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DEAN WITTER
FUTURES COMMENTARY
Prepared by Dean Witter, Inc.
Base Metals
COPPER: The withdrawal of trade support and active fund selling touched off renewed liquidation pressure with three months falling to an intra-day low of 93.20 basis December and at 2065 on three months. The weakness appeared to be linked to the belief stocks will continue to get progressively larger both on the LME and COMEX. The weak tone following the strong rally this week presents the specter of further losses which could carry values down toward the 88-cent level basis December over the intermediate term and toward the 1950 area on three months.
Energies
Petroleum values rallied sharply as early weakness lacked follow through and fresh buying developed in response to news that Iraq had prevented UN weapons inspections over the past week. The bullish tone on the upside appeared to have been exacerbated by incorrect reports that Colombian oil workers had extended their strike by 24 hours along with the shutdown of a 55 tbd cat cracker in Venezuela for scheduled maintenance.
Early weakness to crude values was reversed in mid-morning trade as renewed support by funds and commission houses emerged. The strength to values might have been linked to a news report incorrectly stating that Colombian oil workers had extended their strike by 24 hours. The strike action is scheduled to start tomorrow and last only 24 hours. The news combined with reports that UN weapons inspectors had been prevented from viewing sites in Iraq helped generate renewed buying throughout the complex.
Some of the support might also have been linked to the steady tone in product markets despite the bearish API report. Cold conditions in the Northeast appeared to have encouraged fresh interest in heating oil while the gasoline appeared to benefit from the shutdown at PDVSA's El Plaito refinery for scheduled maintenance.
Despite the strength to values, we suspect the market will be rather limited from current levels on a value basis although from a seasonal basis the market still appears to have time to rally into early November. On a value basis the rally failed to attract a tightening in differentials for gasoline. In addition, recent weather conditions are likely to be short lived. Instead it appears warmer conditions will likely begin to prevail this weekend. In crude, poor refining margins appears to be limiting demand and improving availability.
Natural gas recovered from sharp early losses following news that the Trans Canada pipeline was cutting throughput by 142 mmcf/d due to a leak. The news touched off fresh shortcovering. Despite the recovery the larger than expected AGA injection should generally lead to limited upside movement. With weather in the Northeast to turn more moderate we look for fresh selling to emerge near the 315-318 level basis November.
Softs
COTTON: The market has traded down to new contract lows on December this past week. The pressure appeared to reflect the lessening of concerns over the U.S. crop, sluggish export demand and the appearance world crop prospects might be better than expected. In addition, the market also appears to be responding to seasonal pressures associated with the harvest. As the harvest progresses and clearer indications of the crop became apparent, we look for better export demand to develop. The supply demand situation despite a possible upward adjustment in the U.S. crop is likely to remain rather balanced. Overall, we see the bulk of bearish news as discounted and look for better support to be established near the 70.80-71.30 area basis December.
SUGAR: Steady buying through the session led prices higher and to settle firm on the day. Speculative interest again was the noted feature providing the bulk of the support which came in response to talk that nearby supplies will be tight in the 4th quarter. Although the market has showed strength recently, the lack of fresh news as well as the bulk of the bullish fundamental outlook being discounted. However prices look poised to recover further and trade higher to retest resistance at the 12.00 level basis March.
COCOA: Prices traded mostly lower throughout the session, before settling in weak fashion on the day. Trade selling provided the early weakness which attracted light speculative profit taking in linked to a GNI report which indicated that the Ivory Coast main crop could come in at 1.05-1.1 mmt. These numbers compare to the ICCO main crop estimate of 1.14 and an E.D.F. Mann forecast of 0.95 mmt. In response to these developments, prices broke hard to the downside to retest support at the 1640 level basis December before recovering moderately to close at 1667. Once again the outlook still remains positive for prices underpinned by reports of drought-type conditions in the key cocoa growing area in West Africa and Southeast Asia.
COFFEE: Prices came under renewed selling pressure. The weakness still appears linked to harvest pressure from Central America. While concerns over Robusta production levels persist, we still see the market susceptible to further selling in New York. Reports the former USDA AG attache for Brazil had revised downward his forecast of the Brazilian crop for 1997/98 to 28.2 mb from 28.6 mb appeared to have little impact on the market.
FROZEN CONCENTRATED ORANGE JUICE: Values traded in a rather firm fashion with little in the way of fresh selling developing near current levels and in advance of the Crop report. The movement was reported at a healthy 6.4 mg compared to 5.0 mg last week. A sharp increase in the bulk movement accounted for the increase.
Grains
Today's weekly Export Sales report sparked a higher start across the CBOT led by nearby beans. Today's near record 1.41 mmt (51.7 million) sales for beans even helped corn and wheat open higher on spillover even though their export paces of 755 and 526k were a bit below expectations. Good harvest weather continuing until 0.2- 0.51” rains move into Midwest Sunday afternoon into Monday limited today's initial enthusiasm until late morning, but prices gradually added to today's opening gains.
SOY COMPLEX: Evening up of positions ahead of Spark's production estimates on Friday morning and slow farmer marketing so far this crop year also lent some general support today. Nervousness ahead of today's afternoon Brazilian meeting concerning GMO bean imports also lent support to meal while today's 5 million drop U.S. beanoil stocks to 1.7 billion pounds was neutral, but Cargill buying 1000 beanoil outright and bull spreading the options in this pit also caught the floor's attention. Modest commercial bull spreading again today along with reports Friday's NOPA crush would be 1 million higher than last week's 27.1 million pace lent late support as funds were net buyers of November by the close.
New crop beans didn't take out its overhead 630 resistance today, but it still ended on strong note. The Brazilian's decided to postpone their GMO import decision until October 8, when some members requested more time to study recently supplied materials, but Sparks production estimate, NOPA's crush and Taiwan's 162k bean tender will be watched closely Friday. With the floor leaning towards a 2.8 billion or higher level because of current talk of better than expected yield coming from the country, no big increase from Sparks 2.751 and USDA's 2.746 billion levels in September caught many traders off guard. We want to wait until the weekend before finalizing our October production estimate to get more reports from this year's harvest which will likely be 25-30% done depending upon the weather, but we remain cautious about pushing production up too quickly since most actual yield reports have been in 40-low 50's. We need to hear more high 50's and 60's to increase the USDA's 39.3 bushel yield, the 2nd highest yield ever. Looking at SN8/SX8's +17-19 as initial bullish entry point.
CORN: After today's steady to slightly higher opening, good harvest weather ahead and reports that South Korea had bought 52K 0/0 US/Chinese corn for December-February and reports that China may be offering amounts until April slipped values to this week's 255½ lows. Domestic end user buying and spillover support from beans and wheat helped this pit firm into close, but December wasn't able to overtake its 260 resistance late.
With the trade also talking about 9.4 billion production because of current better than expected yield reports, Sparks morning production estimate will be watched closely. Similar feeling about jumping up corn too quickly with harvest only 17-20% by Monday, so see 253-63 range.
WHEAT: After early spillover support, fund selling pressured December to its lowest level since July 21 after the opening, but commercial buying and the EU grain committee's non-aggressive sales posture helped rebound this pit higher after mid-morning. Approving only 152,000 intervention sales at 7.73 ECU versus talk of 9-9.5 rebate along with reports that Wednesday's rains in Northwest Argentina might have come too late to improve yields, helped lift this pit the balance of the day.
December wheat and WZ/CZ spread bounced today, but both need stronger export demand or Southern Hemisphere problems to prompt closes back above 365 and +105 to confirm turn up.
October 2, 1997 Dean Witter, Inc.
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