April 29, 2020
And as wrote several weeks ago, and have copied again below, all of that Oil, already stored WAS bearish as it went into storage…but as it now sits there, it now only represents massive buying that WILL be done…
From my April 6th newsletter…
I consider the story about Oil Storage, which has appeared at every major Crude Oil bottom I’ve ever seen, as being just as ignorant today as I believe it has always proven to be…If you want a lengthier explanation as to why, give me a call…but for the moment I’ll simply state that pretty much ALL of that oil in storage has ALREADY been shorted in the futures markets or through forward contracts by the energy companies…WHEN THEY PRODUCED IT AND PUT IT IN STORAGE. I can assure you that Exxon, for example, is not in the business of speculating on oil prices…Their business is to take it out of the ground, refine it and sell it…and make their margins. And while making profits for them is easier in a rising market, they are ALWAYS short hedging their production at every stage of the cycle, such that when prices are falling, they are not watching trillions of dollars of product value disappear…The point is, if you can imagine all of the stored oil in the world as being in one big tub, and it is filled to the brim (as is now being touted in the media), there are two things that will happen…The first is that the oil companies WILL slow their production (remember, the tub is FULL) and secondly, as they remove barrels from the tub to process it into gasoline and diesel, THEY WILL BE BUYING BACK THEIR SHORT FUTURES POSITIONS…and guess who the sellers will be? SPECULATORS, who were most likely NOT short $30 higher, but who are NOW convinced that, due to this “glut” of oil, there is easy money to be made on the short side. THE POINT IS, ALL OF THAT OIL IN STORAGE REPRESENTS MASSIVE FUTURES BUYING…and I don’t mean somewhere way out in the future…I mean, right now, with every barrel that comes out of the tanks and into usage.
And aside from that, if there is anybody out there who doesn’t think all the markets are just a big mob psychology game…that no values are real…I want them to give me a logical reason why one of the most important commodities on the planet can have a $58 range in one day…and trade down to a “value” of negative $40 a barrel…
DO UNDERSTAND THIS…
I will tell you that going into last Monday’s trade (the day prices went negative), there were over 100,000 contracts outstanding in May Crude, with just 2 days left to trade…versus a normal 3000-4000 when expiration is that close…and the MASSIVE 100,000 contract SELLING liquidation that HAD to happen by Tuesday’s close, some of which was apparently tied to extremely large Chinese speculative interests, and perhaps some that was tied to Oil ETF’s …pretty much ALL got liquidated on Monday…and simply stated, there were not anything close to 100,000 buyers to take the other side of their selling…And we ended up with an anomaly that we have basically never seen in the futures markets…Furthermore, I would add that it is my VERY strong opinion that it won’t happen again, in spite of the fact that hoards of opinion generators who really know nothing about the markets are now warning that investors should be prepared for the same sort of outcome…negative prices…in the current June contract…which I think it absolute hogwash.
My bottom line is this: I am relatively certain that there is NO ONE, who WAS long Crude, that is STILL long Crude…THEY ARE ALL GONE…that nobody can stand that kind of heat…and that anyone who was long (other than some hedgers) has SOLD OUT. And that IS when you buy a market…When there is nobody left to sell it…You want blood on the tracks? Well…You have definitely seen it…CRUDE IS A BUY.
Did I see anything even close to this happening? No. Absolutely not. But I do think I know what I am seeing now…and that, I firmly believe,is a bottom…which, again, is classically being accompanied by seemingly quite “logical”, but totally erroneous reasoning, that with so much of it in storage, “There’s no way it will be going up anytime soon.”
MY VERY IMMEDIATEL RECOMMENDATION IS TO BUY CALLS AND/OR FUTURES IN CRUDE OIL…AND I AM DOING SO IN THE VERY FRONT OF THE MARKET…IN THE JUNE AND JULY CONTRACTS…OR EXACTLY WHERE ALL OF THE GLUT IS SUPPOSED TO BE…
On a general note, I will say that the past few months we have had two MAJOR stories in the news, plus one “mini” major story (which I’ll address later)…The first is obviously COVID-19, which has pervaded everything, and the second is Crude Oil, especially during the past week when it became, without any doubt, the biggest, loudest, scariest commodity story of all time…And it is my VERY strong belief (which does not mean I am right) that we have now hit the apex of both those story’s negative influence on the markets…and I therefore continue with the “Buy Everything” approach that I first expressed in my March 18th and March 23rd newsletters, beginning with the Stock Indices…
I MIGHT BE DEAD WRONG BUT I THINK THE BOTTOMS IN BOTH STOCKS AND CRUDE HAVE CONCLUSIVELY BEEN MADE…AND THAT THEY, ALONG WITH A NUMBER OF OTHER COMMODITIES HAVE BOTTOMED AS WELL (EXCEPTING GOLD, WHERE I AM LOOKING TO BE SHORT)…AND WITH THIS IN MIND, MY CONTINUING RECOMMENDATION IS TO GET LONG ANY OR ALL OF THE FOLLOWING MARKETS.
Start with the Stock Market…where, per these recent headlines from Marketwatch and CNBC, I note that there are still PLENTY of geniuses out there who have been, and still are, telling you “Don’t buy it!”, which I believe only adds to my bullish case…
And this is my view…
BUY CRUDE OIL
Here are a few ways to go…using the July contract…
We are back on Long July Soybean Meal…very much so…and still looking for at least a 20% rally.
About 3 weeks ago, with Meal appearing to have reversed back down after about a 10% rally, we switched out of Soybean Meal to Soybean Oil (still using the both sides approach), thinking that Soyoil, as a Biofuel, would be rising together with what I wrongly perceived as the bottom have been made in Crude Oil…The result was that Soybean Oil also fell sharply right along with Crude…and last week I made the switch back into Meal (which had made new lows)…and intend to remain there…STILL anticipating the same sort of 15%-20%+ rally that has occurred so many times during the past 20 years.
And I am not just blindly clinging to this idea…The fact is that during the past 20 years, substantial rallies have occurred after mid-April in 15 of those 20 years…and considering the volatility we are seeing in virtually all of the markets, I don’t think this year will be any different…SO I AM EVERY BIT AS BULLISH ON THIS IDEA AS I WAS SEVERAL MONTHS AGO. EVEN THOUGH, AS ALWAYS, I MIGHT BE DEAD, DEAD WRONG, I STILL CONSIDER THIS TO BE A LETTER PERFECT 1&1 SITUATION…
Part of my recommendation to “Buy Everything” is predicated on my belief that ALL of these markets have been artificially hammered to price levels that are not sustainable from a cost of production standpoint, and simply stated, I would be amazed if any, or more importantly, even some of them were still this low 2 or 3 months from now…and I want to own them all, pretty much knowing that if just ONE of them gets going on the upside, it could pay for the price of owning all of them…Obviously, if I am wrong, and none of them “Go,” it certainly could mean losing every dollar you have invested…but that is a risk I am personally prepared to take…together with my opinion that all of them WILL rally from here.
That being said, I will also say that I NEVER know which (if any) of the markets I own is going to be the first to go, or which might be the biggest…or if they will all just take off together (or collapse). I DON’T know and that is why I’m not sitting here saying, “I like this one the most.”
And right now, Cotton appears to be the first out of the gate…I would also note that I do KNOW, anecdotally, that farmers were selling their Cotton in droves down around the 50-52 cent area at the beginning of April…forced through FEARS of even lower prices, and crop loans being due, to pass their product along to the merchants…which, unfortunately is exactly what you see at MANY commodity market bottoms…that is, the farmers give it up…and then the bull market gets started.
Corn, at $3.15 a bushel, just blows my mind…making it feel like we’re back in the 1980’s or something…This crop, of which 40% of domestic consumption goes to Ethanol production, therefore has a direct tie to the Crude Oil market, which kind of makes it (and Sugar) an indirect energy buy…And not to forget, this market, as well as several other row crops, is priced down here below the cost of production…WHEN IT IS NOT EVEN FULLY PLANTED YET IN THE NORTHERN HEMISPHERE…In other words, it’s a LONG way from being made…and ANY weather problems, or scares, could have a dramatically bullish effect on prices. This, to me, is a cheap, cheap buy with a LOT of potential leverage…
As noted above, Sugar, also a biofuel, is also tied to the Crude market…Like Corn, I see this as just an amazingly low price…
And make no mistake, this market can move just as quickly on the upside as it did on the downside…
Wheat is also in this group but in the interest of getting this thing done…
I’m skipping to the other BIG news story out there…the Meats and the plant closings.
BUY LIVE CATTLE AND FEEDER CATTLE
And all I will say there is, the plants WILL reopen…they haven’t been blown away, never to slaughter another animal…They just have to be sanitized. And then? They will be back in full force…Meanwhile, I can tell you that if Cattle and Hog prices stay at their current mind boggling levels, there won’t BE a meat industry in this country…Maybe I am just dead, dead stupidly wrong, but my first thought is that I think the meats have NOWHERE TO GO BUT UP…and secondly, I would point out that I have always considered Cattle and Hogs, more than any other markets, to be prone to making sometimes enormously big, fast…crazy type non-stop moves…And into today’s volatile environment, I cannot help but be expecting the same on the upside.
These markets are not cheap…but I absolutely want to be in them…especially in the Cattle complex, as my feeling is that both Feeder Cattle and Live Cattle solidly bottomed about a month ago, and have subsequently been consolidating ever since…AND…I think are now ready to get it moving, potentially very sharply so, on the upside.
And this might be a big one…As I put all this together, it often helps me to crystalize my own thinking…And the more I looked at the Feeders below, the more I thought to myself, “Expensive. But BE in it. For sure.”
And Lean Hogs have just gone up about as straight up as anything ever does…I am still bullish this market but figure that this is a good time to see some sideways action for a while…while the CATTLE START MOVING.
Enough for one day….OK guys, there is a LOT happening…If you have the risk capital and think that anything here makes sense, give me a call and let’s talk about getting you IN.
All charts are by Aspen Graphics
All option prices in this newsletter include all fees and commissions.
The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: All of them