodity Futures Trading Commission (CFTC), offers a weekly snapshot of the positions taken by different market participants in the U.S. futures markets. Published every Friday at 3:30 PM Eastern Time, the COT report reflects positions held as of the previous Tuesday's closing business hours. Peak Trading Research assesses the latest COT report, examining alterations in price and open interest to provide an appraisal of net fund positioning daily.
- Brent Crude and Heating Oil at their lowest hedge fund position estimates for the past year.
- Gasoline is very near its lowest hedge fund level for the year.
Relative Price and Positioning
Relative Positioning – Oversold versus Overbought on the horizontal axis. COT current net position compared to the COT data over the past 24 months.
Relative Price - Cheap versus Expensive on the vertical axis. A comparison of the front month current price compared to the front month price over the past 24 months.
- Heating Oil, Brent Crude, and Gasoline are the most “Cheap and Oversold” markets amongst all commodities.
The Bottom Line
Brent Crude, Heating Oil, and Gasoline are at or near their lowest carry yield, are at or near their lowest hedge fund position estimates and are the most “cheap and oversold” markets across all commodities. These 3 indicators continue point to a bounce in the Energy markets.
Digging deeper, let's look at the charts and see what the technical analysis reveals.
Technical Analysis
Heating Oil, Gasoline, and Brent Crude have very similar “wedge” shaped charts. The lower support level was challenged on Tuesday, September 10th for all 3 markets but each has recovered and continues to bounce along the bottom of the formation. I continue to think that we will see a break above the declining trendline or a drop through the horizontal support, but these markets do not appear in any hurry to do so.
More Information
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The SpreadEdge Weekly Newsletter is published every weekend and provides a broad overview of the important seasonal, technical, and fundamental indicators within the Energy, Grains, Meats, Softs, Metals and Currency markets. In addition, spread trade recommendations and follow-up on open trades is also provided. For a free copy of the Weekly Newsletter, please send an email to info@SpreadEdgeCapital.com
Darren Carlat
SpreadEdge Capital, LLC
(214) 636-3133
Darren@SpreadEdgeCapital.com
Disclaimer
SpreadEdge Capital, LLC is registered as a Commodity Trading Advisor with the Commodity Futures Trading Commission and is an NFA member. Past performance is not indicative of future results. Futures trading is not suitable for all investors, The risk associated with futures trading is substantial. Only risk capital should be used for these investments because you can lose more than your original investment. This is not a solicitation.
On the date of publication, Darren Carlat did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.