- New Science in old markets -

Grains get more bullish; energy gets bearish – perhaps very

There have been some signs of life in the grain markets lately and now there will be some more.

There were a couple of compressions in Soya meal on Monday and Tuesday this week which broke upwards yesterday. Regular readers will know that fresh trends start when compressions form and then break, so this means we now expect some more strength immediately.

This is the third grain market to provide signs that it will strengthen:

1.  We had a compression in wheat that moved higher and confirmed the move by re-compressing and moving up again.

2.  Next there was a bottom extension in Soya oil, indicating that the drop there was ending. Extensions occur at the end of moves and when they occur at a bottom, there is a good chance of a rebound. This compression then appeared at a weekly-scale too, meaning that a more serious rebound was likely.

3.  Now we have this fresh compression and upward break in meal, so there seems to be a general recovery of sentiment throughout the grain markets: Buy some meal here.

The exceptions to this creeping bullishness are Corn and the closely grain-related Cotton market. Corn is moving doggedly sideways and is setting up for a compression that will start the next move. There hasn’t been any such signal yet but it may only be a few days away and we will see what happens then. Cotton (which competes with some grains for available acreage) is dropping as I write but there is no sign of a bottom extension yet. When there is one, the eventual rebound will probably coincide with some more strength in those grain contracts that are already in uptrends at that time:

Meanwhile, energy prices are moving the other way. We have seen a series of compressions, all of which have now broken down. The exception remains the compression in Rbob gasoline as it is at a weekly scale and so we cannot tell until Friday’s close whether it too has broken. The others have definitely done so and so the chances are that Rbob will too. The fact that the Rbob signal is at a weekly scale is ominous as a confirmed break down from it would lead to weakness that might last for 3 or 4 months. We assume that you stopped out of Brent long positions for a modest loss and we are now looking for a place to sell various energy contracts short. Aggressive traders could do so now in the US contracts, but rallies back up to the level of these compressions are possible, which would provide a better opportunity:

A break of this weekly-scale compression could do a lot of damage to all energy prices, so it is time to remind you that there is a potential feedback loop here. The biggest producer/exporter of crude remains Saudi Arabia, which was once incapable of spending all the money that it earned from these sales, so it built huge reserves. That situation flipped over in recent decades and Saudi Arabia now needs the money to support its lavish spending. This means that it will not find it so easy to reduce production in its role as ‘swing producer’ to support prices at the low end of the trading range, as it has done for years. Lower prices may in fact even lead to an increase in Saudi production, to maintain revenues. OPEC is notoriously fractious when it comes to co-ordinated production cuts (they all cheat) instead and so there is a chance that we will see a price plunge. It may not happen on this occasion but this feedback loop of lower prices leading to higher production is a lurking presence that will one day arrive in the market - it would not be the first time. Copious new US energy supplies from fracking makes this even more likely.