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.

• Gasoline is at its lowest % carry yield for the past year
• Heating Oil is very near its lowest level.
   

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 at very near their lowest hedge fund position estimates for the past 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, Gasoline, and WTI Crude 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 point to a bounce in the Energy markets (note that I exclude Natural Gas from this assessment because it has a low correlation to the other Energy markets).

Digging deeper, let's look at the charts and see what the technical analysis reveals.

Technical Analysis

Note that I am only showing Heating Oil and Brent Crude here because Gasoline has a nearly identical pattern as HO.  The similarity of these charts confirms how highly correlated these markets are.  As I analyze these charts, I can see that a bounce higher is very possible.  However, I can also see these markets dropping straight through support.  This could lead to a free fall from there!  I want to see a clear breakout above the downward trendline or a breakdown through the horizontal support level before leaning one way or the other.  I suspect that we will see a breakup or down very soon.

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

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.