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 article I will focus on the Energy markets and review the last weeks price action, % carry yield, hedge fund position estimates, relative price and positioning, and the daily charts.  Each of these indicators will be reviewed in the following sections.

Weekly Closing Prices

Closing prices for the last trading day of the current week compared to the last trading day of the previous week.  Expiration months are roll adjusted.

• Every Energy market except Natural Gas rose a minimum of 7.5% last week.  WTI Crude was the biggest gainer at +9.1%.

% 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 and Gasoline are very near their lowest carry yield for the past 52 weeks.
   

• Heating Oil finished with a Carry yield of (3.0%) which is just above the lowest level of (3.5%) set a few weeks ago.  Heating Oil is traditionally a positive carry market, so the extended negative carry is unusual.
• Gasoline is likewise just above the lowest level from a few weeks ago with +3.0% carry compared to the low of 2.7%

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, Heating Oil, and Gasoline have recently posted hedge fund estimates at lows for the past 52 weeks, but Heating Oil is currently the only Energy market very near the lowest 52-week level.

• Heating Oil finished last week with an estimated net short position of (37,471) slightly better than the low for the year the previous week of (46,156).  Heating Oil remains over 57,000 contracts below the 52-week average.

• Hedge Funds added 60,645 net long positions of Brent Crude for the week taking the market from (23,129) net short to 37,516 net long.  Note that WTI Crude Oil also added nearly 59k net long contracts,

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, Gasoline and Crude Oil continue to be “Cheap and Oversold”.  Interestingly, Natural Gas is the only Energy market not in this quadrant. despite being the only Energy market down for the week,

Technical Analysis

• Brent Crude, Heating Oil, and Gasoline (not shown) each continue to trade within the wedge formation.  The price action last week moves these markets from the bottom of the wedge and a good amount towards the upper part of the formation.

Summary
Most of the indicators shown suggest that the Energy markets are very near a bottom and COULD be ready to start making a move higher.  However, these markets need to convincingly break through and hold above the top of the wedge before a sustained move higher can begin.  Based on the price action over the past several weeks, a break below the bottom of the wedge seems just as likely.  I have pared back my overall exposure to these markets waiting for a clear break one way or the other.

More Information

Use coupon code “SpreadEdge” and get the Weekly Newsletter and Daily Alerts for $1 for the first month.  For a limited time, you can receive my Futures Training Videos for free with a 3-month, 6-month, or 12-month subscription.

For a FREE eBook about the SpreadEdge seasonal spread strategy.

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

www.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.