COMMODITY FUTURES FORECAST
WEEKLY REPORTPrepared by Commodity Futures Forecast
OPEC Threatens Oil Cut
(January 11, 2001) We bought March crude oil last Friday based upon the emerging technical strength in front of OPEC's meeting. While there was preliminary sword rattling about production cuts, few anticipated the higher numbers proposed by oil ministers that approach 2 million barrels per day. This "balancing act" against global economic weakness poses a further threat to the tittering U.S. economy and challenges any European recovery. Swing producer, Saudi Arabia, remains the only member that is skeptical of large cutbacks.
While the Saudis can certainly motivate with their enormous capacity, it is unlikely they will intervene against fellow OPEC constituents. Political pressures emanating from the Israeli/Palestinian conflict are too close for comfort and the coalition from the Gulf War has long been dissipated. Arab alliances have been amorphous, at best. The problem stems from a separation of political and economic interests. Obviously, OPEC proves money is stronger than government ideology. The Israeli "conflict" poses a completely different set of criteria and circumstances.
Energy traders should note that OPEC's formation and first "political" act was in response to Israel's victory during two Arab/Israeli wars. The embargo worked so well that it stuck as a tool for revenue manipulation. In the late 1960's and through the 1970's, Arab states were unable to clearly define themselves and their positions. Prior to 1948, there were no "Palestinians" because Palestine was never a state. Those who were displaced by Israeli occupation were Jordanians or other Arab state nationals. Those living within Israel at the time of independence were simply Israelis who happened to be Arab. It is somewhat ironic that Arabs never wanted to be called or associated with the name Palestinian because it represented an automatic refugee status. If you were Palestinian, you had no country.
This background becomes important because Middle East tension is heating up just as the United States appears to be falling into recession. President Clinton's push for a Middle East peace settlement reveals the tenuous U.S. position. Too much pro-Israel pressure can result in an OPEC backlash. Too little support for Israel will be viewed as an opportunity to fortify against U.S. influence within the region.
President-elect Bush must deal with this situation and it is obvious President Clinton is not making the path easier with his last minute attempt to broker a deal. The Clinton proposal actually goes against the conservative grain because it seeks to dampen U.S. resolve to support Israel. On the one hand, oil may appear more valuable than Jerusalem. The U.S. needs oil to run and grow its economy. On the other hand, losing Israel as a strategic pressure point could cost the U.S. the entire shooting match...to use a Texas expression.
As this political picture unfolds, March crude oil is likely to breakout above $28.50 resistance. Yet, last week we assumed prices would test a 50% retracement before settling back. Unfortunately, the market had its way with us and every other trader who interpreted a bullish formation. Prices dipped just below $26.66 before rebounding, of course.
Admittedly, our 2666 stop was close for the expected or potential volatility. Yet, this conclusion comes after the fact. Had prices penetrated our stop and continued south, it would have been virtuous placement. With prices bumping against possible technical resistance, we must carefully evaluate whether it is prudent to risk another $1,000 or more to gain $1,500 on a test of 2950. What makes the trade worthwhile is a breakout above 2950 to test the former $33 top made in November.
Some technicians believe the chart revealed a massive head and shoulders formation with September's left shoulder, October's head, and November's right shoulder. The bust below the 2975 neckline plunged prices right to a presumed objective 473 points below the 2977 neckline at 2504. The dip missed this market by 10 ticks, but who's counting?
The weekly chart continues to paint a bearish picture with prices below both moving averages. Here, the trend appears decisively broken and the current rally marks interim profit-taking.
If anything, prices can recover to test 3050 or even 3100. Absent a penetration of the averages, crude should retest 2400 and lower.
Do you follow the weekly or daily? Simply because a first objective is made after a head and shoulders doesn't necessarily mean the reversal is over. Talk of OPEC cuts doesn't mean production has slowed. In fact, OPEC's previous quota transgressions are coming to market and should continue appearing in inventory through the February delivery. The question is whether OPEC's new resolve will inspire traders to snap up all the crude they can get...before supplies tighten.
Crop Report
The USDA report kicked grain prices with a more optimistic view for soybeans and an even keel for corn. Basically, the 2000 production is bumping up against records at a time when Southern Hemisphere yields can combine to produce an interim glut. South America's soybeans and corn are progressing well which is likely to pressure prices as we move into their harvest. Our January is equivalent to July below the equator. February is to August, May is to September, and June is to October.
Since Jimmy Carter's grain embargo, the U.S. old-crop/new-crop soybean spread relationship has been increasingly influenced by Southern Hemisphere production. This is because South American cash crops become available before the July expiration. If Southern beans and corn are cheaper, U.S. exports suffer. Cheap is defined by price and Dollar parity. Before the U.S. Dollar began correcting, "cheap" was taking on a new meaning!
The falling dollar along with this correction offers a glimmer of hope that feed grains can regain momentum. I am concerned that March corn dropped below the 20-day and 40-day moving averages to come within 1/2¢ of our stop. Equally discouraging is the fact that our upside objective was missed by a penny. This serves to illustrate that technical analysis is a difficult science. Even when you're right, you can be wrong.
Obviously, 2.32 proved to be a three-pronged resistance. The daily chart suggests rough time for corn since the averages have been breached. Yet, the weekly hints that an interim recovery remains in tact.
A winter consolidation would be healthy for the weekly chart by extending the consolidation just below 2.25. This sets a new upside objective above 2.35
Many farmers have been holding inventory in anticipation of better prices. As I suggested in previous Reports, there was an opportunity for forward selling. In surveying some information channels, I fear the majority of those storing for better prices are still holding. Now, the concern is that we could go to a zero LDP and a deteriorating basis.
Keep in mind that farmers face a significant disincentive to plant corn. Inputs are through the roof. From fertilizer to energy, there is no way farmers can justify planting for the current basis (differential between local cash prices and the futures).
Farmers have come to terms with new rules. Price parity dictates crop rotation more than any former consideration. Coming into last summer, corn had the favorable parity. As we end the 2000/2001 winter, beans are likely to be more attractive. But, if we see further collapse in both, none will be attractive.
This latest Crop report leaves the market with little news until we start to anticipate planting intentions. Effectively, the U.S. numbers are in. Unless the USDA misplaces beans or discovers a boo-boo in their numbers, we know where we stand going into the spring.
Frankly, today's immediate reaction to the numbers seems overdone. When you look at analysts' average estimates, the numbers were not so far off as to generate a total reversal. So, profit-taking was definitely a factor. After talking with farmers, I don't think they'll be selling into this slump. Time will tell.
Wheat remains unaffected by the report since it is primarily a winter crop. Today's rally of a few cents keeps me optimistic that March may break away from July with more strength. So far, the spread is steady around 22¢. I am inclined to give another 5¢ from 22¢ for protection to avoid a possible stopout on a spike.
My overall perspective leads me to a more optimistic speculative view. The contradiction between wishing for adversity and wanting prosperity works against farmers and traders alike. As California experiences torrential rains and battering seas, the Midwest witnesses record snowfall and the eastern corridor digs out from a Nor'easter. It's a "normal" year. Do you think we'll have a normal summer?
Softs
Anyone who has traded commodities over the years understands the potential of international soft commodities. The complex was originally made up of coffee, cocoa, and sugar. It has expanded to include orange juice since Brazil has become a significant player in the world orange juice market (despite the Florida delivery).
We bought March cocoa at 770 two weeks ago based upon the technical base formation and the hint that the bottom was made. The breakaway formation came on the heels of mounting Ivory Coast unrest.
Prices finally jumped above the moving averages and formed a solid consolidation above 750...for a change. Let's face it! This was and is cheap cocoa!
I was looking for a bottom to hold in November when prices seemed to support at the three-pronged 810 bottom formed in August, September, and November. Well, that was wrong. Once 810 support was broken, cocoa was in never-never land. The only suggestion of a new support was the V rally in late November. From December to the present, the Ivory Coast situation served as a negative. Dealers expected dumping to raise cash.
Now, the fundamentals point to a possible serious supply disruption. Cocoa traders (like coffee and sugar traders) know that when cocoa makes up its mind, it can move! Fortunately, we're on board at a very favorable entry. Understand that volatility will demand wide stops. If we get a breakout above the former consolidation band established between 810 and 870 during the summer, I would expect to see a test above 1000...at last.
Even 1000 is cheap. So, don't get trigger happy.
January 11, 2001 Philip Gotthelf Commodity Futures Forecast P.O. Box 566, Closter, New Jersey 201-784-1235
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