Are We In A "Flash Drought"?

According to the US Drought Monitor and the WSJ we might just be in the midst of a mini "Flash Drought."

Rain is forecast in the coming days for many of the corn and soybean growing areas, however the question is just how much will they actually get?


From the WSJ:

The federal Drought Monitor showed that one-quarter of the Midwest region, which includes the heart of the nation's Farm Belt, was in some level of drought as of Tuesday, up sharply from 7.9% the previous week. Drought conditions were considered severe in nearly 4% of the region, up from zero a week earlier.

Wall Street Journal

Where's The Top In Lean Hogs?

Lean Hogs have been showing a lot of strength this week, after a sharp sell-off only a week earlier.

On Thursday we saw a 78% weekly increase in pork exports according to the USDA. Seemingly a sign of increased demand.

October futures are trading at a 'steep-ish' discount to cash, which is always somewhat of a concern when holding a short (bear spread) position.

Last Friday we saw yet another net increase in long positions held by managed money. The CFTC data has been showing net longs at an extreme level for the past few weeks and we are still seeing buying coming into the market.

It should be interesting to see what happens with Friday's report as there was significant weakness in prices last week.

For now I'm happy to continue holding my bear spread.

Natural Gas Continues To Show Strength, But For How Long?

The recent hot streak throughout a large portion of the US has seen natural gas continue its rally that started in the early part of August.

Yesterday the EIA released its storage number which showed an injection of 67 BCF which was slightly above expectations.

As we can see from the chart, futures sold off sharply, only to rebound over the remainder of the session.

The Nov13/Jan14 spread finished higher and shows no signs of reversing just yet.

The weather still seems to be the dominate factor at the moment, with the National Hurricane Center saying two westward-moving storm systems in the Atlantic Ocean could become tropical cyclones over the next two days. That's on top of the above-normal temperatures.

We will continue to watch this one for signs of a changing weather pattern, with the shoulder season fast approaching.

Brazil Raises Rates

Brazil has raised interest rates once again in a bid to tackle stubbornly high inflation.

The central bank’s monetary policy committee, Copom, raised Brazil’s benchmark Selic rate by 50 basis points to 9 per cent late on Wednesday.

Let's keep an eye on the real as well as coffee and sugar and see how they play out.

More from the FT:

Although price pressures eased last month after local governments were forced to revoke public transport fare increases, twelve-month inflation still came in at 6.27 per cent – just below the central bank’s 6.5 per cent maximum tolerance level.

Inflation has not ended the year on or below the central bank’s target of 4.5 per cent since 2009.

Financial Times

Changing Weather On The Way?

The latest 8-14 day outlook from the NOAA, appears to be telling us that the weather will be cooling off.

That might not be soon enough for a hit to corn and soybean yields, but it could give us a chance to enter natural gas.

The market has without doubt been pricing in a slight reduction in yield for corn and soybeans and it will be interesting to see where the USDA revises its outlook in the September report.

For natural gas the current run of hot temperatures might not be enough to outperform projected injection levels, as the later season hot streak won't have the level of heat that you might expect in the peak of summer.

I'm still watching the Nov13/Jan14 spread for first signs of a reversal.

All eyes on Syria as we wait on heating oil

With the ever increasing possibility of US military action toward Syria, markets reacted accordingly adding what I would consider a "fear premium."

While Syria itself is not a large oil producing nation, the potential for the conflict to spread throughout the region, as well as the impact action might have on Syrian allies, drove up the price of crude oil to an 18-month high. RBOB and heating oil also ended the day sharply higher while the broader markets sold off heavily.

Markets certainly don't like conflict (see Libya 2011) and it's impossible to know exactly how everything will unfold.

I'm still watching the Dec13/Mar14 spread with an eye to getting in over the next month should things settle down. The conflict in the middle east has the potential to help this spread overshoot the mark and give us an excellent entry point. But I won't be jumping in too early.

Proceed with caution...

Heating Oil presenting a good technical opportunity?

The Dec13/Mar14 heating oil spread looks to be bouncing around a solid technical level that might be offering us a good opportunity.

Distributors generally buy up their inventories in late summer and by autumn they have all they need leading to a slide in prices.

Meanwhile the oil complex has been pushing higher over the last few months but has been in a trading range recently, seemingly on the back of supply disruptions/fears and ever increasingly supply from new technologies, while recent demand has been strong based on EIA inventory numbers.

We're still a month off the seasonal window so for now I'm just keeping an eye on this one ahead of Wednesday's EIA data.

Weather continuing to drive grains and natural gas

The grain and oilseed markets have started the week with a huge up-move, with expectations intensifying of a heatwave in the next 7-10 days.

Corn and soybeans led the rally, with concerns that the yields, particularly soybeans, with be hurt.

This was also reflected in the USDA crop conditions with both being revised lower late Monday.

In regards to both corn and soy, looking at the spreads they are hugely over extended, in terms of what we have historically seen. However it's just too dangerous (in my opinion) to be trying to pick a top given the buying that continues to come in.

I might be inclined to look at spread in wheat, which has been flying under the radar a little, given the large worldwide supply.

Wheat is following the lead of corn and soybeans, but still has a lot of competition from other worldwide producers. This in effect is helping us get a better price with hopefully some good potential and (somewhat) limited downside.

Natural gas has also been trending higher on the back of above average temperatures across much of the US. Prices didn't really break out higher on Monday, even given the extra heat, which makes me think there's a fair bit priced in already and people are ready and waiting for a change.

As I spoke about last week there is the potential to look for a nice move lower when we begin to enter the shoulder season. It's also fair to say that given the late start to the ramp up in temperatures, injections aren't likely to be as high as one might expect in the peak of summer.

I'm continuing to watch the weather closely for a potential late season sell-off on any change in outlook.

What does Brazilian Real intervention mean for Coffee?

The real climbed 3.7 percent to 2.3488 per dollar on Friday after the Brazilian central bank announced a $60 billion intervention program aimed at strengthening its currency.

A plunge in the real to a four-year low this week threatened to spur inflation, which is nearing the top end of the central bank’s target range.

In terms of trading I've been eyeing a short position in coffee, given the ongoing supply increases and the relative weakness of the real. Now that the real is poised to bounce it poses another interesting question.

Will this present an opportunity to get a better price on our short position? Or will it help put a floor in the price as exporters will be less tempted to sell as they'll get less value?

I've been watching a couple of bear spreads, one of which is the Dec13/Jul14. I was looking for a bounce but it might be best to wait and see what, if any, reaction we get early in the week.

Comments out from Citigroup suggest that we shouldn't be getting too excited, but there is potential for a short term move:

The announcement of intervention in Brazil is fairly large at up to 36bn USD in derivative intervention up to the end of the year. As a reminder, in 2008/2009 the BCB sold 14bn USD in spot and auctioned 33bn in FX swaps.

The current program is also large relative to the current account deficit less FDI.

Of course, it does not fix any of Brazil’s problems.

So for now I won't be jumping in early in the week, but I'll certainly be keeping an eye on a potential point to enter at the first sign of a reversal on any bounce, should one come.

Warm weather lifting natural gas

The latest NOAA 8-14 day forecast, continues to show above average temperatures across the bulk of the US.

As a result natural gas has been getting some nice support, which was also boosted by the latest storage number that showed a smaller than expected injection.

With the later than normal hot streak it might mean a slight delay to what is considered the "shoulder" season for natural gas. A period of lower demand.

I'm going to be watching the Nov13/Jan14 spread with an eye to potentially getting an even better price.

If the weather keeps this one bid up, when the shoulder season hits, we might be in for a nice move lower.

But as ever, timing is everything. For now it's one to watch.

Time to exit ahead of Cattle on Feed?

It's fair to say that our Live Cattle/Lean Hogs spread has been a little bit of a grind throughout.

On a couple of occasions we just about got stopped out only to survive by a couple of ticks.

A few times it's looked like it might break out of its range to the upside but for whatever reason that never eventuated.

On Friday we have the release of this months cattle on feed report.

Whilst it is expected to show cattle producers have fewer cattle, as with any data release it's always a gamble to hold into.

For that reason I think it might be time to take this one off and lock in a tidy profit. The seasonal window runs until Thursday next week, but it's often a good idea to exit before that date to avoid those who trade off the windows alone.

It does have to be said that I'm still very much bearish on lean hogs, however I really just want to lock in a profit with the data coming out and the seasonal window coming to a close. We also still have our hog bear spread in play so being a little less reliant on one leg is never a bad thing.

Here's a preview of what to expect from the cattle on feed report:

Cattle on feed via Cattle Network

Is there still more downside for coffee?

Coffee continues to push lower as supply seems to be ever increasing.

Brazil enjoyed a record crop in 2013, supposedly an "off year," and next years crop is also looking large.

Recently there had been some concerns with potential frost damage to crops but those fears seem to have diminished.

The Brazilian real once again weakened on Wednesday, pushing to fresh lows against the USD, which hurt prices further.

Looking at the COT situation, it appears that there is still some room to move toward a further "net short," position, with managed money off the extreme levels at the moment.

I've been keeping an eye on the Dec13/Jul14 spread and really just waiting for a pullback to enter on. Unfortunately one hasn't really been forthcoming.

I'll keep watching and waiting...

Cotton goes limit down on improved outlook

Tuesday saw a big sell off in cotton, with the Dec13 contract going limit down.

Monday evening saw the conditions of US crops improved to 46% rated good to excellent up from 43% by the USDA.

There had been concerns over the quality of this years crop, which resulted in a recent run up on the back of this months WASDE report showing a reduction in potential yield.

We also saw improved production likely to be coming out of India, with the Cotton Association of India saying good rainfall during the monsoon season would mean a 4.6% increase in output.

Looking at out current Dec13/Mar14 spread, there was some continued weakness which is good for us.

The seasonal window doesn't "start," until the 7th of September so today's news gives us a bit of a helping hand after it drifted away on the back of the WASDE numbers.

Weakness in the real hurting sugar and coffee

The last few sessions have seen continued weakness in the Brazilian currency, aiding the sell off in sugar and coffee.

Sugar has been hardest hit, dropping well below the 17.00 cents/pound mark.

That comes on the back of the latest COT report showing that managed money added a massive 40,000 new net long positions (short covering) over the previous reporting period.

For me the interesting one is coffee. I have my eye on a bearish position in an new crop/old crop spread and the currency weakness, if it continues, will help push prices down further. Details to come...

When the real weakens versus the USD, Brazilian exporter's get more value and are encouraged to sell, depressing commodities that trade in USD.

Weather continues to bid up grains and natural gas

As the weather continues to get warmer across much of the US, commodity markets have certainly started pricing in the changing outlook.

On Monday we saw corn and soybeans rally on the back of warmer and dryer conditions over the weekend, which look to be continuing into the future.

Many of the grain growing areas are in need of some late season rain and the current forecasts aren't looking overly promising.

Both outrights and spreads rallied, adding a further weather premium. However the spreads look like they could have potentially overshot the mark and could be in line for a pullback.

Natural gas started the week off stronger, pushing through the 3.40/mmbtu level which has been acting as resistance, as the additional heat across the bulk of the US should create more demand for gas fired electricity.

The spreads rallied early only to pullback to unchanged. I exited my positions last week on the back of the changing tone to the weather forecast.

Are traders waiting by the door in hogs?

Another week and another record net long position in lean hogs, according to the latest COT report.

It's well known by traders that September is generally the time of year when we see weakness in hog prices.

This year we are looking at increases in production which will be aided by cooler weather as well as corn prices that are much lower than the same time last year.

With that in mind it is interesting to see a continued increase in the net long position of managed money.

It makes me think that there are a number of traders siting ready and waiting to pounce on the first sign of weakness which could also lead to an additional spike lower on the back of some big money covering.

Merck halts Zilmax sales

Live Cattle futures spiked early Friday before selling off, after Merck & Co. Inc. said that it was temporarily halting sales of Zilmax, a feed supplement that can help animals increase lean muscle.

It's thought that a cutback in Zilmax use could trim the supply of beef beginning this fall, although producers said they did not expect major changes.

Reuters

AUD pushing higher ahead of RBA minutes

The Aussie Dollar is pushing towards its highest level in three weeks, ahead of tomorrows release of the RBA minutes believed to be showing that there is no hurry to reduce interests rates further.

The yield on Australia’s 10-year government bond has been trading near 4.02 percent, the highest we've seen in two months.

Interestingly Friday's COT data showed that managed money slightly reduced their overall net short position, indicating a slight reduction in the overall bearish view toward the AUD.

Is this the turning point in natural gas?

With the unseasonably cool weather we've seen throughout a large portion of the US, natural gas has seen a bit of a sell off.

Last week there was a large injection into storage (albeit there was a reclassifcation) and this week we also saw an injection well above the 5-yr average.

However the 65 BCF injection came in below the average of the analysts forecasts which was actually 70 BCF.

The forecasts out of the NOAA are calling for a move higher in temperatures across the bulk of the US and this will likely reduce the level of injections over the coming weeks. We are also seeing some tropical weather patterns developing, that as yet won't impact natural gas, but they're certainly worthy of note.

There are still two more weeks to run of this particular seasonal window with the bulk of the moves appearing to be in late August. However I'm not overly convinced this time around as we aren't in a "normal" season per se.

3.40/mmbtu has been a level that underlying natural gas has been stuck below so it's interestingly poised at the moment.

I think I'm actually going to take off my natural gas position, but I'll be very interested to see how the next two weeks play out.

Weather outlook for natural gas

The latest weather forecasts from the NOAA appear to be getting increasingly supportive for natural gas as we move further into August.

From the map we can see that we are looking at normal to above-normal temperatures across the bulk of the US.

Price is still below the 3.40/mmbtu mark and our spread has been hovering between 39-40.

There is also some talk of some tropical weather patterns beginning to form so that's something else to keep an eye on.

On Thursday we have the latest storage number and I'm thinking this might be the time to close out our spread.

Some strength in the hog market

There was real strength all day Wednesday in the lean hog markets.

Futures have been trading at a steep discount to cash and it's interesting to contemplate if that discount is warranted.

Cash was trading at 102.23 to the October futures at 88.275. October is also the most active contract so there is quite possibly some rollover going on.

This hasn't helped either of our spreads as we (like many traders) await the typical weakness in hogs this time of year.

For now our live cattle/lean hog spread is only just holding above our stop at 40 even. There's some chance of an exit in the coming days.

Was the USDA's corn number wrong?

Corn certainly spiked on Monday when the USDA came in with a lower yield projection than many analysts where looking for - and receiving quite a bit of skepticism in the process.

However it has been revealed that the differences in the actual vs expected could actually be down to the way in which the data is formulated.

It appears that many analysts that were looking for a number closer to 160 may well be right.

That could be what was reflected in Tuesdays action with traders sending Chicago's December contract plunging 3.7% to $4.47 ¼ a bushel, its lowest finish since September 2010.

From CNBC:

The procedures for judging the crop size were different because August is the first month that USDA surveys farmers and physically checks fields to determine its estimates. In previous months, it relies on statistical formulas because the crop has not sufficiently developed.

From July 24 to Aug. 6, the USDA interviewed more than 24,000 producers about their yield expectations as of Aug. 1. The government will continue to survey the growers throughout the autumn to provide updated reports.

"From now to the end of the season, we'll use the same procedure month after month," Honig said. "It probably becomes a lot more valid to make those comparisons month to month."

CNBC

Cotton sitting at the crossroads

On Monday cotton got a real bid, when the USDA revised lower both yield and harvested acres.

That lead to some follow through buying on Tuesday, pushing the soft commodity up 1.8%, it's best finish in 17 months.

Interestingly world cotton carryout is actually at a record high. Much of the world supply however is based out of China, which many consider to not necessarily be available to the world market.

China also had it's own crop downgraded, based on some 'unfavourable' weather.

The proportion of the US crop rated "good" or "excellent" fell two points over the week to 43%, with particular falls in Alabama, South Carolina and Tennessee.

From our perspective, the current Dec13/Mar14 spread, held up reasonably well given the strong buying. I often like to use the spread as almost a leading indicator of price action for the underlying. 

Quite often when we see a strong outright and the spread not following suit, it can mean there is room for a potential reversal.

The weather outlook is heating up

The latest NOAA 8-14 day forecast looks like there might be a slightly changing weather pattern about to hit the US as we head into the second half of August.

Judging by the chart, the cooler area in the south east is getting smaller and above average temperatures are trying to push their way into the more highly populated east coast areas and much of the west coast.

We saw this news filter into the market early yesterday and it put a bit of a bid into natural gas.

Our spread pushed higher early only to settle toward the lows.

We are still likely to see another injection into storage this week but it might serve as a good chance to cover if the weather starts to heat up.

Easing the oil glut

With all the talk of increased oil production coming out of the US, you could be forgiven for thinking that the price of a barrel of oil could be a lot cheaper.

Most recently crude has been hovering just north of $100 p/barrel on the back of a string of larger than expected inventory draws.

As supply increased, it was a lack of intrastructure that lead to a glut at Cushing and pushed the Brent/WTI spread out to $20 earlier in the year.

As supplies become more available, we've seen refiners really ramp up production recently. This is also in-line with what we'd expect in the US summer which is the peak driving season.

But now with the added output that glut has now turned to gasoline. The average price for regular gasoline at U.S. pumps fell 7.61 cents in the past two weeks to $3.5985 a gallon, according to Lundberg Survey Inc. Similarly RBOB futures have been selling off heavily for the best part of a month.

The Environmental Protection Agency said Aug. 6 that refiners and blenders would have four extra months to meet this year’s requirement to blend 13.8 billion gallons of ethanol into gasoline under the 2007 Renewable Fuels Standard. The EPA also announced that it “anticipates proposing adjustments” to next year’s level, which is set to reach 14.4 billion gallons. This has the effect of reducing the price of RIN's and therefore gasoline.

With the Middle East also stabilizing and an extreme net long position in crude in the most recent COT report, I think it's fair to say that we can be cautiously bearish on both crude and RBOB in the short term.

Strength in cotton

The USDA today trimmed expectations for the cotton harvest, with a small reduction in the area to be harvested as well as a slightly reduced yield.

This put a bit of a bid in cotton which doesn't help our spread in the short term.

December cotton closed up 1.3% at 90.08 cents a pound in New York. 

This is the first time in 16 months, cotton has closed above 90 cents a pound.

All eyes on yield

Of the grains and oilseeds, it was soybeans that seemed to get a spark from todays WASDE report.

The much hyped, 'ideal', growing conditions didn't lead to improved yields in either corn or soybeans and we in fact saw revisions lower.

As a result Soybeans were firmly stronger on the day with talk of potential short term bottom after the large sell off we've experienced recently.

Experts seemed to be a little more skeptical of the corn data, as recent crop tours have all been showing strong crop conditions.

All eyes no turn to weather related frost risk as one of the key drivers of both corn and soybeans.

Wheat was reasonably mixed with slight revisions lower in the US being offset by record worldwide wheat production.

USDA Preview

Monday is set for some action in the grains and oilseeds with the monthly WASDE report.

Much of the focus as ever will be on ending stocks.

Traders have been looking for a huge corn crop this year with the number expected to be increased from last month on the back of some ideal growing conditions.

But with a large net short position, should stocks match expectation there is a chance of some short covering.

In soybeans traders are looking for a slightly reduced ending stocks number. This one should be reasonably straight forward.

Finally in wheat there is some chance of a number coming in marginally below expectation. There has been a recent surge in Chinese demand as well as increased production from around the world that could very well fuel a bullish rally.

Corn and Hogs at their COT extremes

Looking at Friday's CFTC data we can see that corn has continued to accumulate a large net short position from managed money.

Today's USDA release will give an insight into predicted ending stocks and with much of the money already positioned in the bear camp and expecting a jump stocks, it will be interesting to see just who is left to add to the short's camp.

Similarly lean hogs are still trading at an extreme net long position based on the most recent set of data.

I've been keeping an eye on this one as I currently have two spreads that will benefit from a fall in hogs prices.

Interestingly our spreads both held up quite well given the addition of more than 7000 new net long positions over the course of the week.

NAB revise AUD lower

NAB have revised their AUD forecasts lower.

They anticipate a rapid reversal of August moves “if, as we currently expect, Fed QE3 tapering commences next month”.




NAB also note:

• An RBA easing bias persists
• A softer USD and a rise in AUD ‘fair value’ as US rates ease back,
• Volatility indicators decline and metals prices lift off their recent floor
• Somewhat stronger China data is helping
• Green shoots of Eurozone recovery and a UK economy currently ‘on fire’ have driven our EUR and GBP forecasts higher
• Say they remain short AUD/USD from 0.9210, stop at 0.9350 , have lowered target to 0.8600 from 0.88

The opposite of peak oil...

If you remember back only five years ago, scientists were huge on the concept of 'peak oil', which effectively meant that oil supply was running out.

'The Economist' is now theorizing that not only is there not going to be peak oil any time soon, but rather demand for oil is going to peak due to technological advances in extracting oil and innovations in automotive technology.

From the Economist:

George Mitchell championed “fracking” as a way to release huge supplies of “unconventional” gas from shale beds. This, along with vast new discoveries of conventional gas, has recently helped increase the world’s reserves from 50 to 200 years. In America, where thanks to Mr Mitchell shale gas already billows from the ground, liquefied or compressed gas is finding its way into the tanks of lorries, buses and local-delivery vehicles. Gas could also replace oil in ships, power stations, petrochemical plants and domestic and industrial heating systems, and thus displace a few million barrels of oil a day by 2020.

The other great change is in automotive technology. Rapid advances in engine and vehicle design also threaten oil’s dominance. Foremost is the efficiency of the internal-combustion engine itself. Petrol and diesel engines are becoming ever more frugal. The materials used to make cars are getting lighter and stronger. The growing popularity of electric and hybrid cars, as well as vehicles powered by natural gas or hydrogen fuel cells, will also have an effect on demand for oil. Analysts at Citi, a bank, calculate that if the fuel-efficiency of cars and trucks improves by an average of 2.5% a year it will be enough to constrain oil demand; they predict that a peak of less than 92m b/d will come in the next few years. Ricardo, a big automotive engineer, has come to a similar conclusion.

The Economist

Cotton - New Trade

This trade in cotton is taken from last weeks watchlist and looks to be a nice longer term play.

Cotton harvest begins over the next month and this is a classic old crop/new crop seasonal.

Technically speaking it appears that the spread seldom trades below parity and even less so below -2.

That gives us quite a nice entry point.

Live Cattle/Lean Hogs - Trade Update

After the news out of Tyson Foods yesterday it was always going to be interesting to see how the cattle market backed up today. And for bulls, it seems to have lost its steam.

Cargill came out and said that it would continue to buy cattle that had been fed with Zilmax, so the talk is that much of reaction is now really built in - and that it was even an over-reaction in the first place.

It's now a matter of if any other meat processors begin to follow the Tyson lead.

Friday's COT report also showed managed money getting net short for week in cattle and long in hogs. So while our spread tinkered on the brink we managed to survive and that might lead to a little bounce.

For now we can maintain the current position.

Natural Gas - Trade Update

After Thursday's semi-bearish storage number, we decided to let this one run and not take off half our position.

Fortunately that seems like it might have been a good descison - for now.

Looking at the intraday chart however, the spread really pulled away late Friday which could just be some covering headed in the weekend.

Regardless, nothing has changed for us so we can maintain this one as is.

Lean Hogs - Trade Update

This one has been a little up and down since entry but closed out the week nicely.

There was some downward pressure late with talk of supplies set to expand, similar to what I mentioned earlier in the week.

Interestingly the latest COT report released Friday, shows managed money's added to their net long positions by around 7000 contracts, yet our spread held up reasonably well, which hopefully bodes well for us going forward.

For now we can let this one run as there is a nice seasonal window through until November.

China poised to become the world’s largest net oil importer

From the EIA, it appears that China is set to become the worlds largest net importer of oil, taking the mantle from the US.

The thing that interests me most is watching the surge in shale production coming out of America. It's also on the back of fears of a slowing Chinese economy.

EIA's August 2013 Short-Term Energy Outlook (STEO) forecasts that China's net oil imports will exceed those of the United States by October 2013 on a monthly basis and by 2014 on an annual basis, making China the largest importer of oil in the world.
The imminent emergence of China as the world's largest net oil importer has been driven by steady growth in Chinese demand, increased oil production in the United States, and a flat level of demand for oil in the U.S. market.

 U.S. total annual oil production is expected to rise by 28% between 2011 and 2014 to nearly 13 million barrels per day, primarily from shale oil, tight oil, and Gulf of Mexico deepwater plays. In the meantime, Chinese production increases at a much lower rate (6% over this period) and is forecast to be just a third of U.S. production in 2014.

On the demand side, China's liquid fuels use is expected to grow by 13% between 2011 and 2014 to more than 11 million barrels per day while U.S. demand hovers close to 18.7 million barrels per day, well below the peak U.S. consumption level of 20.8 million barrels per day in 2005.

Looking beyond 2014, higher U.S. oil production and stagnant or declining U.S. oil consumption, coupled with China's projected strong oil demand growth and slow oil production growth, suggest that once China replaces the United States as the world's largest net oil importer, the gap between net oil imports in China and the United States will grow.

There are several different ways to measure oil import dependence. Discrepancies in the way dependence is assessed arise because oil is imported as crude oil but consumed as refined products, of which crude oil is the main but not only input.
Net oil imports reflect the broadest measure of liquid fuels and include the following elements in the volumes of oil liquids produced and used within national borders: crude oil, lease condensates, natural gas liquids, biofuels, other liquids, and refinery processing gain, which in the United States has been roughly 1 million barrels per day in recent years.

Another common (and narrower) measure of oil import dependence is the ratio of net imported crude oil to net crude oil inputs to refineries. The United States has emerged as a significant net exporter of petroleum products in recent years and a portion of U.S. crude oil imports is used to produce products not consumed domestically. The advent of China as the world's largest importer based on the narrower measure occurs on a different schedule than for the broader one, but the basic trends and drivers remain the same as for the broader measure. However, imports of crude oil alone do not automatically imply domestic dependence on foreign supplies.

A miss in natural gas storage

On the surface it appeared to be a huge miss in natural gas storage last night, when we saw a build of 96 BCF vs expectations of only 77 BCF.

However, the EIA reclassified its base gas as it normally does about once a year. The 96 BCF injection would have been a 82 BCF build prior to the reclassification.

As a result we saw natural gas initially sell-off quite heavily only to rebound.

Our spread also sold off but settled effectively unchanged.

Often times when we see a bearish number (albeit less so than first impressions) that doesn't follow through, it's a sign of a potential reversal.

I'm very tempted to take of half our position here - I certainly would if the injection came in at 96 BCF.

However given the state of the market, which is certrainly trending lower and the benign weather we seem to be having, I think the best course of action is to tighten the stop into 37 even and let this one ride.

We still have three weeks remaining in the seasonal window (2nd September) and given the current trend I think it's worth it letting play out. I am 50/50 here in should be noted.

The action is in cattle...

Last night we saw Tyson Foods decide to stop buying cattle fed with a Zilmax, which promotes weight gain, after finding animals at some of its beef plants that had difficulty walking.

This led to concerns that the move would reduce already tight supplies.

China and Russia have already  sought to restrict meat imports with Optaflexx (a brand of ractopamine), which is an alternative to Zilmax.

As a result our live cattle/lean hog spread gained after being on the verge of being stopped out only days earlier.

With underlying live and feeder cattle both hitting limit highs throughout the course of the day, there is some chance we'll get some follow through buying when pits open on Friday.

For the moment I'm tightening the stop to 40 even as this one hasn't been overly strong prior to yesterday's events.

The Chinese love their copper

Overnight we saw the release of a range of import and export data out of China, which overall was much more posiitve than had been widely expected.

Shipments to China of unwrought copper and copper products rose to 410,680 metric tons in July, the highest since May 2012, customs agency data showed today.

Chinese trade data showed exports rising 5.1% from a year earlier, up from June’s 3.1% fall.

Imports, which had dropped 0.7% in June, showed a 10.9% leap for July.

As a result our stop got tagged and we are forced to take a small loss on the trade. I'm still bearish overall on copper and China but unfortunately stops are there for a reason.

Weather Outlook

The latest NOAA six to ten day and eight to fourteen day forecasts are still showing a large area of the US expecting below normal temperatures through the third week of August.

With below normal temperatures expected in the major grain and oilseed growing regions, price remain bearish, with the only fear being the potential for an early frost.

In terms of energy demand for natural gas, the benign conditions will likely keep a bearish tone in the already down-trending price.

Lean hogs COT report

As we have two positions that currently include being short lean hogs it's interesting to note where we stand with the most recent COT report.

We can see from the chart above that we are right at an extreme level in terms of managed money being net long.

With grain prices continuing to fall and that being an added incentive for farmers to increase numbers, ideally we might get some longs covering their positions.

Watchlist

Heating Oil / Crude

Looks a little dangerous as we've really seen this one trending hard.

Kansas Wheat / Chicago Wheat

I like the look of this one on a pullback.

Coffee

We can work a good price here.

Cotton

This one rarely trades below parity it seems and even less below -2.

Live Cattle / Feeder Cattle

Always a danger one in my book. We are getting to a reasonable looking level however.

Wheat

A nice seasonal window and a good trend developing.