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Home Trading Articles SAMPLE - Weekly Spread Commentary 6/14/19

SAMPLE - Weekly Spread Commentary 6/14/19

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Hidden Potential?


Some seasonal strategies can make nice moves. Others may have even more hidden potential.

Consider natural gas. The season of greatest consumption is, of course, winter. That heating season runs November-March. By spring, inventories have been depleted and supply in storage is at or near its annual nadir. But large regions of the country depend on natural gas to generate electricity in order to run air conditioners during the heat of summer. Thus, there is usually a surge in demand during spring as stocks are partially rebuilt.


By the summer solstice, however, those stocks quickly needed for the cooling season are ready to be sold into the market, putting downward pressure on more nearby deliveries. In fact, MRCI has found that September Natural Gas has closed lower on about July 9 than on about June 18 in 17 of the last 18 years.

Meanwhile, the industry is also rebuilding inventories for the next heating season --- but normally without a sense of urgency. As those supplies build, prices are further pressured. Because natural gas futures build seasonal disparities in supply/demand into the price structure, nearby deliveries suffer relative to those for next spring when supplies have been depleted. Thus, for example, the Long May/Short December Natural Gas spread has closed more favorably toward May on about July 9 than on about June 17 for the last 18 consecutive years --- suffering no daily closing drawdown whatsoever in 9 of those 18, and only 4 greater than $0.022/mmBtu. (Each $0.001/mmBtu is worth $10.00.)

This spread tends to make its low in the first (December) of the twelve months prior to expiry and its high in the last (November). So far this year, it made its low at -$0.63/mmBtu in December. Since then it has trended slowly higher --- at least until breaking on Friday.

But that was immediately after reaching its high so far of -0.17. In reaching that high, it had broken a 2.5-year downtrend visible on weekly and monthly charts. Was the Friday break a washout of weak-handed longs in a retest of that broken downtrend line?

The seasonal pattern shows a dip into mid June as a distinct --- and historically reliable --- buying opportunity. Is this it? Last year the spread traded at even money; the all-time high was made in November 2009 was a premium of +0.64. Is there potential quietly hidden in the spread?

Now consider soybeans. The USDA crop marketing year runs September-August, with the bulk of the crop usually planted mid April through May. Normally, once planting is in full swing, the market turns its attention to new-crop at the expense of old-crop --- and especially so in anticipation of new South American supplies becoming more readily available to world markets by June.

Thus, for example, August soybeans --- the last old-crop contract --- normally underperform such new-crop contracts as March throughout May and into mid June. However, nearby July futures then begin to trade for delivery, and bullish speculators start liquidating long positions in order to avoid deliveries. Many of those long positions are then reinstated into August, which typically reverses such old-crop/new-crop spreads as August/March --- at least into early July. In fact, the Long August/Short March Soybeans spread has closed more favorably toward August on about July 3 than on about June 23 in 14 of the last 15 years --- in only one of which suffering a daily closing drawdown greater than 5.50 cents/bushel. (Each 1.00 cent/bushel is worth $50.)

So far this year the spread has traded as narrow as only -17.50 cents/bushel, and that being in December. Large supplies amid the tariff war with China, the largest importer of soybeans in the world and who sharply reduced their US purchases this year due to said war, pressured prices lower --- and especially old-crop/new-crop spreads.

Then came the rains. Delayed corn planting drove the industry to assume that many acres originally designated for corn would be switched to soybeans, hurting prices and this spread even more. In May, it traded to a discount as wide as -43.50. After a bounce up to -36.25, it returned to make a new low --- but only at -44.25.

But that was the widest discount since August 2008. In fact, the monthly chart shows that, in at least the last 30 years, this spread has exceeded a discount of -45.00 in only 2007 and 2008.

Bull spreads are now featured in the corn market as the USDA reduced its estimate of ending stocks for year 2019-2020 to the lowest in six years. And that was just a first reduction. Will more follow?

Analysts are now concerned that delayed planting will also affect assumed soybean acreage. In fact, the USDA estimated that, as of June 9, only 60% of the expected US crop had been planted versus the 5-year average of 88%. They further suggest that there may be time but that producers will have to plant at a record pace. Can they do it?

That is but one of the many questions that the grain and soy markets will need to grapple with over the next few weeks. How much corn acreage was lost? How much corn yield will be lost? How many soybeans acres will be planted? Will soybeans yield be lost?

And do those questions assume perfect weather from here on out. Can you make that assumption? The corn crop is typically not made until mid July when pollination occurs during potentially hot and dry weather. The soybean crop is usually not made until early August.

When will those questions be answered? Might there be hidden potential in old-crop/new-crop spreads? The next crucial day may be June 28, when the USDA is scheduled to release its estimate of Grain Stocks (old-crop) and Planted Acreage (new-crop). At least until then, will a bird in the hand be worth two in the bush? An initial hint might if this spread trades to a discount narrower than -36.25.


Please remember: These are NOT trading recommendations. They are intended only as potential ideas based on the market's own performance in the past, but past performance is not necessarily indicative of future results. Futures trading involves substantial risk of loss.


If you have any questions or comments, call me at 541-484-7256 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Trade 'em

Jerry Toepke

MRCI Editor & Spread Expert

Last Updated on Wednesday, 19 June 2019 06:21  
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