Wed, 25th May 2016

Anirudh Sethi Report


Archives of “futures contract” Tag

Demand for oil storage soars amid supply glut

With crude oil piling up around the world the space inside terminals is now a hot commodity.

The market for crude oil storage futures has been expanding since last year’s launch. Instead of giving buyers oil, the futures contracts confer the right to store it — in caverns on the Gulf of Mexico coast.

Open interest, or the number of contracts outstanding, has increased to the equivalent of 23.5m barrels of capacity, more than doubling since the beginning of the year.

Oil companies, refiners and banks have been trading the contracts, said Bo Collins, co-founder of Matrix Markets, which helped develop them. “The only crowd that’s sort of missing from the mix is the HFT [high-frequency trading] crowd,” he said.

The contracts were introduced as a supply glut caused oil stocks around the world to swell, driving up demand for tanks.

Buyers get the right to store high-sulphur “sour” crude at the Louisiana Offshore Oil Port (Loop), which contains one of the biggest terminals in North America.

In the Gulf coast region that includes Loop, crude stocks have risen to records of more than 280m barrels, up 18 per cent from the beginning of the year. Nationwide, oil stocks rose by 1.3m barrels last week to 541.3m, just shy of a 1929 record, the energy department reported on Wednesday.

Speculative Position -An Update For Forex ,Treasury ,Crude

The US dollar staged an impressive reversal against many of the major foreign currencies on May 3. In the following week, speculators in the currency futures market made significant adjustment in their holdings. We identified a change in the gross position in the currency futures of 10k contracts or more to be significant. 
In the week ending May 3, there were two such adjustments. In the CFTC reporting period ending May 10, there six of the 16 gross position we track surpassed the 10k contract threshold.  Let’s begin by look at the three currency futures in which speculators carry a net short position: the euro, sterling, and the Mexican peso. 
Euro bulls and bears made significant adjustments.  The bulls took profits on 11.8k contracts to leave a gross long position of 101.3k contracts.  The bears continued to cover shorts and took out another 13.5 contracts to leave 123.1k still short.  This is the smallest gross short euro position since July 2014.  In early December, it stood at 262k contracts.  The adjustment saw the net short euro position slip to 21.9k contracts from 23.6k.  The net short position has been reduced for eight weeks running.  
Similarly in sterling, speculators reduced both gross long and gross short exposure in the Commitment of Traders week ending May 10.  The gross short position was pared by 14k contracts to 72.6k.  The gross long position was reduced by almost 20%, as 14k contracts were liquidated, leaving 37.6k.  The net short position slipped to 34.9 contracts from 40.4k to extend the reduction for the third consecutive week. 

Chinese Commodity Carnage Unwinds Entire Bubble – Steel Futures Crash Most Since 2009

Well that de-escalated quickly…

As Reuters reports, 

Chinese steel futures were on course for their biggest weekly fall since 2009 on Friday, as a selloff in the country’s commodities showed signs of spreading to other global markets for raw materials such as palm oil and base metals.

Weakening fundamentals along with strong measures by Chinese exchanges to stamp out speculative activity have helped reverse momentum in China’s massive commodity futures markets from bullish to bearish in less than a month.

The deepening losses have started to weigh on global markets elsewhere, in a similar manner to the boom and bust cycle in the country’s stock markets last year.

This is what government-intervention-driven malinvestment-creating unintended consequences look like…

Iron Ore, Rebar Crash Into Bear Market

Real demand for steel in China dropped at least 7% in April from the year before, according to Citigroup’s Tracy Liao estimates, so it should not be a total surprise that the frenzied speculative buying in Iron Ore, Rebar, and various other industrial metals in China has crashed back to reality as volumes plunge, dragging The Baltic Dry Freight Index with it as yet another government-manipulated ‘signal’ collapses into a miasma of malinvestment and unintended consequences.

As The Wall Street Journal reports, to the extent that China’s industrial recovery explains why iron ore and steel prices have jumped this year, China’s latest trade data served as a reminder of how brittle this reason is. 

China’s steel net exports rose 8.8% in April from a year before and 9.4% between January and April from a year ago. That raises the question: Why are mills exporting more steel when Shanghai front-month futures prices for rebar steel rocketed 48% between January and April, and signaled a potential rise in demand? Shouldn’t mills be selling more of what they make at home? And steel production is weak, so it isn’t as if producers are churning out more steel available for exports.

The answer may be that there is no sustainable increase in Chinese steel demand. Steel use picked up around March, but this was seasonal, and even then it wasn’t so dramatic. Steel traders, whose job is to anticipate demand from property developers and the like, held lower inventories at the start of this construction season than last year, suggesting they saw limited real demand in the pipeline.

Real demand for steel in China dropped at least 7% in April from the year before, Citigroup’s Tracy Liao estimates, based on changes in exports and inventories. The drop was at least 5% between January and April from the year before.

That reinforces fears that easy money-fueled speculation is the prime mover of steel and iron ore prices today. That “Churn” is over…

An Update on Yen ,AUD ,Euro ,Crude

Speculators in the futures market continued to pare short foreign currency positions but were cautious about expanding long positions in the CFTC reporting week ending May 3.  In fact, two of the three largest adjustments were the cutting of gross long Japanese yen and Australian dollar positions.  
Speculators took profits on 11.8k contracts of gross long yen positions, leaving 85.6k contracts still long.  It was the second consecutive week that gross long yen positions were reduced.  The magnitude of the move was the second largest of the year.  It may be particularly noteworthy that the longs were cut as the dollar dropped over the reporting period from JPY111.30 to JPY105.50. 
The speculative gross long Australian dollar futures position was cut by 10.9k contracts, leaving the bullswith 99k contracts at the end of the statement period.  The decline in the Australian dollar after the end of the reporting period suggests the unwinding likely continued. The gross long position remains at elevated levels,  which outside of the previous week, is the largest in three years.  

BREAKING-China’s steel futures suffer biggest weekly loss ’09

China’s steel rebar futures fell 9.5 per cent this week, the biggest loss since the contract started seven years ago following measures by the country’s futures exchanges to curb speculative trading.

China’s three largest futures exchanges have raised transaction fees and margin requirements and reduced night trading hours over the last few weeks after a wave of speculative trading saw steel prices jump 50 per cent this year. In one day trading in steel rebar futures exceeded the turnover on the country’s equity exchanges

The average holding period over the past few weeks in China for steel rebar and iron ore futures has been 2 and 2.4 hours, according to analysts at Morgan Stanley.

10 Lessons For Traders

1. Call options. If you truly have conviction, buy long dated call options as volatility tend to be under priced for long maturities.

2. Short selling. It is harder to short sell than most think, and almost no one is good at it. One hurdle is the drift, but there are countless more.

3. Romance. You’re clearly better off to marry someone in management than to marry the stock.

4. Dip buying. The successful buys on dips and vice versa, it follows that the unsuccessful do the opposite.

5. Market. Everyone is always bearish on the market, only the super successful dares to be bullish/naive.

6. Story. Human brains are hard wired over thousands of years to build stories around your beliefs/thesis.

7. Flexibility. The super successful are always ready to change their mind/direction. Go from long to short or from short to long.

8. Art. Stock picking is as much art as science and very rarely are the smartest the best at this game.

9. Top-down. Local knowledge remains under appreciated. The top down guys ends up shorting the best companies and vice versa.

10. Management. Always invest with the best in class management, however you are better off with a good end market and bad management than the other way around.

China warns off commodities market speculators

China’s army of retail investors has been warned off speculative trading in commodity futures as officials attempt to quash what looks to be the country’s latest market bubble.

A sternly worded text message popped up on mobile phone screens across China’s central Henan province on Friday, reading: “The Henan Securities Regulator reminds you that institutions or individuals without regulatory authorisation are not allowed to trade securities and futures. Don’t believe anyone who says they have inside information; only trade through legal brokerages.”

The warning comes as worried Chinese regulators move to curb a burst of speculative trading in commodities futures — particularly cotton and the “ferrous complex” of steel, iron ore, coking coal and coke — that they fear could spark another round of destabilising financial volatility. The Chinese contracts have been some of the most heavily traded in the world this month, catching regulators and international analysts off guard.

The spike in volumes has triggered a clampdown by the country’s largest commodity exchanges, which have moved to curb activity by increasing margin requirements and requiring brokerages to report their most active clients. In addition, the regulator has told financial institutions that usually trade stocks to cool down speculative trading in futures, according to futures traders.

U.S. Commodity Regulator Was Unaware About Deutsche Bank’s Gold-Rigging Until Ten Days Later

Almost two weeks ago, On April 14, we reported the striking news that DB has decided to “turn” against the precious metals manipulation cartel by first settling long-running silver and gold price fixing lawsuits which in addition to “valuable monetary consideration” would expose the other banks’ rigging after DB also “agreed to provide cooperation to plaintiffs, including the production of instant messages, and other electronic communications, as part of the settlement.”

It was then that we also reminded readers that the US commodity “regulator”, the CFTC in 2013 closed its five year investigation concerning allegations that the biggest bullion banks manipulate silver markets and prices.  It proudly reported in September 2013 that it found no evidence of wrongdoing and dropped the probe. This is what it said: 

The Commodity Futures Trading Commission (CFTC or Commission) Division of Enforcement has closed the investigation that was publicly confirmed in September 2008 concerning silver markets. The Division of Enforcement is not recommending charges to the Commission in that investigation. For law enforcement and confidentiality reasons, the CFTC only rarely comments publicly on whether it has opened or closed any particular investigation. Nonetheless, given that this particular investigation was confirmed in September 2008, the CFTC deemed it appropriate to inform the public that the investigation is no longer ongoing. Based upon the law and evidence as they exist at this time, there is not a viable basis to bring an enforcement action with respect to any firm or its employees related to our investigation of silver markets.

BREAKING- China imposes fresh curbs on commodities as iron ore, steel slide

Chinese commodities exchanges stepped up efforts on Tuesday to curb surging prices that some say have been driven by speculators, raising fears of another derivatives bubble after last year’s stock market collapse.

Transaction fees for iron ore futures were hiked for a second time in as many days, after the original increase led to a sharp drop in iron ore and steel futures in China that helped cool a week-long surge in local commodities markets.

Base metals futures also fell on Tuesday, while other commodities, including coking coal and cotton, surrendered most of their early gains to end nearly flat.

China’s top commodity exchanges in Dalian, Shanghai and Zhengzhou increased trading margins and fees in response to last week’s spike in prices and volumes, which some analysts said were not matched by fundamentals for the underlying commodities.

The Dalian Commodities Exchange in northeast China said it would raise transaction fees for iron ore and polypropylene futures contracts twice in two days this week.

The exchange said on Tuesday it would also hike transaction fees for coke and coking coal futures contracts starting from April 27.