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Red says, Players are placing Big Bets on the Commodities' Bull
Y 2011 is bringing up memories of Y 2008 action in he commodities pits, as rising crop prices kindle fears of a food crisis and bubbling Crude Oil prices.
In parts of the World, inflationary pressure is building, and the commodity player is in the mix.
Prices for Corn, Soybean and Wheat in January returned to highs that just 2 yrs ago sparked food riots in more than 30 countries from Haiti to Bangladesh.
Brent Crude Oil, the North Sea benchmark, hit 99 bbl Friday, its highest mark in 27 months.
In the USA this week, regulators unveiled sweeping rules to keep big players exercising too much power over prices, on fears that another food crisis could jeopardize the Global economic recovery.
US Senators warned of a speculative Bubble that threatens to drive up gasoline and food prices higher.
However, many commodity prices are rising for good reasons, as the physical demand is rising rapidly, for gasoline, Chinese car sales rose 33% last year, or for Corn, the US ethanol industry will consume 40% of the Nation's crop this year.
But players are riding the commodities Bull and placing Big Bets. Money flows into commodities have been huge. Barclays Capital estimates $60bn was injected into commodities in 2010. Some observers believe speculative trading has sent prices to excessively high levels, making a sharp recoil likely should the fragile economic optimism fade.
Figures from the Commodity Futures Trading Commission, the US regulator, reveal Strong Bullish Bet by money managers, and including hedge funds.
Into year;s end they owned a record net Long, position in Crude Oil futures and options on the New York Merc. In September the same players held record net Longs on Corn.
Hedge fund analyst's are focused on Global economic trends, also, money managers, including Trend followers using computer programs to track market momentum and high-frequency traders move in and out of positions in microseconds, all accounting for the market's action.
Electronic players were responsible for record high volumes last year in Energy, Metals and Agricultural commodities at the CME the largest US futures exchange.
To some observers of the action in the commodities is described as a bubble and raise The Big Q: will there be an orderly unwind or a disorderly unwind?
After combined 65 yrs of combined experience in commodities Shayne and I find that hard evidence of Strong correlations between players' positions and price movements is undefined in the extreme.
As an example: in New York Cotton trading managed money's Bullish position has fallen by 50% since mid-September, and the prices hit their highest level the Exchange's history in December.
Also, money managers were Bearish soybean as recently as July, just before a months long rally. They quickly built a record net Long position by November.
The above examples are evidence of small marginal impacts at most on the average level of prices.
Accused that it turned a blind eye to the activity of index players, the CFTC in Y 2009 began publishing their overall positions. The data did not help the critics.
It showed indexers' net Long position in US Crude Oil futures fell 11% in the 1st 6 months of Y 2008, even as Crude Oil rose to 140 bbl, and their Cotton position was roughly unchanged in Y 2010, in spite of the rise to record prices, and even as Wheat has risen since July, the index net Long position has declined.
The head of Crude Oil research at JPMorgan (NYSE:JPM), noted recently that when Crude Oil demand has risen by a massive 2.5M BPD in Y 2010, and supply is still being held off the market, it is hard to create a case that speculators are pushing Crude Oil prices higher.
The CFTC would like to limit Big Player holdings, but some members doubt the proposals would affect the prices. Stay tuned...Paul A. Ebeling, Jnr. www.livetradingnews.com